TaxTMI 
TaxTMI 
1967 (12) TMI 59
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....eal was concerned) was left on a discretionary trust for the benefit, support and maintenance of all or any of the testator's son John Travis Gartside, his son's wife or children (if any). The trustees were given an absolute discretion to apply any or all of the income of the fund as they thought fit and the income not distributed was to be added to the capital of the fund. They also had power to make advancements to any child of the son out of the trust fund, provided that such advancement did not exceed one-half of then presumptive share of that child. After the testator's son's death the trustees were to hold the capital and income on trust for the son's children who being male attained the age of 21 years or being female attained that age or married previously. On January 8, 1941, the testator died. On August 5, 1942, the testator's son married and on January 5, 1945, twin sons were born. For 20 years the trustees accumulated the income and distributed none of it. In May, 1961, they applied 786 of the income for the benefit of the testator's son and in June, 1961, they applied ? 50 for the benefit of his wife. On January 2, 1962, when the tw....
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....whole or any ascertainable part of the income. How then does the interest (or aggregate interests) of the whole group differ where (as here) the trustees can decide to accumulate the whole income? The difference is that the group as a whole comprise all the persons interested under the discretionary trust; in so far as the trustees, in the execution of that trust, determine to distribute the income, it must be distributed amongst one or more of the persons constituting the discretionary class. The trust must be executed, if at all, in their favour. The group as a whole are the only persons beneficially interested under the discretionary trust. But a single object among the group is only one of several persons beneficially interested. He is not the only person interested in the income as a whole, and he cannot be said to be solely interested in any part of the income. The quantum of his interest is not measurable. The judge applied the wrong test for determining whether the interest in question was in possession or in expectancy. The test is not whether the interest confers an immediate right to payment of income, but whether the interest is a present interest or a future interes....
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....mited to cases where the interest disposed of or determined has become an interest in possession so that but for the disposition or determination the property would have passed under section 1 or would have been deemed to pass under section 2(1)(b). There are several cases in which it has been held that where a discretionary trust is limited to cease on the death of a person, followed either by a new discretionary trust for a different class or by an absolute trust of income or capital for one or more persons, there is a passing under sections 1 or 2(1)(b). These cases support the view that the interest under a discretionary trust is an interest in possession, and not an interest in expectancy. If the interest were in expectancy, there would have been no passing under section 1 or a deemed passing under section 2(1)(b), and the claim for duty (if any) would be under section 2(1)(d) in respect of the interest accruing or arising on death of the deceased: see Hanson on Death Duties, 10th ed. (1956), (p. 187); Scott v.** and is distinguishable on its facts, because (i) The question was whether Hubert's vested but defeasible estate in fee simple in the land was in possession, not w....
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....ound for giving the term a novel and wholly different meaning, such as the meaning for which the Crown contends: see Scott v. Inland Revenue Commissioners(4); Burrell and Kinnaird v. Attorney-General(5); Coutts v. Inland Revenue Commissioners(6); In re Kirkwood(7) and Westminster Bank v. Inland Revenue Commissioners(8). It is accepted in this court that the objects of the discretionary trust have an interest within the meaning of the Finance Act, 1894; and that Attorney-General v. Farrell(9); In re Hodson's Settlement(10) and Westminster Bank v. Attorney-General(2) were correctly decided, although these points are being kept open for argument in the House of Lords should that be necessary. We are not concerned with the position of the objects of a discretionary trust where the whole income must be distributed among them and they therefore could, while all sui juris, decide how the income from time to time should be dealt with. Where, as in the present case, the trustees have a discretion as to the quantum, if any, of the total income to be applied for all or any members of the discretionary group, there is no material distinction between the interest of a discretionary ob....
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....onary objects and the accumulation beneficiaries were interests in possession, interest in possession in the whole of the advanced funds would have been determined by the advancements and estate duty would be payable on the whole of these funds. But if the interests of only one of the groups was an interest in possession, it extended only to an indeterminate part of the income of the trust fund and so its cesser would not have attracted duty: In re Kirkwood(11) and Attorney- General v. Power(12). On the footing that the interest of only one of the two groups was an interest in expectancy, the two groups together could not be treated as a single group having an interest in possession. If the income of a fund is during a specified period held as to half in trust for group A and as to the other half in trust for X for life then for group B, group A and group B have not between them an interest in possession during the life of X. Maugham L.J. in Attorney-General v. Burrell* said that the discretionary objects in that case, together with a number of ascertained persons, could be treated as a single composite person for the purposes of section 2(1)(b) of the Finance Act, 1894. Though ....
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....d not have been excluded from the advanced property. Until they attained full age, the advances were under the deeds poll to be held in trust for them contingently on their attaining that age: this must amount to non-exclusion of them. A benefit to a former life beneficiary by an associated operation is to be treated as non-exclusion for the purpose of sub-section (2): see section 43(2) and (3) of the Finance Act, 1950. These provisions would bring further inequitable consequences. Many advances must have been made in the past some long ago, from trust funds where the previously subsisting trust was a discretionary trust for a life. The discretionary class may have contained not only the advanced beneficiaries but also all their close relatives. The advanced funds may have been shares in private family companies which have remained unrealised and will be likely to be traceable indefinitely. In circumstances such as those, if discretionary trusts were within section 43, freedom from duty would only be obtained for an advance where not only the advancee but the entire class of relatives had been excluded from any benefit by any associated operation. Thus the five-year period would....
