TaxTMI 
TaxTMI 
1967 (12) TMI 59
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....cretionary 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 twin sons were aged 17, the trustees exercis....
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....t 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 interest. The judge confused two separa....
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....d 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 wheth....
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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 object....
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....retionary 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. Thoug....
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....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 be ....
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....ime to make advances out of 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 ori....
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....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 girl who goes in for a beauty ....
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....re the trustees distribute the whole of the income to one of the 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 ....
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....ant in fee. The court, therefore looked to his primary interest as tenant in fee: and as that had never become an interest in 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 posse....
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....usts stated as follows: "Upon trust during the lifetime of my son John 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 Garts....
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....ing hands and passing to the twin sons of John equally upon attaining 21, as they did 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 agr....
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....funds changed hands, all the trusts attaching to them before the advancements came to 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, co....
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....cised in his favour." In Attorney-General v. Farrell* Greer L.J. said of a discretionary object: "He had 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 hav....
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....ed that the value of a single discretionary object's interest cannot be measured, and that, accordingly, no estate duty is payable on his death. This rule 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 lif....
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....or whose maintenance or benefit the trustees have power to apply the income from the trust property. But the two positions in law are fundamentally different. 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 su....
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....torney-General v. Power** does not touch this point. If, contrary to my view, the group of discretionary objects had no interest in possession but only an interest in expectancy, 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 ....
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....art of the income as the trustees in their absolute and uncontrolled discretion should think fit for the benefit of the deceased and his wife and children or any of them and 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 wa....
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....as an object of a discretionary trust may have in the trust fund or its income. If it were otherwise, then on the bankruptcy of an object of a discretionary trust he would cease to be a person for whose benefit 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 ....
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....ll's case(10) was decided only on a narrow point--namely that under paragraph (c) of section 38(2) duty becomes payable on the death of a settlor who is an object of a discretionary trust under the settlement, even if the discretion was never exercised 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 disc....
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....annot be an interest in possession; that would be a contradiction in terms. (c) There was no ground for using the term "interest in possession" in a novel sense in the Act of 1894. (d) The discretionary objects never had an interest in possession in the trust fund because they never had a right of present enjoyment 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 ....
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....nd after the death there is no passing even though the beneficial interest arose under two separate instruments. Public Trustee v. Inland Revenue Commissioners (In re Kirkwood)## was a similar case, save that the trusts of the income were discretionary trusts. That case did not deal with the question whether there was an interest in possession and, in any event, 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 inte....
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....he disposition or determination. That would produce the absurdity that a trust for X for life could be determined and replaced by a discretionary trust for X and other persons for a long period and then X, being one of the persons becoming entitled, would not need to be excluded from any benefit and could have the whole income without preventing the five-year period from running. 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 a....
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....ays Bank Ltd.** income to which the interest extended, so referred to, appears to have been taken as meaning "income which the annuitant could lawfully require." See also Skinner v. Attorney-General*; Attorney-General of Ceylon v. Chettiar**, the Kirkwood case***. In In re Baron Vestey's Settlement# a firm distinction was drawn between the chance of participating in income of the trust property and the interest which 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 c....
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....ay have an interest in possession, although the right to financial benefit is future and conditional. "Interest" cannot be equated with such an interest as confers an immediate and unconditional right to financial benefit. It would be wrong to but an artificial meaning on the word merely because of the wording of section 7(3) of the Act of 1894: see Coutts & Co. v. Inland Revenue Commissioners# and Westminster Bank Ltd. v. Inland Revenue Commissioners##. The receipt 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 a....
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....ance's case(6) and Burrell's case(7). In Kirkwood's case(8) the power to accumulate was not decisive. (b) The prospect or chance of sharing in the income of the trust fund by receiving some income from the trustees: see Farrell's case(9) and what Salmon L.J. said in the Court of Appeal in the present case(10). (c) The right to be considered by the trustees as eligible for a payment to be made: see what Lord Denning M.R. said in the present case(11). 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 d....
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....* were overruled, it might lead to a change in the form of marriage settlements; property could on marriage be settled with a long-term discretionary trust for the spouses and the issue of the marriage, and the entire income could then be paid under the trust for life to the settlor without attracting duty on his death. It would destroy the whole scheme of the Estate Duty Acts to hold that there was no interest in case of discretionary trusts with powers of accumulation. Section 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 on....
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....a whole because they had an interest in the income. Where there is a trust in the due performance of which the whole income of a fund may be paid out to a person or group of persons and to no one else, that person or those persons have an interest extending to the whole of the income. Power's case* dealt with wholly different questions from the present case and is distinguishable because it was not a case of a discretionary trust; the trustees had only a power of maintenance and advancement, which they were under no 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 benef....
