Re Bourne’s Settlement Trusts, Bourne v Mackay and Others

 

Re Bourne’s Settlement Trusts, Bourne v Mackay and Others

TRUSTS

COURT OF APPEAL

LORD GREENE MR, MORTON AND TUCKER LJJ

12, 13 FEBRUARY 1946

Perpetuities – Accumulations – Statutory periods – Settlement – Fund for benefit of settlor’s grandchildren already living at date of settlement – Annual sum

to be paid to each grandchild on attaining 18 – Remainder of income to be accumulated, in separate fund, from date of settlement until youngest grandchild

attained 23 – Donees of both funds to be chosen by trustees from among grandchildren and their children – “Raising portions” – Life of settlor only period

available – Trustee Act 1925 (c 19), s 31 – Law of Property Act 1925 (c 20), s 164(1) (a), (d), 2 (ii) (a).

The settlor settled £7,000 upon trust for the benefit, in the first instance, of seven named grandchildren of whom the eldest was 7 years old and the youngest

one month old at the date of the settlement. Subject to the payment of £52 a year to each grandchild on attaining 18, the income of the 􀂭 411􀀉 fund was, from

the date of the settlement, to be accumulated in a separate fund, called the income fund. The date of final distribution of both funds was the date on which the

youngest surviving grandchild attained 23. Before the date of final distribution, the trustees were empowered to give each grandchild on or after attaining 23

that grandchild’s share of the £7,000 together with £500 out of the income fund. The class among which the income fund was divisible at the date of final

distribution consisted of such of the seven grandchildren as were living at the time and the children of any grandchild who had died. In the case of the capital

fund, the class consisted of such of the seven grandchildren as were living at the time and the children of any that were dead and also of the children of the

grandchildren who were still living. In the case of each fund, the trustees had an absolute discretion as to which member or members of the class in question

should take, and in what proportion. It was contended on behalf of the Crown that the Law of Property Act 1925, s 164(1)(a), applied and that the fund could

not be accumulated for a period longer than the life of the settlor, with the result that the property passed on the death of the settlor and estate duty was

chargeable thereon under the Finance Act 1894, s 1. On behalf of the beneficiaries it was contended that, since the trustees could apply the accumulated fund

as a portion by exercising the power to pay out £500 therefrom to a grandchild, the object of the provision for accumulation was to create a fund for “raising

portions” within the meaning of sub-s (2)(ii) (a) of s 164, so that s 164 did not apply and the direction to accumulate was valid. It was further contended that,

if the direction to accumulate was held to be void for the excess beyond a period allowed by s 164(1), the period in para (d) of s 164(1) was the appropriate

one during which accumulation could be allowed, because, had there been no trust to accumulate, the grandchildren could, under the Trustee Act 1925, s

31(1)(ii), have asked for the income to be paid to them on the youngest attaining 21:—

Held – (i) the direction to accumulate was not a provision for “raising portions” within the meaning of sub-s (2)(ii)(a) of the Law of Property Act 1925, s 164,

notwithstanding the fact that the trustees were empowered under the settlement to pay out £500 from the accumulated fund to a grandchild. The document

must be construed at its date, and whether the provision was used for “raising portions” or not depended entirely on the discretion of the trustees at some future

date. The accumulation was therefore void under s 164(1) of the Act except for a period allowed by the Act.

(ii) the appropriate period during which the income could be accumulated was not that in para (d) of s 164(1), because the grandchildren were not

“entitled to the income directed to be accumulated.” Under the trusts of the settlement, the intermediate income might go to someone other than the recipient

of the capital, and therefore the Trustee Act 1925, s 31, did not apply, because, under sub-s (3) thereof, the section only applied in the case of contingent

interests where the trust carried the intermediate income.

(iii) since the accumulation was to take effect from the date of the settlement, the appropriate period during which it could be allowed was that in para (a)

of the Law of Property Act 1925, s 164(1), ie, the life of the settlor. The property, therefore, passed on the death of the settlor and estate duty was chargeable

thereon on her death, under the Finance Act 1894, s 1.