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....f the trust fund to any of the grandchildren. These advances should be of sums up to one-half of the share of that grand- child in the fund. On the death of the grandfather on January 8, 1941, the trustees took possession of the trust fund. On August 5, 1942, the son married. On January 5, 1945, the son and his wife had twin sons (the two grandsons), but no other children. For 20 years after the grandfather died, the trustees accumulated all the income of the fund. They did not distribute any of it to the discretionary objects at all. None to the son or his wife or the grandchildren. Then in 1961 they paid ? 786 10s. to the son and ? 50 to his wife. Save for those two payments, they accumulated all the income of the trust fund and added it to the capital. In 1962 the figures were as follows: the original trust fund stood at ? 93,700, earning a gross income of ? 6,400 a year. The income which had accumulated over the years came to ? 55,185. On January 2, 1962, the trustees decided to exercise the power of advancement. The twin grandsons were then nearly 17 years of age. The trustees advanced each of them ? 23,500. These advances were made out of the original trust fund. ....
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....'s death under section 1 or section 2(1)(b) of the Act of 1894. If requisites 1 and 2 are satisfied, it is admitted that requisites 3 and 4 are satisfied. I turn, therefore, to requisites 1 and 2. 1. Did the discretionary objects have an "interest limited to cease" on the son's death? This point is settled by authority. For 80 years now the courts have held that each one of the objects of a discretionary trust has an "interest" in the trust fund, even where there is power in the trustees to withhold it and accumulate the surplus for others: see Attorney-General v. Heywood*, followed in Attorney-General v. Farrell**. These cases have stood so long and so many transactions effected and I may add, so many statutes passed on the faith of them that we must abide by them. What is the reasoning underlying those cases? I think it is simply this: Every person who is an object of a discretionary trust has a right in respect of the trust fund, even when there is power to withhold it and accumulate the surplus. He has a right to be considered by the trustees as eligible for a payment to be made to him. This right is analogous to the right of a competitor for a prize. Like a gi....
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....he objects of the discretionary trust. Just as in Attorney-General v. Heywood##, the trustees paid to Edmund Peel during his life the whole income of the funds of the settlement; and in Burrell v. Attorney-General* the trustees applied nearly the whole of the income (? 115,000) in paying the allowance to Harry. Surely when the whole income is paid to one of the discretionary objects, his interest is an "interest in possession." There is nothing future about it at all. It is actually in hand. And he has the beneficial enjoyment of it. Next, take the case where very little is paid to one of the discretionary objects, as here, when only ? 786 was paid to the son and ? 50 to the wife. No valid distinction can be drawn between the case where the whole is paid out and only very little. The interest of everyone who receives something is an interest in possession. Next, take the case where some objects of the discretionary trust receive something and others receive nothing. It seems a little difficult to say that those who get nothing have an interest in possession. But be that as it may, it is plain that the group of all the discretionary objects, considered as one unit, have an interest ....
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....n possession before his death, it followed that under section 5(3) the property did not pass on his death. Reliance was placed on the definition is Fearne's Contingent Remainders, 10th ed. (1844), p. 2: "An estate is vested in possession when there exists a right of present enjoyment." That definition is good for legal estates, but I do not think it apposite for equitable interests. At any rate, not for the "interest" in a discretionary trust. Fearne would probably not have regarded it as an interest at all. But we must do so. Being an "interest," we have to inquire when it is "in possession". I think it is in possession when the only people who are entitled to receive the income are the discretionary objects, considered as a composite unit. The only alternative is to say that no one is in possession of the income. Which is absurd. Someone must be in possession. And it is the group as a whole. In my opinion, so long as the whole income was distributable to the discretionary objects, it was an "interest in possession," even though it was not in fact distributed to them. It was an interest in possession of the property as a whole. 3. Measurement. There is an established ....
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.... Travis Gartside to pay or apply the whole or such part as my trustees shall in their absolute and uncontrolled discretion think fit of the income of such fourth share for or towards the maintenance support or otherwise for the benefit of my said son John Travis Gartside or during his life for his wife or children (if any) or any one or more exclusively of the other or others of them in such manner in all respects as my trustees shall in their absolute and uncontrolled discretion without being liable to account think fit and shall accumulate the surplus (if any) of the said income by investing the same and the resulting income thereof in manner hereinafter mentioned. To the intent that the accumulations shall be added to the fourth share and follow the destination thereof with power nevertheless for my trustees at any time to resort to the accumulations of any preceding year and apply the same for the maintenance support and benefit of my said on John Travis Gartside or (during his life) any wife or children of his or any one or more of them (b) Upon trust after the decease of my said son John Travis Gartside both as to the capital and income of the fourth share for all or any the ....
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....d in January, 1966; but the Crown claims in addition duty on the two advanced funds. Under each of these deeds poll the advanced sum was directed to be held upon trust for one of the two advanced beneficiaries if he should attain the age of 21 years. There were further provisions purporting to defer the payment over of parts of the sum until the beneficiaries should attain 25 years and 30 years of age, but these provisions were, I think, invalid and each advanced grandchild can now call for the transfer of the whole fund to him absolutely, they having attained 21 years of age in January, 1966. The result of the two advances was two put an end, so far as the advanced funds were concerned, to the discretionary trust of income during the life of John Gartside and to all the remainders under the will of the testator. The Crown now claims duty on the two advanced funds. These, of course, did not pass on John Gartside's death and the Crown must rely on the fiction set up by section 43 of the Finance Act, 1940, which has already in effect been read by my Lord and, which I need not repeat. It is agreed that each advanced fund constituted an interest limited to cease on the ....
