Stephenson (H.M. Inspector of Taxes) v Barclays Bank Trust Co. Ltd.
[1975] 1 WLR 882[1975] 1 All ER 625
(Judgment by: Walton J)
Stephenson (H.M. Inspector of Taxes)
vBarclays Bank Trust Co. Ltd.
Judge:
Walton J
Legislative References:
Finance Act 1965 - The Act
Finance Act 1969 - The Act
Interpretation Act 1889 - The Act
Judgment date: 3 December 1974
Judgment by:
Walton J
By his will dated 24th November 1939, the late Sir Richard Winfrey, after appointing his son Richard Pattinson Winfrey and the Respondents, Barclays Bank Ltd., to be executors and trustees thereof, inter alia (i) bequeathed to his widow an annuity of £600 per annum to commence from his death; (ii) bequeathed to each of his three daughters Ellen, Lucy and Ruth annuities of £300 per annum for their respective widowhoods, to commence respectively from the dates of the deaths of their respective husbands, with a direction for appropriation of a fund to answer the annuities with power to resort to the capital of the appropriated fund in case the income should prove insufficient. Any surplus income thereof, and the ultimate capital, was to fall into, and form part of the income or capital of, residue. He disposed of his residuary estate upon an accumulation trust (in the events which happened) for the period of 21 years from his death and then upon trust for all his grandchildren living at his death who should attain the age of 21 years in equal shares, with certain substitutional provisions and an ultimate gift over with which I am not concerned. The outbreak of war appears to have had a very devastating immediate effect upon the testator's fortunes, because he made a codicil to this will on 24th June 1940, as a result of which, putting it shortly, the annuitants were confined to the income of the residuary estate but any surplus income was to be treated as a reserve fund applicable for payment of the annuities to the daughters. The testator died on 19th April 1944. Probate to his will and codicil was granted on 28th August of that year to the executors therein named. Four years later the daughter Ruth was widowed. The testator's widow died in 1951. On 28th October 1952 the elder of the two grandsons of the testator living at his death attained the age of 21; on 13th April 1955 the younger of the two did likewise. In 1959 Ellen was widowed; in 1963 Lucy was widowed. On 18th April 1965 the accumulation period ended.
Finally, on 27th January 1969 all those concerned with the residuary estate-the trustees, the two grandchildren and the three widowed daughters- entered into a deed of family arrangement whereunder a fund was appropriated to answer the daughters' annuities, the trustees advanced a sum to the two grandchildren for the purpose of being used to buy additional income for the daughters, and thereby the daughters confirmed that upon the appropriation being effected the trustees and the estate and effects of the testator other than the appropriated fund should be immediately released from all claims (if any) by and liability to the daughters or any of them, to the intent that the trustees might then forthwith transfer the remainder of such estate and effects to the two grandchildren. In fact the trustees had prior to the date of this deed already acquired the investment which was to form the appropriated fund, so that immediately upon its execution the last clause to which I have referred took immediate effect. The trustees did not, however, immediately transfer the residuary estate to the two grandchildren in equal shares, or at all, and so far as I am aware the trustees are still holding that fund.
On these simple facts the question arises whether, as a result of the operation of the provisions in the deed of family arrangement, capital gains tax became payable by the Respondent trustees as upon a deemed disposal of the whole (or, alternatively, so much thereof as did not consist of land or, just possibly, as did not consist of land and mortgage debts) of the remaining residuary estate which thereafter the trustees held upon trust for the two grandchildren in equal shares absolutely. It is argued by the Crown, for whom Mr. Browne-Wilkinson and Mr. Gibson have appeared, that it did; and by Mr. Lawton, for the Respondent trustees, that it did not, for a variety of reasons with which I must deal in detail later.
The matter ultimately turns upon a very few provisions of the capital gains tax legislation, which I think I should set out. First of all, s. 19 of the Finance Act 1965 reads:
'(1) Tax shall be charged in accordance with this Act in respect of capital gains, that is to say chargeable gains computed in accordance with this Act and accruing to a person on the disposal of assets...(3) Subject to the said provisions, a tax, to be called capital gains tax, shall be assessed and charged for the year 1965-66 and for subsequent years of assessment in respect of chargeable gains accruing in those years, and shall be so charged in accordance with the following provisions of this Part of this Act.'
Section 20(1):
'Subject to any exceptions provided by this Act, a person shall be chargeable to capital gains tax in respect of chargeable gains accruing to him in a year of assessment during any part of which he is resident in the United Kingdom, or during which he is ordinarily resident in the United Kingdom.'