Notes

This case construes the exception to the restriction on the accumulation of income in the Law of Property Act 1925, s 164(2)(ii). It is held that “provision for

raising portions” cannot be construed as meaning a provision for creating a fund available for portions, and accordingly a provision under which trustees have

a mere power to deal with the accumulations in such a way that the result could be described as a portion, is not within the exception. It is essential that the

fund must be applied to portions, and can be dealt within no other way, if the exception is to apply.

Since, under the settlement considered in this case, the trustees had a discretion as to the division of the fund among the class indicated, none of the

members can be said to be a person who would be entitled to the income directed to be accumulated. 􀂭 412􀀉 Section 164(1)(d) is, therefore, inapplicable, and

the life of the settlor is the appropriate period during which accumulation can legally be made under s 164(1)(a).

As to Limits of Period of Accumulation, see Halsbury, Hailsham Edn, Vol 25, pp 168–171, paras 287–289, and para 292; and for Cases, see Digest, Vol

37, pp 136, 137, Nos 642–657, and pp 144–146, Nos 706–718.

As to Provisions for Raising Portions, see Halsbury, Hailsham Edn, Vol 25, pp 178–181, paras 303–307; and for Cases, see Digest, Vol 37, pp 139–143,

Nos 668–689.

Case referred to in judgments

Thellusson v Woodford (1805), 11 Ves 112, 37 Digest 63, 67, 1 Bos & PNR 357, affg (1799), 4 Ves 227.

Appeal

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Appeal by the beneficiaries under a settlement from an order of Evershed J dated 6 July 1945. The facts are fully set out in the judgment of Lord Greene MR.

John Pennycuick for the trustees.

C L Fawell for the beneficiaries under the settlement.

J H Stamp for the Crown.

13 February 1946. The following judgments were delivered.

LORD GREENE MR. The question submitted for the decision of the court by the originating summons was whether or not estate duty was chargeable under

the Finance Act 1894, s 1, on the occasion of the death of the settlor, Mrs Clara Louisa Bourne, on the footing that the settled property passed on her death.

That question involves two questions on the true construction and application of the Law of Property Act 1925, s 164, which replaced the provisions of the

Thellusson Act which itself invalidated certain types of trusts for accumulation.

The settlement is of an unusual and complicated nature, and I do not propose to go through it in detail. There are certain broad points which may usefully

be mentioned. It settles the sum of £7,000 for the benefit, in the first instance, of seven named grandchildren, the eldest of whom was, at the date of the

settlement, about 7 years old, and the youngest of whom at the date of the settlement was about a month old. As each of those grandchildren attained the age

of 18, he or she became entitled to a sum of £52 a year out of the income of the settled property. Meanwhile, and subject to that, the income of the settled

property was to be accumulated. It was to be accumulated in a separate fund which the settlor calls the income fund. The ultimate destination of both the

£7,000 capital and the income fund is provided for in cl 1(3) and (5) of the deed. But there is an interim provision under which the trustees are empowered to

transfer to each of the seven grandchildren his or her share of the £7,000 together with a sum of £500 out of the income fund. The earliest date at which that

transfer could be made was on the grandchild attaining the age of 23 years. That was a mere power, and the trustees could elect, in the case of a grandchild, to

continue to pay £52 a year down to the date of final distribution. The date of final distribution of both funds, the £7,000 and the income fund is the date on

which the youngest surviving grandchild attains 23. The class among whom the income fund is divisible is such of the seven grandchildren as shall be living

at the distribution date, and the children of any of those grandchildren who should then be dead. The class in the case of the capital fund of £7,000 is precisely

the same, save that children of grandchildren are members of the class, or may be members of the class, notwithstanding that their parents may be alive at the

distribution date.

