Pearson and Ors v Inland Revenue Commissioners
[1981] A.C. 753(Decision by: Lord Russell of Killowen)
Between: Pearson and Ors - Respondents
And: Inland Revenue Commissioners - Appellants
Judges:
Viscount Dilhorne
Lord Salmon
Lord Russell of KillowenLord Keith of Kinkel
Lord Lane
Subject References:
REVENUE
CAPITAL TRANSFER TAX
SETTLEMENT
Trust for settlor's children subject to overriding power of appointment
Trustees' power to accumulate and apply income for duties, taxes, outgoings
Appointment of cash to beneficiary
Whether beneficiary's interest 'interest in possession' before appointment
Whether chargeable to capital transfer tax
Legislative References:
Finance Act 1975 (c. 7) - s. 21, Sch. 5, para. 6 (2)
Case References:
Allen-Meyrick's Will Trusts, In re - [1966] 1 W.L.R. 499; [1966] 1 All E.R. 740
Alston-Roberts-West's Settled Estates, In re - [1928] W.N. 41
Attorney-General v. Farrell - [1931] 1 K.B. 81, C.A.
Attorney-General v. Heywood - (1887) 19 Q.B.D. 326, D.C.
Attorney-General v. Power - [1906] 2 I.R. 272
Aylwin's Trusts, in re - (1873) L.R. 16 Eq. 585
Baden's Deed Trusts, In re - [1971] A.C. 424; [1970] 2 W.L.R. 1110; [1970] 2 All E.R. 228, H.L.(E.)
Baird v. Lord Advocate - [1979] A.C. 666; [1979] 2 W.L.R. 369; [1979] 2 All E.R. 28, H.L.(Sc.)
Berkeley, decd., In re - [1968] Ch. 744; [1968] 3 W.L.R. 253; [1968] 3 All E.R. 364, C.A.
Burrell and Kinnaird v. Attorney-General - [1937] A.C. 286; [1936] 3 All E.R. 758, H.L.(E.)
Buttle's Will Trusts, In re - [1977] 1 W.L.R. 1200; [1976] 3 All E.R. 289; [1977] 3 All E.R. 1039, Templeman J. and C.A.
Clitheroe Estate, In re - (1885) 31 Ch.D. 135, C.A.
Commissioner of Stamp Duties (Queensland) v. Livingston - [1965] A.C. 694; [1964] 3 W.L.R. 963; [1964] 3 All E.R. 692, P.C.
Corbett v. Inland Revenue Commissioners - [1938] 1 K.B. 567
Fleming v. London Produce Co. Ltd - [1968] 1 W.L.R. 1013; [1968] 2 All E.R. 975
Gartside v. Inland Revenue Commissioners - [1968] A.C. 553; [1968] 2 W.L.R. 277; [1968] 1 All E.R. 121, H.L.(E.)
Gestetner Settlement, In re - [1953] Ch. 672; [1953] 2 W.L.R. 1033; [1953] 1 All E.R. 1150
Gourju's Will Trusts, In re - [1943] Ch. 24; [1942] 2 All E.R. 605
Gulbenkian's Settlements, In re (No. 2) - [1970] Ch. 408; [1969] 3 W.L.R. 450; [1969] 2 All E.R. 1173
Joel's Will Trusts, In re - [1967] Ch. 14; [1966] 3 W.L.R. 209; [1966] 2 All E.R. 482
Jones, In re - (1884) 26 Ch.D. 736, C.A.
Kirkness v. John Hudson & Co. Ltd - [1955] A.C. 696; [1955] 2 W.L.R. 1135; [1955] 2 All E.R. 345, H.L.(E.)
Locker's Settlement, In re - [1977] 1 W.L.R. 1323; [1978] 1 All E.R. 216
Londonderry's Settlement, In re - [1965] Ch. 918; [1965] 2 W.L.R. 229; [1964] 3 All E.R. 855, C.A.
Lord Advocate v. Fothringham - [1924] S.C. 52
Ormond Investment Co. Ltd. v. Betts - [1928] A.C. 143, H.L.(E.)
Macfarlang v. Inland Revenue Commissioners - 1929 S.C. 453
Master's Settlement, In re - [1911] 1 Ch. 321
Morgan, In re - (1883) 24 Ch.D. 114
Murray v. Inland Revenue Commissioners - [1926] 11 T.C. 133
Phipps (P.) & Co. Ltd. v. Rogers - [1915] 1 K.B. 14
Rank Xerox Ltd. v. Lane - [1981] A.C. 629; [1979] 3 W.L.R. 594; [1979] 3 All E.R. 657, H.L.(E.)
