Pearson and Ors v Inland Revenue Commissioners

[1981] A.C. 753

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(Judgment by: Viscount Dilhorne)

Between: Pearson and Ors - Respondents
And: Inland Revenue Commissioners - Appellants

Court:

Judges:
Viscount DilhorneLord Salmon
Lord Russell of Killowen
Lord 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.)

Hearing date: 27-28 February, 3-6, 10 March 1980
Judgment date: 1 May 1980

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Judgment by:
Viscount Dilhorne

My Lords, the only question to be decided in this appeal is whether Fiona Pilkington and her two sisters, Serena and Julia, were after they were 21 and before March 27, 1974, entitled to interests in possession in settled property. The respondents say that they were and the revenue says that they were not.

By a settlement made on November 30, 1964, the settlor, Sir William Pilkington, transferred to trustees 13,333 ordinary shares of £10 each in Pilkington Brothers Ltd. Clause 2 of the deed established a trust in relation to the capital and income of the trust fund under which the trustees had power to appoint capital and income for the benefit of all or any one or more of the "discretionary objects" of the trust. "Discretionary objects" was defined as meaning the principal beneficiaries, their children and remoter issue and the respective wives, husbands, widows and widowers of the principal beneficiaries and their children and remoter issue. The principal beneficiaries were all the children of the settlor.

Clause 3 provided, inter alia:

"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 ...

(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 or marry under that age and if more than one in equal shares absolutely."

Clause 14 read as follows:

"The trustees shall in respect of any property subject to the trusts hereof have all the powers of management and exploitation of an absolute beneficial owner ..."

Clause 21 was 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 or the trust fund or any part thereof."

Fiona and her sisters had all reached the age of 21 by the end of February 1974. The position then was that, subject to the trustees' power of appointment under clause 2 and their power to accumulate income under clause 3 (a) and the possibility of partial defeasance on the birth of further children to the settlor, the trust fund was held in trust for Fiona and her sisters in equal shares.

By a deed of appointment made on March 20, 1976, the trustees appointed that £16,000 should be held on trust to pay the income thereof to Fiona during her life or during the trust period whichever should be the shorter.

The Finance Act 1975 introduced the capital transfer tax under which tax is charged "on the value transferred by a chargeable transfer." Subject to certain exceptions, a transfer of value is any disposition made by a person as a result of which the value of his estate immediately after the disposition is less than it would be but for the disposition: and a chargeable transfer is any transfer of value made by an individual after March 26, 1974: see Finance Act 1975, section 20 (2) and (4).

Schedule 5 to the Act has effect with regard to settled property. This Schedule draws a distinction between what may be called fixed interest trusts and discretionary trusts. A person entitled to an interest in possession in settled property is in general treated as if he was beneficially entitled to the property in which his interest subsists. If during his life his interest in possession comes to an end, there is a charge to tax as if he had himself made a transfer of value and the value transferred had been equal to the value of the property in which his interest subsisted: Schedule 5, paragraph 4 (2). If he dies and is then entitled to an interest in possession, tax is charged as if immediately before his death he had made a transfer of value equal to the value of his estate (section 22) of which his interest in possession formed part. On the other hand, if he becomes absolutely entitled to the property in which he had an interest in possession, there is no charge to tax; nor is there if his interest in possession comes to an end but on the same occasion he becomes entitled to another interest in possession in the property: Schedule 5, paragraph 4 (3).

It follows that if Fiona had an interest in possession in the 13,333 shares settled by her father, she would not have become liable to capital transfer tax on the appointment to her of the £16,000. On the other hand, if there was no interest in possession of the settled property when that appointment was made, the position is very different. Sub-paragraphs (1), (2) and (4) of paragraph 6 of Schedule 5 read as follows:

"(1)

Where a distribution payment is made out of property comprised in a settlement and at the time the payment is made no interest in possession subsists in the property or in the part of it out of which the payment is made, the payment is in this Schedule referred to as a capital distribution.

(2)

Where a person becomes entitled to an interest in possession in the whole or any part of the property comprised in a settlement at a time when no such interest subsists in the property or that part, a capital distribution shall be treated as being made out of the property or that part of the property; and the amount of the distribution shall be taken to be equal to the value at that time of the property or, if the interest is in part only of that property, of that part.

...