The trusts in relation to those classes, one of which, as will be seen, is rather broader than the other, are not trusts by way of absolute gift; in each case

there is a complete and absolute discretion given to the trustees as to which grandchildren or great-grandchildren are to share in the two funds, and in what

proportions. It would be possible for the trustees under those trusts, when the time for distribution arrived, to hand to each grandchild, assuming all seven

were alive, one-seventh of the capital plus one-seventh of the income which had been accumulated. It would be possible for the trustees to give the entirety of

both funds to one grandchild, or to one great-grandchild. On the other hand, it would be possible for the trustees to give the whole of the capital fund to one

member of the class, and the whole of the income fund to another member of the class. Indeed, if the children of living grandchildren alone were selected as

the beneficiaries in respect of the capital fund, as they are not 􀂭 413􀀉 members of the class specified in respect of the income fund, that result would happen,

because you would then get the whole of the income fund going one way, and the whole of the capital fund going another. There are various possibilities, but

I have picked out these for a reason which will appear presently.

At this stage I can perhaps conveniently deal with a suggestion of counsel for the beneficiaries under the settlement to the effect that the paramount object

of this settlement could be in some way ascertained and attributed to one particular exercise of the trustees’ discretion. I cannot find that there is any

paramount object in this settlement, save the object that the destination of these funds shall be such as the trustees in their discretion shall decide. It seems to

me that any purpose which falls within the four corners of that discretion is just as much paramount as any other purpose, and it is impossible to say of any one

purpose that it is more paramount than another. That is sufficient to bring me to the other arguments which have been addressed to us.

The relevant section of the Law of Property Act 1925, is s 164. Subsection (1) prescribes the statutory limits which are imposed upon the power to direct

accumulations. The first argument addressed to us was based upon the terms of sub-s (2) which operates to exclude from those restrictive provisions certain

matters mentioned in the subsection. Accordingly, if counsel for the beneficiaries is right in his argument that this case falls under sub-s (2), the second

question in the appeal, which arises under sub-s (1), does not fall for consideration. But, in my opinion, sub-s (2) has no application to the present case. That

was the view of Evershed J and, in my opinion, he was perfectly right. The words of sub-s (2) on which counsel for the beneficiaries relies are these:

‘This section does not extend to any provision … (ii) for raising portions for (a) any child, children or remoter issue of any grantor, settlor or

testator.’

That language has been criticised as not being very clear, but it has to a certain extent been clarified by judicial decision. The section does not say: “Any

provision for the benefit of any child.” Something more must be found before the exception operates. The provision must be one “for raising portions.” The

phrase “raising portions” is a technical phrase in conveyancing. A more accurate way to express the intention of the legislature might possibly have been to

use the phrase “for creating portions.”

Counsel for the beneficiaries says that the phrase really means: “A provision for creating a fund available for portions.” In other words, if you find that

the object of the accumulation is to create a fund which it will be possible for somebody to use for portions, or to apply for portions, that brings the exception

into operation. Applying it to the present case, he says: Here is a fund raised by means of accumulations. It is possible for the trustees to apply that fund as a

portion by exercising the power to hand over £500 out of that fund to a grandchild under cl 1(4) of the settlement. When the ultimate distribution is regarded

(he says) this income fund could be paid to a child who was given by the trustees no interest in the capital fund.

It has been settled quite clearly that the phrase “raising portions” does not cover the case where all that is done is to treat accumulations as, and deal with

them as, an addition to capital. Indeed, if that were what the phrase meant, any accumulation for the benefit of children would have fallen within the

exception. The authorities come to this: that accumulations do not fall within this language unless they are themselves, as separate items, used for the purpose

of portions. This must not be merely by way of addition to a capital gift.

To my mind, the point comes down to a narrow one: Is counsel for the beneficiaries right in treating as included in this exception any provision available

for portions if the person given the necessary power chooses to make them available? That is the position here. As I have just pointed out, the trustees could,

if they chose, direct this income fund in such a way that the entirety of it would go to a beneficiary taking no interest at all in capital. If the settlement itself

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had so directed, I apprehend that that would have been a portion because it would not have been a mere addition to capital. On the other hand, it is perfectly

possible for the trustees, in their discretion, to hand over the whole of the income fund and the whole of the capital fund to the same person. If the settlement

itself had so provided, such a provision in the settlement, 􀂭 414􀀉 according to the authorities, would not have been a provision for raising portions. Similarly,

the trustees could have divided it up into sevenths, giving to each a portion of the capital fund, and a portion of the income fund. That again would not have

been raising portions. Where the settlement merely makes it possible to take any of these courses, and merely gives a power to deal with the accumulations so

that the result could be described as a portion, it does not, in my opinion, satisfy the section. You cannot predicate of the provision in the settlement that it is a

provision for “raising portions” when whether it is so used depends entirely on the discretion of some third person, who may use it in that way or who may not.