Section 22:
'(1) All forms of property shall be assets for the purposes of this Part of this Act, whether situated in the United Kingdom or not, including-( a ) options, debts and incorporeal property generally, and ( b ) any currency other than sterling, and ( c ) any form of property created by the person disposing of it, or otherwise coming to be owned without being acquired...(5) In relation to assets held by a person as nominee for another person, or as trustee for another person absolutely entitled as against the trustee, or for any person who would be so entitled but for being an infant or other person under disability (or for two or more persons who are or would be jointly so entitled), this Part of this Act shall apply as if the property were vested in, and the acts of the nominee or trustee in relation to the assets were the acts of, the person or persons for whom he is the nominee or trustee (acquisitions from or disposals to him by that person or persons being disregarded accordingly).'
Section 25(1):
'In relation to settled property, the trustees of the settlement shall for the purposes of this Part of this Act be treated as being a single and continuing body of persons (distinct from the persons who may from time to time be the trustees), and that body shall be treated as being resident and ordinarily resident in the United Kingdom unless the general administration of the trusts is ordinarily carried on outside the United Kingdom and the trustees or a majority of them for the time being are not resident or not ordinarily resident in the United Kingdom.'
Then there is a proviso to that subsection which I need not read.
Then, I think it is convenient to refer to s. 45(1) for the definition of 'settled property', which, with a certain exception which is not material for present purposes, is defined as meaning 'any property held in trust other than property to which section 22(5) of this Act applies'. Then, still in s. 25 of the Act:
'(3) On the occasion when a person becomes absolutely entitled to any settled property as against the trustee all the assets forming part of the settled property to which he becomes so entitled shall be deemed to have been disposed of by the trustee, and immediately reacquired by him in his capacity as a trustee within section 22(5) of this Act, for a consideration equal to their market value.'
Finally, there is a provision which was not in fact passed until after the events with which we are concerned, but which, as it is a declaratory provision, is accepted on all hands to be of retrospective effect. It is to be found in Sch. 19 to the Finance Act 1969, para. 9. That reads:
'"It is hereby declared that references in Part III of the Finance Act 1965"-and I then omit some words which have been repealed-"to any asset held by a person as trustee for another person absolutely entitled as against the trustee are references to a case where that other person has the exclusive right, subject only to satisfying any outstanding charge, lien or other right of the trustees to resort to the asset for payment of duty, taxes, costs or other outgoings, to direct how that asset shall be dealt with."'
The first question which arises is, at what point of time did or will the two grandchildren become absolutely entitled as against the trustees to the residuary estate? There have been suggested the following points of time: (i) by Mr. Lawton, 13th April 1955, when the younger of the two grandchildren attained the age of 21; (ii) by Mr. Browne-Wilkinson, 27th January 1969, when the deed of family arrangement was executed; (iii) by Mr. Lawton, the date or dates upon which there is made an actual distribution of the residuary estate between the two grandchildren. This last submission was, in point of fact, the ground upon which the Special Commissioners found in the Respondents' favour. The Revenue had assessed them to capital gains tax for the year 1968-69 (in accordance with the second date indicated above) in the sum of £10,000. This is in fact an estimated sum, and no actual computations have yet, so far as I am aware, been made.
The Respondents appealed to the Special Commissioners against this assessment, and they allowed the appeal. Their reasons are stated as follows:
'"If they had so wished, Richard and Charles"-they are the two grandchildren-"as tenants in common could at that point of time"- that being the date of execution of the deed of family arrangement- "have taken steps to have the residuary estate transferred to themselves. They did not, however, take this course, and the property accordingly continued to be held in trust, the trustees distributing the whole of the income equally between Richard and Charles. The trustees would not, however, appear to have become then bare trustees merely distributing income and having no other duties of any kind to perform. They were, it would seem, empowered as hitherto to exercise the discretion conferred on them by clause 7(c) of Sir Richard Winfrey's will to change investments, and it is, we think, evident that Richard and Charles could not have arrogated to themselves the right to direct the trustees how on such a matter the assets should be dealt with. This being so, it seems to us that Richard and Charles still did not have the exclusive right, subject only to falling within the ambit of the 'subject only' phrase, to direct how the assets in question should be dealt with, unless (and there is in our view no sufficient warrant for this) the words 'dealt with' are interpreted as having in the context in which they occur not their full ordinary meaning but a more limited sense. Accordingly Richard and Charles did not in our view on the occasion when the deed supplemental to the will was entered into become 'absolutely entitled as against the trustee' to any settled property, within the narrow scope of the words cited as they fall to be construed having regard to the declaratory provisions contained in the said para. 9."'