(4)

Tax shall be charged on any capital distribution as on the value transferred by a chargeable transfer where -

(a)

the value transferred less the tax payable on it is equal to the amount of the capital distribution; ..."

So if Fiona became entitled to the £16,000 at a time when no interest in possession subsisted in that, a capital distribution of £16,000 has to be treated as having been made. Further every 10 years from the date of the relevant transfer occurring after April 1, 1980, tax is charged at the rate of 30 per cent. of the rate which would otherwise be chargeable on the value of the property in the settlement in which no interest in possession subsists: Schedule 5, paragraph 12. Where a settlement was made before March 27, 1974, the tax chargeable on any capital distribution made before April 1, 1980, (now extended to 1982) is reduced: Schedule 5, paragraph 14. This provision recognises that some hardship and injustice may result from the abolition of estate duty and its replacement by capital transfer tax in relation to a settlement where there is no interest in possession and provides an opportunity for securing a variation of the trust before the full extent of the tax has to be borne.

The meaning to be given to the words "interest in possession in settled property" is thus of vital importance in ascertaining liability to capital transfer tax.

For the purpose of interpreting paragraphs 6 to 10 of Schedule 5 "interest in possession" is defined as meaning inter alia "an interest in possession to which an individual is beneficially entitled": Schedule 5, paragraph 11 (10). This definition, which does not apply to paragraph 3 (1), would be of no assistance if it did.

Schedule 5, paragraph 1 (9) states that in the application of the Schedule to Scotland, any reference to an interest in possession in settled property is a reference to an interest of any kind under a settlement actually being enjoyed by the person in right of that interest. By the Finance Act 1976, Schedule 14, paragraph 10 the words "actually being enjoyed by the person in right of that interest" were deleted and replaced by "by virtue of which the person in right of that interest is entitled to the enjoyment of the property or would be so entitled if the property were capable of enjoyment."

It was contended on behalf of the revenue that "interest in possession" in the Finance Act 1975 should be construed with the amended definition of those words for the purpose of the application of Schedule 5 to Scotland made by the Finance Act 1976. In Kirkness v. John Hudson & Co. Ltd. [1955] A.C. 696 the question whether it was legitimate to seek guidance from a later Act in construing an earlier one, and, if it was, what light the later Act threw upon the earlier one arose for consideration. Viscount Simonds at p. 711 enunciated the proposition that it was only where there was an ambiguity in the earlier Act that recourse might be had to a later Act for its construction. He pointed out that it would be easy to say there was such an ambiguity as to justify recourse to a later Act to resolve it if judicial opinion differed as to the meaning of the words in the Act but that the House had decided in Ormond Investment Co. Ltd. v. Betts [1928] A.C. 143 that that was not so. Lord Simonds went on to say, at p. 712:

"... each one of us has the task of deciding what the relevant words mean. In coming to that decision he will necessarily give great weight to the opinion of others, but if at the end of the day he forms his own clear judgment and does not think that the words are 'fairly and equally open to divers meanings' he is not entitled to say that there is an ambiguity. For him at least there is no ambiguity and on that basis he must decide the case."

Lord Reid was of the same opinion. He said, at pp. 735-736:

"A provision is not ambiguous merely because it contains a word which in different contexts is capable of different meanings. It would be hard to find anywhere a sentence of any length which does not contain such a word. A provision is, in my judgment, ambiguous only if it contains a word or phrase which in that particular context is capable of having more than one meaning."

I do not think the words "interest in possession in settled property" are equally open to divers meanings. It is the determination of the application of those words to particular circumstances which gives rise to difficulty. I do not therefore consider that one is entitled to have regard to the amendment made by the Finance Act 1976 as to the manner in which a reference to "interest in possession" is to be interpreted in Scotland for the purpose of construing the meaning of "interest in possession" in Schedule 5; but even if one was entitled to do so, I would not regard that amended definition as of any assistance. If Parliament had wanted "interest in possession" to be so interpreted, it would have said so and I do not think that there is any justification for concluding that a provision inserted for the purpose of applying Schedule 5 to Scotland defines the meaning of those words in the Schedule in their application to England and Wales.

No attempt is made in the Finance Act 1975 to define "interest in possession" apart from the definition in paragraph 11 (10) and the definition for the purpose of applying the Schedule to Scotland. What then should be the approach to construing those words in the Act? In my view one should first seek to determine the ordinary and natural meaning of those words and then consider whether there is anything in the context in which they are used to lead to the conclusion that the proper interpretation of them involves a departure from the ordinary and natural meaning.

