Commissioners of Inland Revenue v Sir Kenneth Berrill and Gumb (as Trustees of H. E. and M. E. Kent Settlement)
| Jurisdiction | England & Wales |
| Judgment Date | 23 July 1981 |
| Date | 23 July 1981 |
| Court | Chancery Division |
HIGH COURT OF JUSTICE (CHANCERY DIVISION)-
Income tax - Additional rate - Protected life interest - Power to accumulate income - Whether income which is to be accumulated or is payable at discretion of trustees - Finance Act 1973, s 16(2)(a) and 17(1).
Under the Settlement, the settlors' adult son has a protected life interest so long as he is alive and under 45, at which age the capital vests absolutely. The Trustees have an overriding power during the protected life tenants life or for 21 years, whichever is the shorter, to accumulate the whole or part of the trust income and to hold such accumulations as an accretion to capital. In the relevant years, the whole of the trust income was accumulated.
Before the Special Commissioners, on appeal against additional rate assessments made in respect of the accumulations, the Trustees contended that the protected life tenant had an immediate vested right to the income subject only to the exercise of the trustees' power of accumulation, and that s 16(2)(a) applied only to trusts for accumulation with or without a power of distribution or discretionary trusts for distribution with or without a power of accumulation.
The Special Commissioners, allowing the appeal, relied on the decision of Fox J. in Pearson v. Commissioners of Inland Revenue [1980] Ch 1 and decided that the income was the income of the protected life tenant as it accrued to the Trustees, so that it was not payable at the discretion of the Trustees. They also decided that the first limb of s 16(2)(a) referred to income subject to a trust for accumulation. The Crown appealed.
Held, in the Chancery Division, allowing the Crown's appeal,
(1) section 16(2)(a) describes in general terms the income to which s 16(2) applies, and it is apt to include income which trustees have power to withhold from a beneficiary entitled in default of the exercise of the power;
(2) section 17 cannot be literally construed and the word "payment" in s 17(1) is apt to include the case where a beneficiary becomes indefeasably entitled to require trustees to pay him income because when it arose he had a vested interest in it subject to a power to accumulate, which power has expired.
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 1 December 1978 and adjourned to 29 January 1979 Sir Kenneth Berrill and Alex Gumb as trustees of the H. E. and M. E. Kent
Settlement (hereinafter called the "the trustees") appealed against the following estimated assessments to income tax in respect of additional rate tax at 15 per cent. on dividends and tax credits:Year |
Amount |
£ |
|
1973-74 |
35,000 |
1974-75 |
35,000. |
2. Shortly stated the question for our decision was whether the provisions of s 16, Finance Act 1973, (charging additional rate on certain income of discretionary trusts) applied to the said H. E. and M. E. Kent Settlement hereinafter set out.
3. Mr. P. Horsfield appeared for the trustees, and Mr. A. K. Scutter for Solicitor of Inland Revenue.
4. The following documents were proved or admitted before us:
A. Copy settlement dated 19 March 1965.
B. Copy trustees' accounts for 19 March 1965 to 5 April 1973.
C. Copy trustees' accounts for year ended 5 April 1974.
D. Copy trustees' accounts for year ended 5 April 1975.
E. Copy assessment for 1973-74.
F. Copy assessment for 1974-75.
Copies of such of the above as are not annexed hereto as exhibits are available for inspection by the Court if required.
5. The following facts were admitted between the parties:
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(2) By a duly executed deed of settlement ("the settlement") dated 19 March 1965 and made between Henry Ernest Kent and Mary Elsie Kent ("the settlors") of the one part and the trustees of the other part the settlors having prior to the execution of the settlement caused 14,000 ordinary shares of £1 each fully paid in Vogue Star Ltd. to be renounced into the names of the trustees, the trustees declared that they would hold the same (and any further property or cash from time to time transferred by the settlors or other persons to or into the control of the trustees) on the trusts of the settlement. The settlement, after reciting that the settlors were desirous of making provision for their son Nicolas Kent (born 26 January 1945) and other persons therein mentioned, contains the following provisions which are material for the purposes of this appeal:
2. The Trustees shall stand possessed of the Trust Fund Upon Trust at their discretion either to retain the same in its existing form of investment or at any time or times to sell the same or any part or parts thereof and to invest or apply the net proceeds of any sale and any cash from time to time comprised in the Trust Fund in or upon any kind of investment or for any of the purposes hereinafter authorised with power at any time and from time to time to vary any such investments or applications for others of any nature hereby authorised.