That brings me back to the argument of counsel for the beneficiaries about the paramount intention. He argued that the paramount intention was to create

portions. I cannot find any paramount intention of that character in this deed. He said that, in regard to the £500, the paramount intention was to give £500 to

each grandchild on attaining 23. The trustees, however, merely had a power to do that. The settlement, far from manifesting an intention that that was to be

paramount, in my opinion, manifested exactly the opposite, because the settlor was in fact saying: “I am not going to decide what is the best thing to do in the

future. I am unable to lay down any rules, but I leave it entirely to my trustees to decide what is the best thing to do.” Counsel for the Crown also pointed out

that the £500 only falls to be given out of the income fund in company with the grandchild’s one-seventh share of the capital fund. I do not pursue that view

because there is a little complication in it, and it does not follow that the £500 would be equal to, or would be more or less than, the share of the income fund

attributable to the £1,000. I do not think it necessary to go into that because, as I construe sub-s (2) of the Law of Property Act 1925, s 164, the provision here

is not a provision for “raising portions,” for the reason that the document must be construed at its date, and it is not possible to say of the provisions therein

contained anything more than that they may or may not be used for raising portions, according as the trustees at some future date in their absolute discretion

decide.

I might perhaps add this. Sect 164(1) lays down the policy of the legislature which came into existence as a result of the well known and surprising

Thellusson case. Subsect (2) is an exception to that matter of policy. In my opinion, its scope is quite definitely limited to transactions in respect of which it is

possible to assert from their very nature that they possess the specified quality. The first of the provisions which are excepted is the provision:

‘… for payment of the debts of any grantor, settlor, testator or other person.’

If counsel for the beneficiaries is right, it would, apparently, follow that a provision which might or might not be used for the payment of such debts at the

discretion of some third person, a trustee or somebody else, would fall within the exception. As the debts mentioned are the debts of any person, not merely of

the testator, it would apparently be possible, on that basis, to direct, for a long period, a perfectly valid accumulation, which might or might not be applied for

the payment of the debts of some heavily indebted stranger, according to the discretion of the trustees or some third person. That surely cannot be right. It

must be possible, in a case which is alleged to come under the exception, to state of the provision that, from its nature, it is a provision for payment of debts,

viz, one which must be applied for that purpose. Similarly, it seems to me that a provision for “raising portions” means a provision which, on the true

construction of the document, must be applied to that purpose. It does not include one which may be applied for a different purpose altogether.

The next controversy arises on the Law of Property Act 1925, s 164(1), which lays down four alternative periods for which an accumulation may validly

be made. It has been decided, many years ago, that an accumulation which goes beyond whatever may be the appropriate period is not absolutely bad, but is

only bad for the excess. The problem which the legislature has laid down for the court under s 164(1) is to discover the period which is appropriate to the

particular case. The first thing to do is to look at the date from which, according to the settlement, the accumulations were to begin. In the present case, they

were to begin at once. Accordingly, para (b) of s 164(1) can be put out of the way altogether because it says:

‘… a term of 21 years from the death of the grantor, settlor or testator.’

􀂭 415􀀉

That cannot possibly be appropriate to a settlement which directs the accumulations to begin, not at the death of the settlor, but immediately the settlement is

executed. Similarly, para (c) also disappears out of the picture. The controversy is between paras (a) and (d) of s 164(1).

It was held by Evershed J that the appropriate period was that in para (a), viz, “the life of the grantor or settlor.” Counsel for the beneficiaries argues that

the appropriate provision is para (d):

‘… the duration of the minority or respective minorities only of any person or persons who under the limitations of the instrument directing the

accumulations would for the time being, if of full age, be entitled to the income directed to be accumulated.’