In Preston; Treatise on Estates (1820), p. 89 an estate in possession is stated to be one which gives "a present right of present enjoyment." This was contrasted with an estate in remainder which it was said gave "a right of future enjoyment." In Fearne on Contingent Remainders, 10th ed. (1844), vol. 1, p. 2 it was said that an estate is vested when there is an immediate fixed right of present or future enjoyment; that an estate is vested in possession when there exists a right of present enjoyment; that an estate is vested in interest when there is a present fixed right of future enjoyment; and that an estate is contingent when a right of enjoyment is to accrue on an event which is dubious and uncertain.

In the light of these statements, it appears that in the 19th century the words "an interest in possession" would have been interpreted as ordinarily meaning the possession of a right to the present enjoyment of something. The appellants in their case contend that:

"... a beneficiary only has an interest in possession if his interest enables him to claim the whole or an ascertainable part of the net income, if any, of the property at the moment at which it is in the hands of the trustees."

The respondents in their case contend that "the phrase 'interest in possession' simply denotes an interest which is not in reversion - a present right of present enjoyment."

So the parties agree that for there to be an interest in possession, there must be a present right to the present enjoyment of something, the revenue contending that it must be to the enjoyment of the whole or part of the net income of the settled property. It is not the case - and in argument the respondents did not contend that it was - that if it is established that the interest is not in remainder or reversion or contingent, it must be concluded that it is in possession. In the present case Fox J. [1980] Ch. 1, 8H, held that

"There must be a present right of present enjoyment."

This was endorsed by Buckley L.J. and Templeman L.J. in the Court of Appeal at pp. 23F and 26F.

We were referred to a considerable number of statutes in which the expression "interest in possession" is to be found. I did not find them of any assistance in relation to the meaning to be given to that phrase in the Finance Act 1975. It suffices to say that I saw nothing in them to indicate or suggest, and I see nothing in the Act itself to suggest, that the phrase should be given any other meaning than that of a present right of present enjoyment. In my opinion that is its meaning in the Finance Act 1975.

The difficulty lies in its application to the facts of the present case. It is said by both parties to be one of fundamental importance. Whether or not that is the case, all we have to decide is whether on reaching 21, Fiona and her sisters acquired interests in possession in settled property. In other words had they then a present right of present enjoyment of anything?

As to that, there are, it seems to me, two possible conclusions. The first is that the power of appointment under clause 2 not having been exercised, the three sisters on reaching that age acquired interests in possession defeasible should the trustees decide to exercise their power to accumulate income. They were then entitled absolutely to the capital and income of the trust fund in equal shares subject to the exercise of that power. The second is that they never secured an interest in possession for they never acquired on reaching that age the right to the enjoyment of anything. Their enjoyment of any income from the trust fund depended on the trustees' decision as to the accumulation of income. They would only have a right to any income from the trust fund if the trustees decided it should not be accumulated or if they failed to agree that it should be or if they delayed a decision on this matter for so long that a decision then to accumulate and withhold income from the sisters would have been unreasonable.

As I read their judgments, the courts below took the first view. Reluctant as I am to differ from judges so experienced in the law relating to trusts, I find myself unable to agree with them. Fox J. [1980] Ch. 1, 9, held that:

"... the interest of a person who is entitled to the income of property subject only to a power in the trustees to accumulate is in possession ... it is a present interest, giving a present right to whatever income is not accumulated." (My emphasis).

In Gartside v. Inland Revenue Commissioners [1968] A.C. 553, an estate duty case, Lord Reid said, at p. 607:

"'In possession' must mean that your interest enables you to claim now whatever may be the subject of the interest. For instance, if it is the current income from a certain fund your claim may yield nothing if there is no income, but your claim is a valid claim, and if there is any income you are entitled to get it. But a right to require trustees to consider whether they will pay you something does not enable you to claim anything. If the trustees do decide to pay you something, you do not get it by reason of having the right to have your case considered: you get it only because the trustees have decided to give it to you."