3. The Trustees shall hold the income of the Trust Fund Upon protective trusts for the benefit of the said Nicolas Kent so long as he shall be living and under the age of 45 years and if he shall attain that age the Trustees shall stand possessed of the capital of the Trust Fund Upon Trust for him absolutely Provided Always that during the life of the said Nicolas Kent or the period of 21 years from the date of the execution hereof (whichever shall be the shorter) the whole or any part of the income of the Trust Fund may from time to time be accumulated by investing the same in any investments hereinafter authorised and the accumulations so made shall be held as an accretion to the capital of the Trust Fund for all purposes.
4. Subject to the trusts hereinbefore declared and to any and every exercise of the powers hereby or by law conferred on the Trustees the Trustees shall stand possessed of the Trust Fund and the income thereof Upon Trust for such of them the children or child (including adopted children or an adopted child) of the said Nicolas Kent as shall attain the age of 21 years if more than one in equal shares And for this purpose a person shall be deemed to be an adopted child if he or she shall be recognised as an adopted child by the law of England for the time being in force. 5(1) In the event of the failure or determination of the before-mentioned trusts then subjected thereto and to any and every exercise of the aforesaid powers the Trustees shall stand possessed of the capital and income of the Trust Fund Upon Trust for such of the children of Helene Harding (the sister of the said Henry Ernest Kent) living at the date of such failure or determination as shall attain the age of 21 years if more than one in equal shares. (2) Subject to all the foregoing trusts and to any and every exercise of the aforesaid powers the Trustees shall stand possessed of the Trust Fund, and the income thereof In Trust for the said Helene Harding absolutely.
6. Notwithstanding and in derogation of the trusts hereinbefore declared the Trustees shall have power exercisable at their absolute discretion at any time or times during the life of the said Nicolas Kent after he shall have attained the age of twenty one years to raise any part or parts or the whole of the Trust Fund and to pay or apply the same to or for the benefit of the said Nicolas Kent freed and discharged from the trusts of this Settlement…, 9.(a) Moneys arising under this Settlement may be invested…(b) It is Hereby Expressly Declared but without prejudice to the generality of the foregoing sub-clause that the Trustees may…(iii) in relation to any leasehold property or other wasting assets effect and maintain sinking fund policies and pay all expenses of keeping up the same out of the income of the Trust Fund…17 Notwithstanding anything herein expressed or implied no part of the Trust Fund or the income thereof shall in any circumstances whatsoever be paid lent or applied to or for the benefit of the Settlors or either of them or any spouse of either of them. 18 This Settlement and the dispositions hereby made are intended to be and are irrevocable…
(3) The following further investments were transferred by the settlors to the trustees to be held as part of the trust fund under the settlement: 31 March 1966, 2800 ordinary shares of £1 each fully paid in Vogue Star Ltd.; 5 January 1968, 197 ordinary shares of £1 each fully paid in Lobby Co. Ltd.; 11 January 1968, 6988 ordinary shares of £1 each fully paid in Vogue Star Ltd. In addition the trustees received by way of bonus issue from Vogue Star Ltd. on 25 March 1966, 5600 ordinary shares of £1 each fully paid. Therefore at the time of the relevant years of assessment the trustees held the following aggregate number of unquoted shares; 29,388 ordinary shares of £1 in Vogue Star Ltd.; 197 ordinary shares of £1 in Lobby Co. Ltd.
(4) On 25 March 1976 the trustees paid to Nicolas Kent a sum of £2,250 net in respect of the income arising out of the trust fund but save as to that payment the trustees have accumulated the whole of the income of the trust fund and have invested the same in accordance with the proviso to clause 3 of the settlement.
(5) On 14 October 1974 the Inspector raised an assessment No. 277/T 83440/75/1 for the year 1973-74 in respect of additional rate tax at 15 per cent. on an estimated amount of £35,000 in respect of dividends and tax credits. The trustees appealed against this assessment.
(6) On 13 October 1975 the Inspector raised an assessment No. 277/T 83440/76/1 for the year 1974-75 in respect of additional rate tax at 15 per cent. on an estimated amount of £35,000 in respect of dividends and tax credits. The trustees appealed...
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