Rochford's Settlement Trusts, In re - [1965] Ch. 111; [1964] 2 W.L.R. 1339; [1964] 2 All E.R. 177
Sargaison v. Roberts - [1969] 1 W.L.R. 951; [1969] 3 All E.R. 1072
Spens v. Inland Revenue Commissioners - [1970] 1 W.L.R. 1173; [1970] 3 All E.R. 245
Vestey v. Inland Revenue Commissioners - [1980] A.C. 1148; [1979] 3 W.L.R. 915; [1979] 3 All E.R. 976, H.L.(E.)
Vine v. Raleigh - [1891] 2 Ch. 13, C.A.
Westminster Bank Ltd. v. Inland Revenue Commissioners - [1958] A.C. 210; [1957] 3 W.L.R. 427; [1957] 2 All E.R. 745, H.L.(E.)
Judgment date: 1 May 1980
Decision by:
Lord Russell of Killowen
My Lords, the settlor Sir R. A. Pilkington executed on November 30, 1964, a settlement of 13,333 ordinary £10 shares in Pilkington Brothers Ltd. The settlor had three children only, his daughters Fiona, Serena and Julia, all of whom had attained the age of 21 before the end of February 1974. These three at all times fulfilled the settlement definition of "the principal beneficiaries." The settlement also defined "the discretionary objects" as meaning the principal beneficiaries, their issue whenever born, and the spouses and relicts of the principal beneficiaries and of their said issue. A "trust period" was defined as the shortest of three periods
- (i)
- the expiration of 20 years from the death of the survivor of the then (November 30, 1964) living issue of King George V,
- (ii)
- until the time when there should be no discretionary object in existence,
- (iii)
- until the time when the trustees might by deed in their discretion declare the trust period to expire.
Clause 2 conferred upon the trustees an overriding power over capital and income of the trust fund by deed or deeds revocable or irrevocable to appoint in favour of any one or more of the discretionary objects in the widest possible terms, restricted only by the need not to infringe the rules against perpetuities and excessive accumulation.
Clause 3 was in the following terms:
"In default of and until and subject to any appointment made under the last foregoing clause the trustees shall hold the capital and income of the trust fund upon the following trusts that is to say:
- (a)
- During the trust period or the period of 21 years from the execution hereof (whichever shall be the shorter period) the trustees shall accumulate so much (if any) of the income of the trust fund as they shall think fit by investing the same and the resulting income thereof in any manner hereinafter authorised as an accretion to the capital of the trust fund and as one fund with such capital for all purposes.
- (b)
- Subject thereto the trustees shall hold the capital and income of the trust fund upon trust for such of the principal beneficiaries as shall attain the age of 21 years or marry under that age and if more than one in equal shares absolutely."
In my opinion the provisions of clause 3 clearly constitute
- (i)
- a mere power in the trustees to accumulate, and
- (ii)
- subject to
- (a)
- that power
- (b)
- the clause 3 power of appointment and
- (c)
- (until the death of the settlor which occurred in December 1976) the possibility of partial defeasance by further children being born to him,
an absolute trust as to capital and income and any accumulations for the three daughters in equal shares on attaining the age of 21 years, which as stated all three had attained by the end of February 1974. It will be observed that this is not a case of a gift of income for the benefit of a discretionary class, as was the case in Gartside v. Inland Revenue Commissioners [1968] A.C. 553. Ignoring, as for present purposes may admittedly be done, factors (b) and (c), the three daughters were absolutely entitled each to one third of the income of the trust subject only to a power in the trustees to divert all or part by deciding to accumulate (during a period permitted by law) some or all of the income as it accrued. In fact the trustees accumulated all income accruing: on the one hand the appellants' claim would have been exactly the same if none had been accumulated: on the other hand the respondents' case equally is that it makes no difference that all had been accumulated: it was therefore common ground that the answer to the question posed in this appeal in no way depended upon what the trustees did or did not do by way of exercise of their power of accumulation.
The only other clause in the settlement requiring notice was clause 21, in the following terms:
"The trustees may at any time or times apply any income of the trust fund in or towards the payment or discharge of any duties taxes costs charges fees or other outgoings which but for the provisions of this clause would be payable out of or charged upon the capital of the trust fund or any part thereof."
The appellants contended that, even without the clause 3 power of accumulation, this clause contained a power in effect to accumulate which, though not in fact operated, had the same result in terms of the liability for capital transfer tax asserted.
On August 8, 1974, the trustees exercised their clause 2 power of appointment over a freehold house in London (part of the trust capital) by revocably appointing the income therefrom to Serena for life, she to be entitled to occupy it rent free but paying rates and other outgoings and keeping it in repair and insured.
On September 16, 1974, the trustees similarly exercised their clause 2 power of appointment over another London house in favour of Fiona.