That case concerned a discretionary trust where payment was made to the beneficiaries at the discretion of the trustees. Here the three sisters' entitlement to income was subject to the trustees' power to accumulate. On reaching 21 they had no valid claim to anything. If there was any income from the settled property, they were not entitled to it. Their right to anything depended on what the trustees did or did not do and the receipt of income by them appears to me to have been just as much at the discretion of the trustees as was the receipt of income by the beneficiaries in the Gartside case.

It was recognised by the respondents that if clause 3 had created a trust to accumulate subject to which the trust fund was to be held in trust for the three sisters absolutely on their attaining 21 they would not have secured an interest in possession on reaching that age. It makes all the difference, so it was said, that the trustees were not under a duty to accumulate but only had power to do so if they thought fit.

I am not able to accept this for in neither case can it in my opinion be said that the sisters on attaining that age secured the right to the present enjoyment of anything.

Fox J. [1980] Ch. 1, 14D, in the course of his judgment distinguished the cases of Attorney-General v. Power [1906] 2 I.R. 272 and Gartside v. Inland Revenue Commissioners [1968] A.C. 553 from the present case on the ground that in those cases "the beneficiaries got nothing unless the trustees decided to give it to them" whereas in the present case the sisters were "absolutely entitled to income unless the trustees decided to accumulate."

I do not think that that is the case. I do not read the trust deed as providing that. Clause 3 (a) gives the trustees power to accumulate as they think fit and the sisters' entitlement depends on whether that power is exercised. If it were the case that the deed did so provide, then I would agree that the sisters had a defeasible interest in possession. Such an interest may be terminated by the exercise of a power of revocation or of an overriding power of appointment such as that contained in clause 2 in this case. The existence of such a power does not prevent the holding of an interest in possession prior to the exercise of the power and until it is exercised, the holder of the interest has a present right of present enjoyment.

A distinction has in my opinion to be drawn between the exercise of a power to terminate a present right of present enjoyment and the exercise of a power which prevents a present right of present enjoyment arising. If in this case the power of appointment under clause 2 had been exercised before the sisters became 21, it could not be said that they then got an interest in possession.

The revenue, while contending that it made no difference in this case that the sisters' entitlement was subject to a power to accumulate as distinct from being subject to a trust to do so, contended that a distinction was to be drawn between what may be called the administrative and the dispositive powers in a trust deed. It was said that such a distinction was drawn in the Finance Act 1969, section 36 (6) (d) where it was enacted that references in the part of the Act dealing with estate duty to the income of any property were to be construed as references to income after deduction of any costs, expenses or fees properly payable out of that income. Section 8 (1) of the Perpetuities and Accumulations Act 1964 provides that:

"The rule against perpetuities shall not operate to invalidate a power conferred on trustees ... to do any ... act in the administration (as opposed to the distribution) of any property ..."

These provisions show that Parliament distinguished between the administration of a trust and the dispositive powers of trustees and in my opinion there is a very real distinction. A life tenant has an interest in possession but his interest only extends to the net income of the property, that is to say, after deduction from the gross income of expenses etc. properly incurred in the management of the trust by the trustees in the exercise of their powers. A dispositive power is a power to dispose of the net income. Sometimes the line between an administrative and a dispositive power may be difficult to draw but that does not mean that there is not a valid distinction. In the present case the revenue contended that the power given by clause 21 to apply income towards the payment of duties, taxes etc. which but for the provisions of the clause would be payable out of or charged upon capital was a dispositive power and that this clause alone would prevent the sisters having an interest in possession on reaching 21. I do not think that this is so. I think this clause falls on the administrative side of the line and merely elucidates the meaning to be given to clause 14.

A considerable part of the arguments addressed to us was devoted to consideration of what would have been the position in relation to estate duty. I do not think it necessary to consider those arguments as I do not think that the position in relation to estate duty assists in determining the application of the words "interest in possession" in Schedule 5.

Each side contended that the case put forward by the other side would give rise in a number of instances to anomalies and injustice. Time was spent in examining whether or not the alleged anomaly would in fact arise. I did not find this helpful for, as Buckley L.J. said [1980] Ch. 1, 24D, in the course of his judgment in this case: "The ingenuity of counsel can almost always produce possible anomalies in either direction, and that has been the case here."

In my opinion the words "interest in possession" in Schedule 5 should be given their ordinary natural meaning which I take to be a present right of present enjoyment and as in my view the sisters on attaining 21 did not obtain that, this appeal should succeed and paragraphs 1 and 2 of the commissioners' determination should be upheld.