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.... a power of appointment are different: Contrast In re Greaves(9) and Burrell's case.(10) The next question is whether, in this case, the interests of the discretionary objects, between them, extend to the whole income of the fund (as the Crown conteds) or extend only to an unmeasurable part of it (as the taxpayer contends). The answer is that they extended to the whole because the discretionary trust is the primary trust and it extends to the whole of the income, the objects have an interest in the whole income: Scott's case(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 inconsi....
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....ent trust. The respondents in the present case rely on the dictum of Lord Upjohn in Kirkwood's case,(1) but it does not help them even if the trust for accumulation contained in the testator's will in that case had been in operation immediately before the relevant death, the accumulation beneficiaries immediately before the death would not have been the same as the beneficiaries immediately afterwards and so the existence of the accumulation trust would not have prevented a passing. Where there is a trust, 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 trus....
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....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 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 ....
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....h the interest subsisted would have been deemed by virtue of paragraph (b) of sub-section (1) of section 2 of the said Act to be included to a particular extent in the property passing on the death, the property in which the interest subsisted shall be deemed by virtue of this section to be included to that extent in the property passing on the death." The case for the respondents is that by making these advances the trustees determined an interest or interests limited to cease on the death of John, and that such interest 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 operati....
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....n interest under these provisions, it must give to the holder of it some right. Then take the next step. A person, who has a contingent right to some benefit from a trust fund in some future event, has a present right to prevent the trustees from dissipating the fund. But that right is not an interest in possession separate from and in addition to his contingent interest. That is made clear by the decision in Coutts & Co. v. Inland Revenue Commissioners*. There beneficiaries had a right to require trustees to make payments of the premium necessary to keep 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.....
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....s that section 7(7) was intended to provide a method for valuing every benefit accruing or arising from any cesser of an interest within the meaning of section 2(1)(b), and it is implicit in section 7(7) that every right which is an "interest" within the scope of these provisions must "extend" either to the whole or to a part of the income of the property in which the right gave to its owner the "interest". The scheme appears 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 ....
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.... be a monstrous result which could never have been intended. In fact the respondents have never tried to claim estate duty when one of several objects of a discretionary trust dies, but that is not relevant in determining what is the true meaning of the word "extend." If giving an extended meaning to a word in an Act, and particularly in a taxing Act, leads to a wholly unreasonable result that is a very strong indication that the word was not intended to have that extended meaning. And the strength of that indication cannot be diminished 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 ....
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.... had them in mind. But provisions authorising trustees to apply the whole or a part of the trust income for the maintenance of an infant who had a contingent but not a vested right to capital were extremely common. In such a case the infant (or his guardian) had a present right to make a claim for payment for maintenance and a right to require the trustees to exercise in bona fide their discretion whether or to what extent they would apply trust income for that purpose. If, so the respondents contend, the right of an object of a discretionary trust to 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 con....
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....in argument any very illuminating discussion of the meaning of the word "interest" in section 2(1)(b) or of the phrase "interest in possession" in the Act of 1940. In Scott v. Inland Revenue Commissioners* before the relevant death the "persons beneficially interested in the income of the property...were...the various persons who were objects of the discretionary trust and the persons who might ultimately benefit by the accumulations and discharge of incumbrances" (Per Lord Russell**). After the death the seventh Earl Cadogan became entitled to receive the whole income. If the seventh Earl had not been one of the objects 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 propert....
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.... on that section but their order was varied in this House so as to strike that out. Counsel for the respondents put his case so high as to argue that these cases show that, whenever there is a primary discretionary trust followed by a direction to deal with any surplus not paid to the discretionary objects by accumulation or otherwise, the court must disregard any such direction and treat the case as if the trustees had been directed to divide the whole income among the discretionary objects. I can find no basis and no rational justification for any such artificial rule. The present case must be decided in accordance with the fact that neither individually nor collectively 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 sect....
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....uld only effectively assign any income which might accrue after his mother's death and before 1968. The trustees were to apply this income for the same discretionary trust as that which then existed but, of course, the objects could not be the same because the mother would have dropped out before this new trust could take effect. The mother died a few days after John had made this assignment. So what happened on her death was that the discretionary trust under the original settlement then came to an end and the new discretionary trust set up by John took effect. It was held that the property passed under section 1 because 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 ....
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....ld come to the settlor in a certain event-in the event of the trustees deciding that he should have the whole or part of the income. If so vague a word as "interest" is used in different Acts dealing with different problems, there is only, in my view, a slender presumption that it has the same meaning in both; where they are dealing with the same problem the presumption is very much stronger. There is here the special feature that the Act of 1894, by section 2(1)(c), picks up and slightly amends that provision in the Act of 1881. But I see no reason why there should be any strong inference from that fact that, when the Act of 1894 goes on to deal with quite a 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 thr....
