Brotherton v Commissioners of Inland Revenue
| Jurisdiction | England & Wales |
| Judgment Date | 01 December 1977 |
| Date | 01 December 1977 |
| Court | Chancery Division |
HIGH COURT OF JUSTICE (CHANCERY DIVISION)-
COURT OF APPEAL-
Surtax - Settlement - Whether vested or contingent interest - Application of rule in Phipps v. Ackers - "Contrary intention" -Law of Property Act 1925 (15 Geo 5, c 20), s 164 - Trustee Act 1925 (15 Geo 5, c 19), s 31.
In 1942 CB made a settlement in favour of his son and daughter ("the beneficiaries"). One moiety of the settled fund was to be held "in trust for the son if and when he shall attain the age of 30 years but if he shall die under that age then" upon the trusts of the other moiety, which was to be held on corresponding trusts for the daughter. In the event of failure or determination of these trusts there was an ultimate gift to charity. The daughter attained the age of 21 on 2 October 1960 and the son on 20 April 1962. The settlement provided that until each beneficiary attained the age of 22 the income of his or her moiety was to be accumulated and that between the ages of 22 and 25 the statutory provisions for maintenance and accumulation in s 31, Trustee Act 1925, were to apply as if the beneficiary were under 21.
The settlor died in 1949 and by his will left the residue of his estate to persons other than the son and daughter. By virtue of s 164, Law of Property Act 1925, the express trust to accumulate the income of each beneficiary's moiety up to the age of 22 terminated on the settlor's death, but in accordance with s 31, Trustee Act 1925, accumulation continued up to the age of 21.
During the 22nd year of each beneficiary the title to the income of his or her moiety depended on whether the beneficiary's interest under the settlement was contingent or vested subject to defeasance on failure to attain the age of 30. Surtax assessments were made on each beneficiary in respect of the income of the 22nd year on the footing that the interests were vested. The beneficiaries appealed to the Special Commissioners on the grounds that their interests were contingent. It was contended on behalf of the Crown that the rule in Phipps v. Ackers (1842) 9 C &F 583 applied. It was contended on behalf of the beneficiaries that the terms of the settlement indicated a sufficient "contrary intention" to exclude the application of the rule. The Commissioners decided that the interests were vested and upheld the assessments.
The Chancery Division, allowing the beneficiaries' appeals, held that construing the settlement as a whole the intention of the settlor was that each beneficiary should have an interest contingent upon his attaining the requisite age, and that there was a sufficiently indicated contrary intention to displace the rule of construction in Phipps v. Ackers. Accordingly, the income of each moiety during the relevant period did not form part of the beneficiary's total income for surtax purposes.
Held, in the Court of Appeal, unanimously allowing the Crown's appeals, that the rule in Phipps v. Ackers(1)applied and that the interest of each beneficiary was vested.
(1) Brotherton v. Commissioners of Inland Revenue
CASE
Stated under the Taxes Management Act 1970, s 56, by the Commissioners for the Special Purposes of the Income Tax Acts for the opinion of the High Court of Justice.
1. At a meeting of the Commissioners for the Special Purposes of the Income Tax Acts held on 30 June 1975 Mr. D.R. Brotherton (hereinafter called "the Appellant") appealed against assessments to surtax made upon him for the year 1962-63 £46,692, for the year 1963-64 £49,916.
(2) Shortly stated, the question for our decision was whether the income from a moiety of a trust fund comprised in the settlement hereinafter described was, for the purposes of assessment to surtax, the income of the Appellant during the twelve months between his 21st and 22nd birthdays.
(3) The appeal was heard together with an appeal by Mrs. A. R. Mears, in which the issues and arguments were the same as in the present appeal, and we gave one decision for both appeals.
3. The following document was produced and a copy is annexed hereto marked "A"(2): a settlement made the 12 February 1942 between Charles Frederick Ratcliffe Brotherton (the settlor) and certain trustees.