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....o an end, together with all the interests in them existing before the advancements were made, and this change of hands caused a new interest in possession to arise, and this must, in my view, have arisen from the interest in possession existing immediately before the deeds executed; cf. the argument of Lord Russell in Burrell and Kinnaird v. Attorney-General*. I am, therefore, of opinion that there was what may properly by described as an interest in possession in the advanced funds taken as a whole before the date of the advancements. This is enough to settle the issue in favour of the Crown. A great many cases were cited to us but none of them is directly in point, and in my judgment the question depends purely on the true construction of the Act and its result is in my opinion to make the Crown's claim for duty good on the two advanced funds. I would allow the appeal accordingly. SALMON L.J.--The ward "interest" as used in the Finance Acts has a wider meaning than its strict conveyancing meaning. It is now well settled that those eligible to benefit under a discretionary trust, commonly called the "discretionary objects," have an interest in the property from which the....
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....no legal right to force the trustees to give him anything; at the same time he has in a colloquial sense an interest in the estate, because it was an estate out of which something might be allotted to him in the discretion of the trustees." And Greer L.J. concluded that that was an interest within the meaning of the Finance Acts. In the same case Romer L.J. said** that it was rightly decided in Attorney-General v. Heywood*** that "the prospect of an object of a discretionary trust sharing in the income, the subject-matter of the discretionary trust, is an interest of that person in the property from which the income is derived." The only right which any discretionary object possesses in addition to his chance or prospect is the right that the trustees shall honestly add fairly, consider whether any, and if so what, part of the income shall be allotted to him. In a sense it may be difficult to appreciate how discretionary objects, who have only such a limited right and only such an uncertain chance or prospect of receiving anything, can be said to have any legally recognisable interest in the trust property. Once, however, it is conceded, as an authority it must be, that they ....
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....le may be difficult to understand. As the Master of the Rolls points out, in the common law courts, it is by no means unusual for the value of a chance to be assessed; see, for example, Chaplin v. Hicks*. If a fund, the subject-matter of a discretionary trust, yields an income of ? 1,000 a year and there are, say, 10 discretionary objects, and the trustees have throughout the years distributed the whole income equally amongst them, there could be no difficulty in assessing the value of the interest of any discretionary object who died. Similarly, there would be no difficulty in assessing the value of such an interest if throughout the years the trustees had never paid the deceased or applied for his benefit any part of the income. Between these two extremes there are, of course, many cases in which the task of measuring the interest would be difficult but no more difficult than the task of assessing the imponderables which has to be performed every day in the common law courts. The rule, however, that, on the dropping of the life of one of the discretionary objects, no estate duty is payable because his interest is deemed to be immeasurable is so well established that it is now imp....
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....t. In the former case we know from the authorities, to which I have referred, that the existence of the power confers an interest in the estate upon the discretionary object, whereas in the latter case the existence of the power by itself confers no separate interest upon the infant. His only interest is his interest in fee. The settlement in Attorney-General v. Power*** was in an unusual form. It vested the estate in fee upon the children of the marriage equally. When the eldest child was born, took he whole estate in fee subject to the birth of any other child or children. On the birth of the second child, half the estate was divested from the first child and went to the second, and so on. Should any child die under 21, his share became divested and divided equally amongst the others. There was also a proviso that during the minority of each child the trustees should hold the rents and profits of his share, which they had power to apply for his maintenance or benefit, and accumulate the surplus, but not for the infant. The surplus rents and profits was not the infant's property in any event, but was "captured by the trusts of the settlement" and, together with the infant&#....
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....pectancy, I, for my part, would feel unable to accept the Crown's contention that their interest can be combined with that of the accumulation beneficiaries so as to form a composite unit which would have an interest in possession. At the time of the advancement, the interests of the accumulation beneficiaries were indisputably interests in expectancy. To combine one group of interests in expectancy with another group of interests in expectancy and thereby form a composite group of interests in possession involves an intellectual gymnastic feat which, no doubt, owing to a common lawyer's inexperience of the exercise, I cannot even follow, let alone perform. In my attempt to do so, I have found no help in In re Hodson's Settlement* or Westminster Bank v. Attorney-General**, which, so far as aggregation is concerned, seem to me to establish no more than that for the purposes of calculating the rate of estate duty payable, the values of different classes of interest may be aggregated. I do not think that it is necessary or even permissible to assume that there must always be some person or body or persons in possession of a beneficial interest in the trust property. If ....
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....to accumulate the remainder of the income. There was merely a power to distribute and the trustees were not obliged to distribute anything. There is a crucial difference between the present case and that of a trust to distribute the whole income. The question raised in these proceedings is whether estate duty became payable on the advanced funds. They did not actually pass or change hands on the death and the issue is whether they were caught by section 43. They cannot have been so caught unless an interest in possession within the section arose under the discretionary provision or the accumulation trust or both combined. It is conceded that the persons who will get the capital of the accumulations have an interest in it, but it is not an interest in possession. It is submitted: (1) Nobody had an interest within section 43 under the discretionary provision; (2) if that is held to be wrong, then any interest under this provision was not an interest in possession; (3) if, contrary to these contentions, there was an interest in possession under the discretionary provision, but only an interest in expectancy under the accumulation provision, duty cannot have become payable as a r....
