Changes ahead for relationship property and trusts

One important aspect for consideration when acquiring property is the acquisition structure. Often parties will consider the suitability of a trust in that structure.

You should be aware that the interface between trusts and relationship property is a live issue and that the law is likely to be reformed in the not too distant future.  This should be factored into the decision process.

Changes on the horizon

The Law Commission has recently published an Issues Paper on the Property (Relationships) Act 1976 (PRA) here.

The Issues Paper covers a wide range of topics, but this Alert focuses on one particular area – trusts in the relationship property context.

The issue is whether the PRA strikes the right balance between a just division of property at the end of a relationship, and the preservation of trusts. The concern expressed is that trusts can cause problems where they hold property that would otherwise be relationship property.

The Commission’s preliminary view is that the PRA does not currently strike the right balance and that the PRA should be reformed to strengthen partners’ rights under the PRA against trusts.

One of the four options given for reform is broadening section 44C of the PRA.

Section 44C enables courts to make orders directing trustees to pay income to the other party where there have been dispositions of relationship property to a trust by one party after the relationship began which have had the effect of defeating the rights or claims of the other party. However it has limitations.

Changes to section 44C discussed in the Issues Paper include:

  1. Removal of the requirement that the disposition be of relationship property and made after the relationship began.
  2. Enabling courts to order that trustees pay trust capital (not just income as at present) to the other partner.
  3. But requiring courts to take account of informed mutual consent given at the time of the disposition by now the disaffected party, and the interests of third party beneficiaries.

However, these proposed changes would not remedy all the limitations of section 44C. For example:

  • If a partner never initially owned the property but instead the property was acquired directly by the trustees, then section 44C may not assist the disaffected party.
  • If a parent’s trust provides a house for the parties and children to live in, which the parties maintain and improve during the course of the relationship, on separation the disaffected partner may have to seek remedies outside the PRA.
  • If putting the property on trust defeats both partners’ interests, and not just one, then section 44C may not assist.

The Law Commission is currently considering the submissions it received on its Issues Paper.

We can expect in due course to receive from the Law Commission its suggestions for significant reform in this area of law.

If you have any queries about the existing law in relation to relationship property, or how the possible changes being considered by the Law Commission may affect you, please contact one of our experts.

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