Soton Equity and Trusts - alastairhudson.com

LECTURE PROBLEM QUESTIONS
1. Trusts of homes
In 2000, Gerald and Daphne were a married couple who had decided to move away from London.
Daphne’s mother Thelma was growing old and so all three of them decided to live together in a bigger
house in the country.
All three of them decided to buy a house in the Essex countryside for £120,000. The Essex house was
bought with £100,000 provided by way of mortgage in the names of Gerald and Daphne. As a
pensioner Thelma was entitled to a £20,000 relocation grant on giving up her council flat: this also
went towards to acquisition of the Essex house.
From 2000, Thelma required daily medical attention at the Essex house. Gerald and Daphne both
worked as teachers and both earned £1,000 per month. The mortgage cost £600 per month and
Thelma’s daily care cost £600 per month. It was decided after a family meeting that Gerald would pay
for the mortgage and Daphne would pay for the medical costs.
In 2000, before completing the purchase of the Essex house, Gerald had promised Thelma that she
could live there for the rest of her life. He said: “I want you to think of this house as being as much
your home as ours”. Meanwhile Thelma looked after all the housework, looked after her two
grandchildren, and in 2005 used all her savings of £3,000 to repair the basement after a freak flood.
In March 2008 Gerald and Daphne realised that they could no longer cope with Thelma and so have
decided that she must be relocated to a full-time old persons’ nursing home for which Thelma will be
required to pay.
Advise Thelma
2. Secret profits and bribes
William was managing director of Cake Ltd, a company which manufactured high quality sponge
cakes. While on company business, William was told that there were big opportunities for biscuit
manufacturers who manufactured high volumes of biscuits for family size boxes. Cake Ltd had never
been involved in biscuit manufacture.
William employed a consultant, Tariq, to conduct research for him into this opportunity. William was
told that to establish Cake Ltd in the biscuit business would require an initial investment of about £10
million and would generate profits of about £2 million per annum. William knew that the board of
directors of Cake Ltd had previously only agreed to invest in new businesses which would generate
£2.5 million in annual profits after an initial investment of £8 million.
However, William had decided that he wanted to exploit this opportunity for himself. He was
concerned that the board of directors might choose to invest in this opportunity in spite of its previous
practice. Therefore, William paid Tariq £20,000 to inflate the estimate of the start-up costs to £12
million and to depress the profits estimate to £1.5 million. Tariq did as he was paid to do.
William presented Tariq’s revised estimates to the next meeting of the board of directors. The minutes
of that meeting show that the board ‘does not wish Cake Ltd to pursue this biscuit manufacture
opportunity because its profit estimate is below £2.5 million and the initial investment will be more
than £8 million.’ William resigned from Cake Ltd the next week and began to manufacture biscuits six
months later.
William earned personal profits of £2 million in 2006. On 5 th April 2007 he paid these profits into a
current bank account in which he held £500,000 on trust for his mother. On 6 th April he spent
£400,000 on acquiring Go Tech plc shares, which have now trebled in value. On 7 th April he spent
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