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.... the trustees of the fund could apply the income, and his trustees in bankruptcy would become such a person in his place. But this is not so. Though "interest" in this Finance Acts is not used in any narrow or technical sense, it has a legal flavour and is not used in a purely popular sense. For example, if land was limited to A for life and then to his heir at law in fee simple, an almost unlimited number of persons during A's life might have an interest in the popular sense, since any of them might become his heir at law if all nearer potential claimants predeceased A. Possibly for this reason, the law does not recognise a potential heir at law as having any interest whatsoever in the legal sense or give him any rights during A's life. The term "interest" in the Act cannot include a relative's chance of ultimately becoming entitled to the property under a settlement of this type. It is not an "interest" in law. Even the fact that a person has an interest which the court will protect does not necessarily give him an "interest" within section 2(1)(b); see Coutts & Co. v. Inland Revenue Commissioners(1). An interest for this purpose must be (a) an interest in prope....
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....xercised in his favour. Where the discretion was so exercised, duty normally becomes payable under paragraph (a) of that section. Duty also becomes payable under paragraph (c) where the settlor has retained a right to definite payments under the settlement, even if he had not in fact received any such payment. Even if Heywood's case(9) and Farrell's case* were rightly decided, they are distinguishable from the present case because they were solely concerned with the meaning of "interest" in section 38(2)(c) of the Customs and Inland Revenue Act, 1881, and, even though that section was incorporated in section 2(1)(c) of the Act of 1894, "interest" there did not have the same meaning as in section 2(1)(b). Heywood's case** is also distinguishable on an additional ground: the primary trust there was to pay money for the benefit of the settlor and his family jointly and the relevant discretion was merely a discretion to exclude him. Under section 2(1)(b) duty is not payable unless the relevant interest could be measured under section 7(7). Accordingly, section 43 of the Act of 1940 would not have imposed duty on the termination, shortly before the death of a discretionary o....
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....ment of it. (e) If the trustees exercise their discretion by paying a sum to a discretionary object, he obtains a right of present enjoyment of that sum but the quality of his interest (if any) in the remainder of the trust fund remain unchanged. (f) The determination of a discretionary provision only determines the possibility of the discretionary objects benefiting under a future exercise of the discretion, but the possibility is at no time an interest in possession. Words must be used in their legal sense unless a contrary intention appears: Commissioners for the Special Purposes of the Income Tax v. Pemsel*. When there is a technical conveyancing term used to describe an interest, nothing entitles one to adopt any other construction. In Attorney-General v. Power**, Palles C.B. rightly said that estate duty would not be payable on the death of an infant who had been entitled to property contingently on attaining 21 and had in the meantime had the benefit of the usual power of maintenance. The same considerations apply to the discretionary provision in the present case: see also In re John's Will Trusts*** and Attorney-General v. Coole#. It would be contrary to th....
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....t, did not deal with the type of trust in the present case. It was dealing with the case where the whole income had to be distributed. If the whole income had to be distributed and all the objects were sui juris, they might have an interest in possession, because they could demand the whole income. A person who only has a hope has no right of present enjoyment. P.W.E. Taylor following: The expression "interest in possession" in section 43, lacking precision, should be so construed as to exclude discretionary trusts because: (1) a doubt or ambiguity in a taxing Act should be resolved against the Crown by limiting the extent of the tax: see Adamson v. Attorney-General###, (2) surprising and inequitable results would follow if discretionary trusts were included. In construing any statute the object is to find the intention of Parliament from the words used and any other admissible material. These results in particular, show that Parliament could not consciously have intended discretionary trusts to fall within section 43. Section 43(2) contains an exemption from or limitation of the charge in section 43 and creates the well-known five-years period. If discretionary trusts or ....
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....ing. Section 43(2) of the Act of 1950 was expanded in section 43(2) and (3) of the Finance Act, 1950: see also the definition of "associated operations" in section 59 of the Act of 1940. Many advances must have been made in the past, some long ago, from trust funds where the prior trust was a discretionary trust for life. Some of these would have been for wide discretionary classes containing not only the advanced beneficiaries but also all their close relatives. The advanced funds may be shares in family companies which will remain unrealised and traceable indefinitely. If discretionary trusts were within section 43, then in such circumstances freedom from duty would only be obtained for an advance if, not only the advancee, but the entire class of relatives had been excluded from any benefit from any associated operation. The five-year period would be started afresh by any benefit to any of the relatives from an associated operation. This would include any disposition affecting the advanced property, whether originally contemplated or not. Thus if the advancee died and left his property to one of the relatives by a will, a five-year period would start a new and attract duty on....