On March 20, 1976, the trustees again exercised their clause 2 power of appointment in favour of Fiona, this time over the sum of £16,000 pan of the trust capital; they irrevocably appointed the income thereof to Fiona during her life or during the trust whichever should be the shorter period. The appointment reserved a power in the trustees to raise and expend capital of the £16,000 fund on repairs etc. to the house previously appointed to Fiona. It also provided that if any capital transfer tax should be payable as a result of that appointment it should be raised and paid out of the balance of the trust fund in exoneration of the appointed fund.
It is in connection with this last appointment that the appellants claim that capital transfer tax is payable as its result. Both Fox J. and the Court of Appeal decided to the contrary. (There was later in fact a clause 2 appointment of a freehold house and £16,000 in favour of Julia on similar lines, but revocable as to both.)
The notice of determination under the Finance Act 1975, Schedule 4, paragraph 6 against which the respondents appealed asserted that under the 1976 appointment Fiona became entitled to an "interest in possession" in the £16,000 part of the settled property "at a time when no such interest subsisted in that part of the property within the terms of paragraph 6 (2) Schedule 5 Finance Act 1975": that a capital distribution was accordingly to be treated as having been made out of that part of the settled property: that the tax chargeable on that distribution was £444 odd.
I do not propose to rehearse passages from the Finance Act 1975. They are fully set out and discussed in the judgments at first instance and in the Court of Appeal [1980] Ch. 1. The short question is whether the Crown is right when it contends that for the purposes of paragraph 6 (2) of Schedule 5 to the Act at the time of the 1976 appointment of £16,000 no interest in possession subsisted in the £16,000. As already indicated the Crown contends that the mere existence of the power to accumulate (clause 3) and equally of the power to apply income for "capital" purposes (clause 21) necessarily involved a situation in which the daughters had no interest in possession subsisting in the trust fund including the £16,000: though it was not contended that the existence of the clause 2 power of appointment had that effect.
In common with my noble and learned friend Lord Keith of Kinkel I do not find any reliable guidance in this matter from the provisions of the Settled Land Acts, nor from consideration of the estate duty legislation which was superseded by the Finance Act 1975. Neither do I find it a useful exercise to compare anomalies and "hard cases" asserted to arise on either solution: such are, I fear, only to be expected in the introduction of such a radical and complicated experiment in fiscal novelty.
The crucial question, in my opinion, lies in the well known distinction between a trust and a power, a distinction recognised by this House in In re Baden's Deed Trusts [1971] A.C. 424, and there only regretted as a distinction which might lead in a given case to invalidity of the disposition. As I have already indicated this is clearly a case of a mere power to accumulate, as distinct from a trust to accumulate unless and to the extent to which the trustees exercised a power to pay allowances to the sisters or any of them. The sisters were able to say that as income accrued on the £16,000 they were then entitled to that income, subject to the possibility that the trustees might subsequently divert it from them by a decision to accumulate it. (Indeed but for the clause 2 power of appointment, and the possibility until the death of the settlor in December 1976 of the birth of further children, they were, notwithstanding the power of accumulation, entitled to claim transfer of the £16,000.) Similar considerations apply to the possibility of the exercise of the clause 21 application of the income for a capital purpose. The case is also distinguishable from the case of a discretionary trust of income among a class - as in Gartside [1968] A.C. 553.
These considerations persuade me that at the time of the 1976 appointment it is not correct to say that no interest in possession subsisted in the three sisters in the £16,000.
My noble and learned friend Lord Keith of Kinkel, in forming the opposite opinion, suggests that otherwise a conclusion follows that the interest goes in and out of possession according as the trustees refrain from accumulating or decide to do so, and to the further conclusion that as the trustees did actually accumulate all the income up to the date of the 1976 appointment, the interest was never in possession. I do not recall that this proposition was advanced for the appellants, who as already indicated agreed (as did the respondents) that the exercise or non-exercise of the powers under clause 3 or clause 21 could make no difference to the outcome. I consider, with respect, that the conclusions stated above do not follow from the view which I have, supporting the courts below, formed. The fact that an interest in possession is liable to defeasance by subsequent exercise of the power does not deny it that description when the benefit of it is thus subsequently taken away.
The statute contains a "non-definition" of an interest in possession which does not assist in answering this problem. If the view which I have formed were the correct one on the statute as drafted, and if it runs counter (as I assume from the fact of this appeal it does) to the intentions of those responsible for the legislation, it should be fairly simple to provide expressly that the existence of a mere power of accumulation, or of a power such as is contained in clause 21, operates to prevent the simultaneous existence of an interest in possession in any property of which the income is subject to such a power.
I would accordingly dismiss the appeal.