He says that that is the appropriate period because it is possible to fit in the whole of the provisions of this deed so as to be consistent with the language of that

paragraph. Evershed J rejected that view and held that the life of the grantor or settlor, being the only period then left, must be taken as the proper period. It

follows from that, of course, that the property passed on the death of the settlor under the Finance Act 1894, s 1.

Looking at para (d) of the Law of Property Act 1925, s 164(1), the first thing that strikes one is this. If the settlement alone be looked at, it is impossible,

in my opinion, to say that any of these grandchildren, or anybody else, would, for the time being, if of full age, be entitled to the income directed to be

accumulated. It is only when they attain 23 that they become entitled to it. But, more than that, no grandchild can say, according to the trusts of the

settlement, that he is entitled to anything, because non constat that a grandchild will ever get anything under the exercise of the trustees’ discretion. The whole

of the fund may go to the great-grandchildren, for all one can tell. It seems to me, therefore, that the language is quite inapt, taken by itself, to cover the

present case.

But counsel for the beneficiaries has raised an ingenious argument which, I think was not in terms raised before Evershed J. It is that the position is

altered by reason of the Trustee Act 1925, s 31. That section enacted, with some amplification, what used to be common form clauses in an ordinary

settlement. It provides:

‘(1) Where any property is held by trustees in trust for any person for any interest whatsoever, whether vested or contingent, then, subject to any

prior interests or charges affecting that property (i) during the infancy [the income may be applied for maintenance] … (ii) if such person on attaining

the age of 21 years has not a vested interest in such income, the trustees shall thenceforth pay the income of that property and of any accretion thereto

under subsect. (2) of this section to him, until he either attains a vested interest therein or dies, or until failure of his interest.’

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Counsel for the beneficiaries says: “You have to approach this question by finding what would have happened if there had been no accumulations directed. If

no accumulations had been directed, when the youngest grandchild had attained 21, the seven grandchildren together would have been in a position to say ‘pay

the income to us’.” He further says—and I am afraid I do not quite follow the reason for this—that the position must be examined without reference to any

possible great-grandchildren. I am not quite sure why that should be so. But, disregarding great-grandchildren for the moment, his difficulty appears to me to

arise when we come to s 31(3) which provides:

‘This section applies in the case of a contingent interest [these interests were contingent] only if the limitation or trust carries the intermediate

income of the property …’

Counsel for the beneficiaries says that that requirement is satisfied in the present case because the trusts, looking at them as a whole, in relation to the income

and in relation to the capital are the same, subject to this, that the trustees can send the funds in two quite different directions, if they please. That seems to me

quite fatal to the argument. Unless you can say of the intermediate income that it is carried within the meaning of sub-s (3), that subsection takes the case out

of the section altogether. How can it be said in this case that the trust carries the intermediate income of the property in any sense at all when the intermediate

income, according to the trusts, may go to somebody totally different from the recipient of the capital, and may never go to any one of the seven grandchildren

who, counsel for the beneficiaries says, are the only people we ought to consider for the purposes of this argument?

􀂭 416􀀉

The real position is that, at the moment when the youngest grandchild attains 21, it is impossible to say that the income is going to be carried to that

grandchild, or to any other grandchild, or to all the seven grandchildren, because it may very well go to somebody totally different. In other words, the income

may not follow the corpus. It seems to me that the phrase “carries the intermediate income” implies that the income follows the corpus. That is the connection

in which, so far as I know, it is always used in speaking of legacies which do or do not carry intermediate income, and of contingent interests under which

intermediate income may or may not be carried. Here you have the possibility of a complete severance between capital and income. For that reason, it seems

to me that the section does not apply.

I entirely agree both with the decision and the reasoning of Evershed J and this appeal must be dismissed.

MORTON LJ. I entirely agree. If I delivered a judgment, I should only be repeating in less felicitious language what has already been said by Lord Greene

MR.

TUCKER LJ. I agree.

Appeal dismissed. Costs to be paid out of the settled property.

Solicitors: Biddle, Thorne, Welsford & Barnes (for the trustees and the beneficiaries); Solicitor of Inland Revenue (for the Crown).

F Guttman Esq Barrister.

[1946] 1 All ER 417