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....hich a favoured discretionary object had in the sum of money which was in the hands of the trustees and in regard to which they had exercised their discretion. The beneficiary's interest in that arose when the discretion was exercised in his favour in respect of that sum. H.E. Francies Q.C. and J.P. Warner for the respondents. It is submitted: (1) The interests with which the House of Lords is concerned are the interests in the trust fund, not in any particular piece of income: see the language of section 43. A particular piece of income in the hands of trustees does not become the subject of an interest of the beneficiaries until it is paid over to them. That is not the interest with which the House of Lords is concerned. (2) The House of Lords is not concerned with the accumulations fund built up before the deeds poll. It is only concerned with interests in the original trust fund created by the will of the testator and limited to endure till the death of his son. The nature of those interests did not change. There were alterations in the objects, at first only the son and later his children, but the nature of the interests remained the same. (3) The expressions "gro....
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....pt of money from trustees by a discretionary object is merely the fruition of his interest, not the interest itself. Each of the discretionary objects was beneficially interested in the trust fund. In the income of the fund which accrued in the lifetime of the deceased someone must have had an interest. If it was not the discretionary objects, it must have been those entitled to the accumulations. The beneficial interest does not belong to the trustee, for it would be contrary to equitable doctrine to say that the whole legal and equitable ownership was in them. In the present case there have been beneficiaries at all material times. Suppose a fund was held in trust for persons to be appointed within 21 years and in the meantime the income was accumulated. The beneficial interest would then remain in the settlor until appointment. If created by will, it would remain in the residuary legatee or next-of-kin. The entire beneficial interest would not have been disposed of and there would be a resulting trust. In re Chance's Settlement Trusts can only be explained on the basis that the possible objects of the trust were persons who would be beneficially interested in the trust....
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..... It is better to combine all three ways of putting it and to say that an interest is the right to require the trustees, as regards the whole income of the trust funds, as it comes into their hands, to consider whether any and what part of it should be distributed among the discretionary objects. That is a continuing obligation. The counterpart is to require the trustees at convenient intervals to apply their minds to this question in regard to the whole of the income, and by reason of this discretionary object has the chance of receiving the whole or a part of it. If the discretion is exercised in his favour, the discretionary object has a title to receive and keep the sum appointed. The mere exercise of the discretion does not give a right to payment because it may be revoked. If there is an interest, it is not to be equated with the right to payment. In the case of an ordinary life beneficiary the right to payment is not the only right included in the interest; there is also the right to sell and the right to mortgage the life interest. A life tenant of a house or landed estate continues to have a life interest, even though he receives no income, because all the income has be....
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....ection 7(7) of the Act of 1894, merely provides a formula for valuing the extend of the benefit and goes no further, and it is not right to use it to limit the construction of "interest" in section 2(1)(b) were "interest", in the light of the scheme of the Act should have such a meaning as to catch an interest like that in the present case. Vestey's** turned merely on the conveyancing language of the Trustee Act, 1925, like In re Backett's Settlement***. These two cases are not in point because the "interests" with which the House of Lords is here concerned are not confined to conveyancing interests. The estate duty enactments do not use the word in the conveyancing sense only. Bibby's case# was not a decision directly on section 2(1)(b). Further, it was wrongly decided in so far as it was held that the widow had no beneficial interest, though the decision could have been justified on the ground that the interests had no value. As to the meaning of the words "in possession", for estate duty purposes interests are either in possession or in expectancy, and this two categories are exhaustive: see section 5(3), 7(6) and 21(3) of the Act of 1894. If the appellants ....
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....o obligation to exercise. If it be held that because of the trust for accumulation, the interest of the discretionary object does not extend to the whole of the income, then it is submitted that the combined interest of the accumulation beneficiaries and the discretionary objects does so extend: In re Hodson's Settlement** and Westminster Bank Ltd. v. Attorney-General***. It is submitted: (1) The right in respect of the accumulations during the lifetime of the deceased constituted an interest in the trust fund because it was a beneficial right in regard to the income of the trust fund. It is beneficial because a fund is produced to the benefit of which the beneficiary may become entitled. (2) It was an interest in possession because it was enjoyed during the life of the deceased, being a beneficial right over current income. (3) The interest cannot be regarded in this case as being merely incidental to capital interests. The interests of the accumulation beneficiaries are not merely incidental to the capital interests because the accumulations fund could have gone to the husband and wife who were not interested in the capital at all. The right to have the interest accu....
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....e(11) and Burrell's case.(12) One cannot escape from that conclusion by saying that Scott's case(13) and Burrell's case(14) turned on the way in which the trustees had in fact applied the income in those cases. This would involve adopting the suggestion made in the Court of Appeal in the present case by Lord Denning M.R.(1) and Salmon L.J.(2) as to what should happen on the dropping out of one of the lives in a discretionary trust, satisfactory though it would be from the point of view of the Crown. Nor can one escape from Burrell's(3) and Scott's case,(4) by holding that they were pure section 1 cases, because that would be inconsistent with the Arnholz case (Public Trustee v. Inland Revenue Commissioners)(5) in the light of which every pre-1960 decision must now be re-examined and, if necessary, re-explained. That is what has been done with regard to Christie v. Lord Advocate(6): see the Coutts case(7) and the Ralli case(8). Nothing was said in Scott's case(9) or Burrell's case(10) which is not equally applicable in the present case. The principle applicable is that all the interest in possession at the time of the death came to an end and ....