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....terest subsisted would have passed on the death under section 1 of the Finance Act, 1894, and (b) if, on the same hypothesis, that property would have been deemed by virtue of section 2(1)(b) of the Finance Act, 1894, to be included to a particular extent in the property passing on the death, imposing a total or partial charge as the case may be. The decision in this appeal turns upon the meaning of the words "interest" and "interest in possession." In the courts below it was generally accepted, following certain authorities, that the beneficiaries had "interests"; the debate was, in the main, concentrated on the question whether they had "interests in possession." But the 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 re....
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....;interests" with which the subsection is concerned, that one would expect these to fit within this classification. I return later to this point. This is not all the guidance one may get as to the meaning of "interest". Section 43 of the Finance Act, 1940, is to be construed together with the Finance Act, 1894. Both its structure and its language are related to those of the earlier Act. The parent provision in the Finance Act, 1894, is evidently section 2(1)(b) with deals with interests ceasing on the death and there cannot be any doubt that "interest limited to cease on a death" in section 43 must refer to the same kind of interest: in section 2(1)(b) the interest has ceased; in section 43 it was limited to cease but has not done so because some event or action has prevented this result. 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 th....
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....l with the position of the accumulation beneficiaries I must deal with some arguments presented to us. The Crown sought to establish that a wide meaning should be attributed to the word "interest," wide enough to include the interest of a beneficiary under a discretionary trust, by three main arguments. First, it was said that the expression "interest" itself is one of complete generality: in the context of the estate duty legislation it should be given a popular rather than a conveyancing meaning. Secondly, when one analyses a beneficiary's right under a discretionary trust, the conclusion must be that he has an interest even in a technical legal sense of the word. Thirdly, the point was said to be settled by authority, in particular by two decisions, Attorney-General v. Heywood* and Attorney-General v. Farrell**: These arguments were substantially accepted by the Court of Appeal but I do 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:....
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....harge for estate duty could be assessed by any similar procedure: and it is clear enough that it fails at the critical point, namely, of establishing that a person with a chance of success has an interest in more than the broadest popular sense, in the fund. (2) Returning to the nature of the beneficiary's right the Crown is met with the difficulty that as a matter of long-established acceptance, and also of authoritative decision (Attorney-General of Ceylon v. Chettiar*** per Viscount Simonds L.C.), no charge for duty arises when one of a discretionary class dies. Lord Denning M.R. regarded this as a special rule whose rationale was unsatisfactory and which should not be extended and, Salmon L.J. said that it was difficult to understand. I do not so regard it: it seems to me an inevitable and necessary and, I am tempted to add. reasonable consequence of the method of taxation laid down by section 2(1)(b) and section 7(7) of the Finance Act, 1894. This was in fact the ground 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 relat....
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....(c) of the Act of 1881 (as amended in 1889) had been incorporated by the unhappy technique of reference into section 2(1)(c) of the Finance Act, 1894--" as if therein enacted." This case, too, was concerned with a settlement which contained a discretionary trust of income for the settlor and other persons. The Court of Appeal, not without hesitation, held that duty was payable and that Attorney-General v. Heywood*** ought to be followed. Lord Hanworth M.R. expressed himself as unwilling to dissent from a case which had stood for so long and been acted upon: Greer L.J. considered that but for Attorney-General v. Heywood* the case would have presented great difficulty. Romer L.J. both applied and approved the previous decision. The appellants invited your Lordships to overrule these cases. The Crown supported them and urged that they should be treated as governing the meaning of "interest" in the present case. I 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 secti....
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....he testator's grand-children had contingent interests. In the second place (one may call this the secondary trust) the trustees had power to resort to any accumulations and to apply them as income, that is, to distribute them between the discretionary beneficiaries. The interest of the accumulation beneficiaries under the primary trust was, in the terminology of the Finance Act, 1894, an interest in expectancy (as contrasted with an interest in possession): the discretionary beneficiaries under the secondary trust had, for the reasons already given, no "interest" at all. So it is impossible to say that when, by the advances, the trust for accumulation of the surplus income was, pro tanto, determined, there was any determination within the section. In the Court of Appeal Harman L.J., while accepting that the rights of the accumulation beneficiaries, taken by themselves, were in expectancy and that those of the discretionary beneficiaries, taken by them selves, 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 po....
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....ate trust for the heir-atlaw or next-of-kin of the testator. This consideration was relied on by the taxpayer to support an argument that there was no passing, because the whole estate, legal and equitable, remained in the heir-at-law and next-ofkin except to the extent that the trustees decided to distribute. It is not surprising that this argument did not succeed. Lord Russell of Killowen disposes of it*, by showing how remote in time and also in reality ("so minute and so remote") the interest was and called it "microscopic". I cannot regard the position of the heir-at-law or next-of-kin as other than a special factor which neither had any bearing on the decision of Burrell's case** nor any relevance by analogy to the present. This matter apart, the nature of the two decisions is clear. They were both decisions on a passing within section 1 of the Finance Act, 1894, on the footing that the property as a whole changed hands, and, if so, neither the decisions, nor any phrases in which the unavoidable word "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....