That, of course, is a reference to para. 9 of Sch. 19 to the Finance Act 1969. From their decision the Crown has appealed to the High Court, and the matter comes before me accordingly. I shall now return to the three possible dates in order. As regards the suggested date of 13th April 1955-which is, of course, only Mr. Lawton's alternative submission-this submission rests upon equating the charge upon the income of the residuary estate of the three annuities to the widowed daughters with the word 'outgoings' in the Finance Act 1969, Sch. 19, para. 9. Mr. Lawton cited to me authority to show that the word 'outgoings' was a word of the widest possible signification. I would agree with that, but one has to look at the word here in the context in which it is found. I cannot think that the right of the annuitants to have their annuities paid out of the income of the residuary estate is a charge, lien or other right 'of the trustees' within the meaning of that phrase as so found in para. 9. It appears to me quite clear that the subject-matter to which para. 9 is directed is the prevention of a situation where the taxpayer was able to say, and say truly, that he was not 'absolutely entitled against the trustee' because the trustees had some personal right of indemnity, of resorting to the trust funds, which took priority over the rights of the person otherwise absolutely entitled. It does not appear to me to be in any way apt language for use in the case of another beneficial interest arising under the same instrument as the beneficial interest of the person said to be absolutely entitled as against the trustees. Such a person is not 'absolutely entitled as against the trustee', whatever that phrase means, for the obvious reason that he does not, subject only to the excepted rights of the trustees, hold the entirety of the beneficial interest in the fund. That beneficial interest is divided between the annuitant and the other person, and he by himself is not entitled to the entirety of the beneficial interest. Mr. Lawton strove very hard to persuade me that the annuitants-the daughters of the testator-were only in the position of chargees, but this will not do. The trust fund was the whole of the assets in the hands of the trustees, and that fund was the source from which the annuities were paid. Any reference to annuities being 'charged' on the capital or income of a fund only relates to indicating that part of the fund out of which they are to be paid, and their priority over other interests in the fund. Per contra , where there is a genuine charge to an outsider-say, a mortgage of some description-upon a proper analysis the trust asset is the equity of redemption only in the mortgaged asset. This is the crucial distinction.
I now approach the second date-namely, when the deed of family arrangement was executed-stressing once again that, having regard to its provisions, any appropriation out of the annuity fund was effected uno ictu therewith. If the concept of a person being beneficially entitled as against a trustee stood alone, there would, I think, be little difficulty in the concept. But it does not stand alone, because in the Finance Act 1965, s. 22(5), one finds the additional words '(or for two or more persons who are or would be jointly so entitled)', the 'would be' being a reference to infancy or disability. Now it was decided by Foster J. in Kidson v. Macdonald (1) [1947] 2 W.L.R. 566 that the word 'jointly' was to be read in the sense of 'concurrently, or in common', and was not to be confined to the strict joint tenancy-that is, a tenancy with benefit of survivorship-as known to English conveyancers. Whilst this point is only one in the foothills, as it were, of the argument, Mr. Lawton did not like this decision in any way, and submitted thereon, first, that it was a decision relating to a trust for sale of land where the two joint tenants were such legally and beneficially, and that there is no reason to suppose that Foster J. would have intended his decision to apply to pure personalty, which constitutes the bulk of the present remaining residuary estate. As a final measure, if necessary, he submitted that that case was wrongly decided. I reject both of these submissions. It appears to me perfectly clear that, although the ratio decidendi of that case arises out of the consideration that the ordinary English conveyancing concept of a joint tenancy in real property is unknown north of the border, whilst the same statutory provisions apply indifferently either side of it, nevertheless the decision is a perfectly general one as to the scope of the relevant phrase in s. 22(5), and is in no wise confined to real property. The arguments as to the generality of the meaning of 'jointly' would have been precisely the same whatever the subject-matter of the trust. As regards the soundness of the decision as a whole, although technically I am not strictly bound to follow it, it appears to me that, even if I had thought the decision logically dubious, I ought to follow a decision of Foster J. on a novel point otherwise untouched by authority. But I go much further than that. The reasoning of the learned Judge in that case appears to me to be well founded, and were the matter res integra such as I should have hoped myself to reproduce.