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....and not merely a power, to distribute the whole income among discretionary objects and the trustees fail to exercise their discretion, the court will divide the income equally between the objects (In re Hughes(2)). So the "interest" of the objects under such a trust is akin to a defeasible interest. In Skinner's case(3) the House of Lords held in effect that for the purposes of duty under section 2(1)(b) on the death of an annuitant under the will of a testator whose estate is still in course of administration, the "extent" of the annuitant's interest must be determined on the same basis as if the annuity arose under a fully constituted trust. In Livingston's case(4) Lord Radcliffe took a different view on this point, but his judgment casts no light on the effect of section 2(1)(b) in relation to the interest under a trust where there is no question of a continuing administration by personal representatives. As to Costabadie's case(5) the basis of the judgment was that the daughter was entitled to a substantial payment, though the amount was left in the discretion of the wife. Chance's case(6) is poorly reported and nothing useful can be got out of the ....
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....nd follow the destination thereof with power nevertheless for my trustees at any time to resort to the accumulations of any preceding year and apply the same for the maintenance support and benefit of my said son John Travis Gartside or (during his life) any wife or children of his or any one or more of them." When the testator died John was unmarried. The next year he married and he had two sons, twins, born on January 5, 1945. His wife and two sons survived during the period relevant to this case. John died on May 8, 1963, and the present case raised the question whether estate duty is payable on his death in respect of sums which the testator's trustees had advanced to his twin sons prior to his death. From the testator's death until 1960 his trustees accumulated the whole income of John's share by virtue of the provision which I have already quoted. In 1961 they paid out of income sums of ? 786 for the benefit of John and of ? 50 for the benefit of his wife and accumulated the balance. By January 1, 1962, the total accumulated income amounted to about ? 55,000. On January 2, 1962, when the twin sons were nearly seventeen years of age the trustees, by virtue of a ....
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....erest or interests had before that date become interests in possession. Until the trustees advanced these funds they were bound under the testator's will to decide, from time to time as income accrued, whether and to what extent that income should be applied for the benefit of John, his wife and his two sons or any of them. After the advances had been made they were no longer entitled to deal with the income from the advanced funds in that way. If the advances had not been made the trustees would still have been bound from time to time to decide whether to exercise that discretion until the death of John when other trust provisions would have come into operation. The argument for the respondents was that the duty of the trustees to exercise that discretion from time to time gave to each of John, his wife and his two sons an interest in the fund, that that interest extended to the whole fund because the trustees could at any time have given the whole of the income from it to any one of them, and that these interests were interests in possession. They say that it is immaterial whether or not the trustees ever at any time in fact gave to any of these beneficiaries any sum or ot....
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....ep up a life insurance policy. When the person insured died that right, of course, ceased because no more premiums were payable. This House rejected the contention that this right to control the actions of the trustees was an interest, the cesser of which on the death gave rise to a claim for estate duty. Lord Porter said**: "I cannot think that in any ordinary sense the interest is the right to have the premiums paid." But the respondents' argument is that there is a distinction between such a right and a right to require trustees to consider whether to exercise a discretion in favour of the particular beneficiary. Before I go further I must examine section 2(1)(b) and section 7(7) of the Act of 1894, which are as follows: "2. (1) Property passing on the death of the deceased shall be deemed to include the property following, that is to say:...(b) Property in which the deceased or any other person had an interest ceasing on the death of the deceased, to the extent to which a benefit accrues or arises by the cesser of such interest; b....
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....to me to be perfectly clear. If the deceased or any other person had a right which "extended" (whatever that may mean) to the whole or to any part of the income of any property and that right ceased on the death of the deceased, then estate duty is to be due to an amount to be determined by section 7(7). If the right of the deceased or other person did not "extend" to any part of the income, then it was not an interest within the meaning of these provisions. It appears to have been assumed in some cases that a right can be an "interest" within the meaning of section 2(1)(b), although its cesser does not cause any benefit to accrue or arise, or that it is sufficient that the cesser causes some benefit to accrue or arise although the interest does not "extend" to any part of the income of any property. I can find nothing either in the words or in the apparent purpose of these provisions to justify such an extension of the meaning of the word "interest" in section 2(1)(b). It may well be that the word "interest" in other provisions of the Act of 1894 has a different or wider meaning, but I must return to that. Next comes the question of what is meant by an interest "extending" to t....
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....inished by the fact that the Revenue authorities have chosen to refrain from collecting tax which, if their view of the law is right, they are entitled to exact. They are in some of the cases indications of a view that, while each of the objects of a discretionary trust has an interest in the trust fund, this interest does not extend to the whole or any part of the interest accruing from the fund. But, on the other hand, all the objects together have a single class or group interest which does extend to the whole interest of the fund. Counsel for the respondents in the clear and well reasoned argument expressly declined to adopt that view and I think he was well advised in taking that course. Where a number of persons are members of a company or other incorporation which has a separate legal personalty, the incorporation can of course, have a single right different from the rights of any of its members. But otherwise two or more persons cannot have a single right unless they hold it jointly or in common. But clearly objects of a discretionary trust do not have that: they each have individual rights: they are in competition with each other and what the trustees give to one is his....