4. The following facts were agreed:
(2) On 12 February 1942 Mr. C.F.R. Brotherton made a settlement (exhibit A) of certain funds (therein called the Trust Fund) upon trusts for the benefit of his two infant children the Appellant (therein called the Son) and Anne Ratcliffe Brotherton (who is now Mrs. A.R. Mears) (the Daughter). The settlement contained, inter alia, the following provisions:
…3. The Trustees shall hold one moiety of the Trust Fund In trust for the Son if and when he shall attain the age of Thirty years but if he shall die under that age then upon the trusts and subject to the powers and provisions hereinafter declared and contained concerning the other moiety of the Trust Fund and so as to form therewith a single fund for all purposes. 4. The Trustees shall hold the other moiety of the Trust Fund In trust for the Daughter if and when she shall attain the age of Thirty years but if she shall die under that age then Upon the trusts and subject to the powers and provisions hereinbefore and hereinafter declared and contained concerning the other moiety of the Trust Fund and so as to form therewith a single fund for all purposes. 5. So long as the Son or the Daughter shall be under the age of Twenty two years the whole of the income of his or her moiety of the Trust Fund shall be accumulated by way of compound interest by investing the same and the resulting income thereof as aforesaid and so long as he or she shall be over the age of Twenty two years but under the age of Twenty five years the provisions of section 31 of the Trustee Act 1925 shall have effect as if he or she were under the age of Twenty one years to the intent that he or she shall not be entitled to direct the Trustees to pay the income of his or her moiety aforesaid to him or her.
(3)
(4) Clause 6 provided an ultimate gift over for charitable trusts.
(5) The Appellant attained the age of 21 on 20 April 1962.
(6) Mr. C.F.R. Brotherton died in 1949 and by his will left the residue of his estate to persons other than the son and the daughter. Questions arose concerning the direction in clause 3 of the settlement for accumulation of the income of the two moieties so long as the son or the daughter should each be under the age of 22, and it was agreed (and was likewise agreed by the parties to this appeal) that the express trust for accumulation came to an end on the settlor's death. The income was in fact dealt with in the following manner:
(a) until the son and the daughter each attained the age of 21, the income of their respective moieties was dealt with in accordance with the provisions of s 31 of the Trustee Act 1925;
(b) a sum representing the net income of each moiety for the period between the 21st and 22nd birthdays of the son and of the daughter respectively was treated, under the terms of a deed of family arrangement (which was not produced to us), as belonging to the persons entitled to the residue of Mr. C.F.R. Brotherton's estate under his will and divided among them on the footing that there was a resulting trust of such income;
(c) between the 22nd and 25th birthdays of the son and daughter the said income was applied for the maintenance of each of them in accordance with clause 5 of the settlement.
5. It was contended on behalf of the Appellant:
(2) that on the true construction of the settlement the gift to the Appellant was a gift of a contingent interest, the attaining of the stated age being a condition precedent to the interest vesting;
(3) that if and so far as the wording of clause 4 of the settlement, taken by itself, might suggest a vested interest liable to be divested in the event of the Appellant's death under the age of 30 years, in the context of the settlement as a whole (and particularly clause 5 thereof) it is clear that the settlor's intention was that the income of the Appellant's moiety of the trust fund between his 21st and 22nd birthdays should not belong to him.
6. It was contended on behalf of the Crown:
(2) that, having regard to the gift over of the Appellant's interest in the event of his dying under the age of 30, clause 3 must be construed as giving a vested interest unless the settlement read as a whole provides a sufficient indication of a contrary intention;
(3) that no such contrary intention could be found in the settlement;
(4) that, accordingly, the income in question was income belonging to the Appellant, forming part of the Appellant's total income for the purpose of surtax;
(5) that (subject to any adjustment of the figures which might be found necessary) the assessment should be confirmed.
Our attention was drawn to the following authorities: Phipps v. Ackers (1842) 9 C &F 583; Stanley v. Stanley 16 Ves J 491; In re Heath [1936] Ch 259; McGredy v. Commissioners of Inland Revenue 32 TC 338; [1951] NI 155; In re Ransome [1957] Ch 348; In re Kilpatrick's Policies Trusts [1966] 1 Ch 730; In re Penton's Settlements [1968] 1 WLR 248; In re Mallinson's Consolidated Trusts [1974] 1 WLR 1120; Theobald on Wills, (1971) 13th edn, paras 1415 et seq; Hawkins on Wills, (1925) 3rd edn, pages 282-5.
7. We, the Commissioners who heard the appeal, took time to consider our decision and gave it in writing as follows:
Mrs. A. Mears, D. R. Brotherton. Decision.
It was agreed between the parties that these two appeals stand or fall together. For convenience, our decision given below refers to the appeal of Mrs. Mears; mutatis mutandis our decision is the same in the case of the appeal of Mr. Brotherton.
Section 164 of the Law of Property Act 1925 provides that the income directed to be accumulated "shall, so long as the same is directed to be accumulated contrary to this section, go to and be...
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