I now turn to a consideration of the phrase 'absolutely entitled as against the trustee', which is now of course fairly closely defined in the Finance Act 1969, Sch. 19, para. 9. It is there defined as meaning that the person concerned
'has the exclusive right, subject only to satisfying any outstanding charge, lien or other right of the trustees to resort to the asset for payment of duty, taxes, costs or other outgoings, to direct how that asset shall be dealt with.'
Now it is trite law that the persons who between them hold the entirety of the beneficial interests in any particular trust fund are as a body entitled to direct the trustees how that trust fund is to be dealt with, and this is obviously the legal territory from which that definition derives. However, in view of the arguments advanced to me by Mr. Lawton, and more particularly that advanced by him on the basis of the decision of Vaisey J. in In re Brockbank [1948] Ch. 206, I think it may be desirable to state what I conceive to be certain elementary principles. (1) In a case where the persons who between them hold the entirety of the beneficial interests in any particular trust fund are all sui juris and acting together ('the beneficial interest holders'), they are entitled to direct the trustees how the trust fund may be dealt with. (2) This does not mean, however, that they can at one and the same time override the preexisting trusts and keep them in existence. Thus, in In re Brockbank itself the beneficial interest holders were entitled to override the pre-existing trusts by, for example, directing the trustees to transfer the trust fund to X and Y, whether X and Y were the trustees of some other trust or not, but they were not entitled to direct the existing trustee to appoint their own nominee as a new trustee of the existing trust. By so doing they would be pursuing inconsistent rights. (3) Nor, I think, are the beneficial interest holders entitled to direct the trustees as to the particular investment they should make of the trust fund. I think this follows for the same reasons as the above. Moreover, it appears to me that, once the beneficial interest holders have determined to end the trust, they are not entitled, unless by agreement, to the further services of the trustees. Those trustees can of course be compelled to hand over the entire trust assets to any person or persons selected by the beneficiaries against a proper discharge, but they cannot be compelled, unless they are in fact willing to comply with the directions, to do anything else with the trust fund which they are not in fact willing to do. (4) Of course, the rights of the beneficial interest holders are always subject to the right of the trustees to be fully protected against such matters as duty, taxes, costs or other outgoings; for example, the rent under a lease which the trustees have properly accepted as part of the trust property. So much for the rights of the beneficial interest holders collectively. When the situation is that a single person who is sui juris has an absolutely vested beneficial interest in a share of the trust fund, his rights are not, I think, quite as extensive as those of the beneficial interest holders as a body. In general, he is entitled to have transferred to him (subject, of course, always to the same rights of the trustees as I have already mentioned above) an aliquot share of each and every asset of the trust fund which presents no difficulty so far as division is concerned. This will apply to such items as cash, money at the bank, or an unsecured loan, Stock Exchange securities and the like. However, as regards land, certainly, in all cases, as regards shares in a private company in very special circumstances (see In re Weiner [1956] 1 W.L.R. 579) and possibly (although the logic of the addition in fact escapes me) mortgage debts (see In re Marshall [1914] 1 Ch. 192, per Sir Herbert Cozens-Hardy M.R., at page 199) the situation is not so simple, and even a person with a vested interest in possession in an aliquot share of the trust fund may have to wait until the land is sold, and so forth, before being able to call upon the trustees as of right to account to him for his share of the assets.
It is, I think, in the light of these elementary propositions that one can understand the forces which have shaped the definitions in the present instance. The scheme of the capital gains tax legislation is to treat all assets alike, and it would be extremely curious if, by reason of the different natures of the assets when a person became entitled to an aliquot share of a trust fund, some were treated one way and some another way for the purposes of that tax. I appreciate that Mr. Lawton says that his solution-no becoming absolutely entitled until actual distribution-would produce a result which treated all assets alike, but it appears to me, for reasons which I shall elaborate later, that this is not the intent of the legislation at all. I think that the definition has been framed, therefore, with the following points in view. (i) The elimination of the trustees' rights of indemnity, because otherwise it would be possible to postpone the payment of capital gains tax indefinitely by keeping alive what might be a very small right indeed. (ii) The elimination of any question as to what were the assets to which a person has become absolutely entitled in the commonest of all cases; namely, where the trust fund ultimately vests in possession in various persons in various shares. Of course, if, in the event, vesting takes place at different times, it appears to me inescapable that the question may still arise. (iii) The definition says 'jointly'; it does not say 'together'. I think this is because it is intended to comprise persons who are, as it were, in the same interest. This is a point which was alluded to by Foster J. in the Kidson case(1) . If property is settled upon A for life with remainder to B, A and B are 'together' entitled absolutely as against the trustees, but they are not so entitled 'jointly', 'concurrently', or 'as tenants in common'. (iv) Finally, of course, the definition is so framed as to require the person who becomes absolutely entitled to be able to give the trustees a good discharge. In a sense, this is the reverse of the penny of absolute entitlement.