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....have the trustees consider his case is an "interest" within the meaning of these provisions, what about the similar right of an infant with regard to maintenance? The respondents do not contend that such an infant has any "interest" and the draftsman and Parliament cannot possibly have intended that these provisions should apply on the death of such in infant before majority. But the only distinction which counsel for the respondents was able to suggest was that trustees are bound to consider the position of discretionary objects without waiting for the objects to make a claim, whereas trustees are not bound to consider whether any sum should be applied towards the maintenance of an infant until a claim is made. That is a very narrow distinction and cannot in my view justify a conclusion that objects of a discretionary trust have "interest" in the trust fund but an infant with a claim for maintenance has not. In my judgment, an examination of the relevant provisions of this legislation leads to the clear conclusion that objects of a discretionary trust do not have interests extending to the whole or any part of the income of the trust fund and it must follow that they do not hav....
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.... of the discretionary trust it would seem that the property which yielded the income passed on the death. Enjoyment of the income changed hands on the death. It was held that the fact that he had been one of the objects made no difference. I do not think it useful to examine Lord Russell's phraseology because no question was raised under section 2(1)(b). But, if one does look at it, he said in the passage which I have quoted that the objects of the discretionary trust "were beneficially interested in the income of the property." He did not invent the idea of a group right: he must have meant that each object was beneficially interested in the income. But I think that he would have been extremely surprised if he had been told that it necessarily followed that each object had an interest extending to the whole income so that on the death of any one of the objects there was a cessor of an interest extending to the whole income within the meaning of sections 2(1)(b) and 7(7). Confusion will generally result if one tries to apply language adequate for the point under discussion to a problem which was not in the mind of the speaker--however eminent may have been the person who used t....
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....vely were the objects of this discretionary trust entitled in any year to receive any part of the trust income: that is shown by the fact that in only one out of twenty years did any of them receive any part of the income. Then it was argued that, although the construction and effect of section 2(1)(b) was not considered in this House in either of these cases, the effect of the decision in Public Trustee v. Inland Revenue Commissioners* was to make them in some way authorities on the proper construction of that section. I do not think that this decision had any such effect. What the case did was to decide "that sections 1 and 2 are not mutually exclusive and that the excepting words in section 2(1)(b) are operative in regard to property which falls within that sub-section even though that property may fall also within the wide words of section 1" (per Lord Simonds **). We are not bound by the decision nor do I think that we are bound by the reasoning to hold that in every case of settled property where there is a passing of the property there must also be the cesser of an interest within the meaning of section 2(1)(b). It could only be on that footing that earlier cases wh....
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....use on the death there was a passing of the right to the income to a new trust set up by a new settlor for the benefit of a new class of discretionary objects. There was little said about section 2(1)(b). My noble and learned friend, Lord Guest, merely said##: "It thus follows that the beneficial interest ceased on the mother's death for the benefit of a class different from that group which had the beneficial interest before the death, in which case there would be a passing under section 2(1)(b).", Lord Morton of Henryton said## that if the share did not pass under section 1, "Class A had an interest in the Kirkwood share which ceased on the death of Mrs. Pattisson, and on her death a benefit accrued to Class B to the extent of the whole of the share. The property passing on the death of Mrs. Pattisson must, therefore, be 'deemed to include' the Kirkwood share and the case falls within 2(1)(b) of the same Act." Lord Upjohn dealt with the matter at somewhat greater length, but he was under a misapprehension as to the discretionary trust; he thought there was a power to accumulate any surplus income but that power in the original settlement had come to an end....
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.... different problem, the word "interest" must be given the same meaning as it had in the Act of 1881. In the absence of good reason to the contrary one would attach the same meaning. But the reasons which I have stated for giving a different meaning to the word in section 2(1)(b) and section 7(7) appear to me greatly to outweigh any presumption which there might otherwise be for adopting the same meaning. The respondents also founded on Attorney-General v. Farrell,* but that case does not appear to me to throw any additional light on the present question. I would allow this appeal. LORD MORRIS OF BORTH-Y-GEST. My Lords, I have had the advantage of reading the opinion of my noble and learned friend, Lord Reid. I agree with it, and would allow the appeal. LORD HODSON. My Lords, I have had the advantage of reading the opinion of my noble and learned friend, Lord Wilberforce. I agree with it, and would allow the appeal. LORD GUEST. My Lords, I have had the opportunity of reading the speech of my noble and learned friend, Lord Reid. I agree with it and I would allow the appeal. LORD WILBERFORCE. My Lords, the testator, Thomas Edward Gartside, by his will dated February 8th....
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....he prior question is whether they had "interests" at all and to that I now turn. At the relevant date, that is just before the death of John Travis Gartside, the potential beneficiaries under the discretionary trusts (for convenience called "the discretionary beneficiaries") were four, namely, John Travis Gartside himself, his wife and his two sons. Under the trusts of income which applied during his life, no one of these beneficiaries had any right to receive any income. The trustees had an absolute discretion to distribute or to withhold distribution of the income of any year, and, as regards any income they decided to distribute, to give all or none of it to any one beneficiary. Any undistributed income had, during the permissible period, to be accumulated, i.e., added to capital. The accumulations so made could subsequently be distributed in the same way as current income -no beneficiary having any right to any such distribution--and subject to this power were held by the trustees upon trusts under which the two grand- children had contingent interests only. I have said that no one of the discretionary beneficiaries had at the relevant time any right to receive any income....
