Unmasking the deception: the truth behind sham property trusts

This is the first of a two-part series concerning the recent case of Islam v Islam [2024] EWHC 1082 (Ch) and the key takeaways for TOLATA practitioners.

In this article, we:

• consider family disputes over property, where equity is often built up over decades by family / parents, sometimes across multiple properties

• examine potential fallout resulting from poor or illegal estate planning and property management

• summarise the current approach of the courts to disputes involving ‘sham trusts’.

Islam v Islam – the facts of the case

In May 2024, the High Court handed down judgment in Islam v Islam [2024] EWHC 1082 (Ch), a family dispute concerning a portfolio of properties.

The case was reported in national newspapers, including The Times, Daily Mail and elsewhere.

Mohammed Islam, the father and head of the family, owned multiple properties in East London and some land in Essex. For each of the properties, trust deeds had been put in place which had been signed by Mohammed, Sultana (Mohammed’s wife), and Tajleena (Mohammed and Sultana’s daughter). The trust deeds declared that the beneficial interest in the properties was held 50% for Tajleena and 50% for Sultana.

Mohammed later died in 2017.

It was asserted by Sultanta and Rahit (Tajleena’s brother and Mohammed and Sultana’s son) in the court proceedings that Tajleena did not, in fact, have an interest in any of the properties, which were, they contended, beneficially owned by Mohammed and Sultana. The trust deeds, they argued, were simply a sham intended to conceal Mohammed’s interest in the properties from his creditors. 

What is a sham trust?

A sham trust is where a property is ostensibly placed into trust for the benefit of a named person or group of people (in this case, Tajleena and Sultanta), but where the parties involved in fact intended to create a different arrangement to that stated in the trust document.

A trust will therefore be a sham where the settlor retains full beneficial entitlement and there is no intention that the apparent beneficiaries are to obtain any benefit. The trust document in such situations is accordingly a façade intended to deceive third parties. 

Lord Diplock in Snook v London & West Riding Investments Ltd [1967] 2 QB 786 defined a sham as, “acts done or documents executed by the parties to the ‘sham’ which are intended by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create”. This definition was subsequently affirmed in  Hitch v Stone [2001] EWCA Civ 63, which said that it was the essence of a sham transaction that “the parties to a transaction intend to create one set of rights and obligations but do acts or enter into documents which they intend should give third parties … the appearance of creating different rights and obligations.”

Sham trusts are typically seen in cases where the settlor/actual beneficiary is seeking to shelter their assets from a third party, such as their creditors or tax authorities. Such arrangements constitute fraud and are therefore unlawful.

How do the courts deal with sham trusts?

How do the civil courts deal with sham trusts where the parties involved in the arrangement subsequently fall out and call upon the court to determine their beneficial interests?

Shams to dishonestly conceal assets from creditors will automatically engage the ‘illegality principle’, namely, that a court will not lend its aid to a person who bases their case on an immoral or illegal act.

The court in such cases must therefore balance that it is contrary to the public interest to uphold a claim founded on illegality, with the need to consider the underlying intended beneficial interests. As a result, the court has some flexibility as to what the consequences should be.

If the principle of illegality is triggered, litigants should be mindful that the court may be minded to send a transcript of its judgment and any relevant evidence to any interested third parties, such as the Department of Work and Pensions and HMRC, which could result in other – even criminal – ramifications.

Were the trusts in Islam a sham?

In handing down judgment in Islam, Mr Justice Rajah held that there was no sham trust.

In reaching this decision, the court considered a broad array of evidence, including the witness testimony of the parties. For instance, Tajleena’s witness evidence in previous family court proceedings, in which she stated her belief that the properties had been “put into [hers and Sultana’s] name solely for inheritance purposes”. If the vesting of the properties in Tajleena’s name was intended to ensure that Tajleena would benefit from the properties upon the death of her parents, Mr Justice Rajah concluded that this could only be achieved if the trusts were not shams. 

While one of Mohammed’s motivations in making the trusts may have been to protect his assets from his creditors, it did not follow that the parties intended the trusts to be shams to mislead his creditors. Intention is not the same as motive.

If they intended the properties to be owned beneficially by Tajleena and Sultana, the trust deeds were not shams, even if the ulterior purpose was that, by creating the trusts, the assets would not then be available to creditors.  

The legal effect of the trust deeds was, therefore, to vest the beneficial interest in Tajleena and Sultana immediately. Nevertheless, Mohammed clearly trusted his family to allow him control of the properties while he was alive, and to respect his wishes as head of the family.  The court took into account the cultural context of a South Asian family, where the practice of the head of the family having de facto control over the pooled assets of the family is not unusual.

The Birketts view

Relying on trust, or the bonds of love, blood and culture, to control and enjoy the property of another does not mean that the other is not still the owner in the eyes of the law. If those bonds are severed, the owner is entitled to vindicate their ownership through the courts.

Next week…

Next week, we consider other aspects of the judgment relevant to TOLATA.  Specifically, we will examine the subject of undue influence – when someone unfairly uses their power or influence to persuade another to make decisions against their will – and the validity of trust deeds obtained through such means.

If you would like further advice on sham trusts, TOLATA or property disputes generally, please contact the Home Ownership Disputes Team.