It follows from the foregoing, of course, that I entirely reject Mr. Lawton's submission that the date of becoming absolutely entitled is the date of actual distribution. I do so for a number of reasons. The first is because this is not what the Act says at all. If actual distribution was to be the test, this must be the test even for a single individual, and the Act would then surely have mentioned that as the crucial date. After all, absolute entitlement, however one defines it, provided the definition is a rational one, must antedate distribution. There is, however, so it seems to me, an even more compelling argument in that the definition of 'absolutely entitled' to be found in the Finance Act 1969, Sch. 19, para. 9, presupposes that such absolute entitlement takes place at a time when the fund is still in the hands of the trustees, because otherwise the reference to 'satisfying any outstanding charge', etc., would be completely otiose. On an actual transfer of the property there can be no question of 'satisfaction' so far as the transferred property is concerned: and, at any rate in the normal case of settled property, any 'lien' of the trustees is a possessory lien only and is lost as soon as the trust property is handed over. It therefore appears to me quite clear that the Legislature contemplated a point of time quite distinct from the date of actual transfer as the date of a person becoming 'absolutely entitled' to trust property.
I therefore conclude, after this perhaps too elaborate inspection of the whole position, that on the execution of the deed of family arrangement the two grandchildren became absolutely entitled as against the trustees to the whole of the remaining assets of the residuary estate, with the result that s. 22(5) of the Finance Act 1965 applies. This, however, is not the charging section. The charging section is s. 25(3), and this section is framed in the singular. The Crown say that, bearing particularly in mind the cross-reference to s. 22(5) therein contained, it cannot possibly be read as confined to a single person becoming absolutely entitled, but must embrace 'persons' as well as 'a person' so becoming entitled, and they refer to the Interpretation Act 1889, s. 1, in this connection. Mr. Lawton, on the other hand, stoutly maintains that this section applies only to a single individual becoming so entitled, and says that it is not sufficient for the Crown to seek to rely upon the Interpretation Act 1889, because in order to make good their argument they will have to read into that subsection, not only the plural as well as the singular, but also the word 'jointly' after the plural 'persons'. I see the force of that argument, but I am not persuaded thereby. I see no necessity to read in anything more than the plural, and the cross-reference to s. 22(5) then, as it seems to me, explains the sense in which the plural is to be understood.
Thus the conclusion of the whole matter appears to me to be that when the deed of family arrangement was executed the two grandchildren became, for the purposes of capital gains tax, jointly absolutely entitled as against the trustees of their grandfather's will trusts to the remaining residue of the estate not thereby appropriated to answer their aunts' annuities, within the meaning of the Finance Act 1965, s. 22(5), and the Finance Act 1969, Sch. 19, para. 9; and that, consequent thereupon, the trustees are by virtue of s. 25(3) deemed for the purposes of capital gains tax to have disposed of the whole of such remaining residue and immediately reacquired the same in their capacity as trustees for a consideration equal to its market value. I have already indicated that the figure of £10,000 is purely notional, and the actual figures will now remain to be worked out by the parties:
I have been supplied with a schedule of the assets forming part of the residuary estate as at 27th January 1969, and, although there are no valuations in regard to any of the assets, it would appear from a brief inspection thereof that, apart from a farm and 21 acres of land and about £3,000 out on mortgage, the vast bulk of the assets are shares quoted on the Stock Exchange. As a practical matter, any moneys out on mortgage are not capable of producing a capital gain, although they may possibly produce a capital loss in certain circumstances. So for practical purposes, if one excludes the land, on any footing each of the grandchildren has become absolutely entitled as against the trustees to one-half of those shares, with the inevitable consequence of a charge to capital gains tax in relation thereto, even if one were to accept Mr. Lawton's argument on s. 25(3) being confined to the singular.
However, he did put forward a further argument to the effect that in such a case that subsection would not apply, because for the purposes of capital gains tax a holding of shares was a single entity, and for this he relied upon the Finance Act 1965, Sch. 7, para. 2(1), which reads as follows:
'Any number of shares of the same class held by one person in one capacity shall for the purposes of this Part of this Act be regarded as indistinguishable parts of a single asset (in this paragraph referred to as a holding) growing or diminishing on the occasions on which additional shares of the class in question are acquired, or some of the shares of the class in question are disposed of.'