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.... What, then, can, one say of "interest" as used in section 2(1)(b)? Two indications are given. The first is in the subsection itself which says that the property is deemed to pass "to the extent to which a benefit accrues or arises" by the cesser of the interest. We are concerned here with a taxing Act, and if one thing is necessary about taxes it is that the amount of them should be ascertained with precision. The subsection must, then, contemplate that some definite portion of the property should be ascertainable when an interest ceases. The second indication is given by section 7(7) which deals precisely with this point: it reads: "7. (7) The value of the benefit accruing or arising from the cesser of an interest ceasing on the death of the deceased shall--(a) if the interest extended to the whole income of the property, by the principal value of that property, and (d) if the interest extended to less than the whole income of the property, be the principal value of an addition to the property equal to the income to which the interest extended." This shows that for the cesser of an interest to give rise to a charge for duty, it must be possible to say of the interest that i....
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....not find them persuasive. (1) It can be accepted that "interest" is capable of a very wide and general meaning. But the wide spectrum that it covers makes it all the more necessary, if precise conclusions are to be founded upon its use, to place it in a setting: Viscount Radcliffe, delivering the Board's judgment in Commissioner of Stamp Duties (Queensland) v. Livingston*** shows how this word has to do duty in several quite different legal context to express right of very different characters and that to transfer a meaning from one context to another may breed confusion. No doubt in a certain sense a beneficiary under a discretionary trust has an "interest": the nature of it may, sufficiently for the purpose, be spelt out by saying that he has a right to be considered as a potential recipient of benefit by the trustees and a right to have his interest protected by a court of equity. Certainly that is so, and when it is said that he has a right to have the trustees exercise their discretion "fairly" or "reasonably" or "properly" that indicates clearly enough that some objective consideration (not stated explicitly in declaring the discretionary trust, but latent in it) mu....
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....round on which it was put by Viscount Simonds L.C. when he said# (quoting and adopting the words of the judge in the court below): "I find it impossible to conceive of a basis of valuation which, in relation to such an 'interest', would conform to the scheme prescribed by section 17(6)" (corresponding to section 7(7) of the Finance Act, 1894). But if, as seems indisputable, the exemption from duty which arises in such cases as these arises directly from the legislative scheme, it becomes a task of great difficulty for the Crown to suggest a definition of interest which, omitting the exempted case, will cover the present situation. No formulation suggested in argument was in fact able to achieve this. (3) I now come to the decisions in Attorney-General v. Heywood* and Attorney-General v. Farrell**. Attorney-General v. Heywood*** was decided in 1887 upon section 38(2)(c) of the Customs and Inland Revenue Act, 1881, when what was levied was a stamp duty on property included in an account. The 1881 Act defined various categories of property to be included in an account, viz., property included in ....
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....see no need to take either course. Perhaps Attorney-General v. Farrell** could have been decided the other way on the ground that once section 38(2)(c) had been embodied in the Finance Act, 1894, s. 2(1), the word "interest" in the earlier section should be given a meaning similar to that which it bears in paragraphs (b) and (d), each of which involved the conception of extent. But this was not done and one can appreciate why not. For section 38(2)(c) is concerned, broadly, with the case of persons who settle their property, yet wish to benefit from it so long as they live. To tax them in such a case is perfectly understandable, however large or small the reserved benefit may be and whether it is defined in extent or undefined. No definition is necessary, because the measure of the charge is the whole value of the property. So naturally no reference is made to "extent"--the mere fact of reservation is enough. I think, therefore, that the decisions in principle are acceptable. But--this is the other limb--acceptance of them does not carry the present case. In section 2(1)(b) of the Finance Act, 1894 (and the same is true of section 2(1)(d) a duty is imposed the quantum of which is r....
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....elves, were not such that duty would be chargeable, came to the conclusion that taking all the rights together, an interest in possession could be found. "Somebody," he said*, "must have an interest in possession." I would, respectfully, agree with his judgment but for the latter point: for, at any rate for the purposes of estate duty, cases may exist where, at the relevant time, no "interest in possession" can be found: one such is where the whole income is being validly accumulated for the benefit of persons with contingent interests. That, in fact, is this case and the fact that it is so prevents the section from attaching. Finally, I must now say something of certain authorities, First, there are two cases in this House the authority of which was invoked by the Crown: these are Scott v. Inland Revenue Commissioners** and Burrell v. Attorney-General***. In each of these cases income was held on trust for a class of discretionary beneficiaries who, singly and collectively, had no right to receive any income in any year. In Scott's case# the surplus income, during the relevant life (of the Sixth Earl Cadogan) was to be accumulated and applied in the discharge of debts or in....
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....interest" was used can be used as authority that the discretionary class in either case, or any member of it, or aggregate of any other persons had an "interest" within section 2(1)(b). Counsel for the Crown sought to adopt them for this purpose. The argument was that they were decided at a time when (following Lord Macnaghten's opinion in Cowley v. Inland Revenue Commissioners***) section 1 and 2 of the Finance Act, 1894, were thought to be mutually exclusive, so that a case could only come within one of the subsections of section 2 if it did not fall within section 1. This House having now in the Arnholz case (Public Trustee v. Inland Revenue Commissioners#) departed from this view of the matter and having held that section 2 is definitive of section 1 by "exclusion" and "inclusion", Scott's## and Burrell's### cases must, it was said, now be regarded as decisions under section 2(1)(b) and so as decisions that an "interest" or "interests" existed. I find this argument totally unacceptable. I know of no principle by which an expressed ratio decidendi can be converted into another ratio decidendi merely because (if such is the case) the first is founded upon a principle ....