HM Revenue and Customs v Trustees of the Peter Clay Discretionary Trust
| Jurisdiction | England & Wales |
| Judge | THE HON. MR JUSTICE LINDSAY |
| Judgment Date | 15 November 2007 |
| Neutral Citation | [2007] EWHC 2661 (Ch) |
| Docket Number | Case No: CH/2007/APP/0237 CH/2007/APP/0264 |
| Court | Chancery Division |
| Date | 15 November 2007 |
[2007] EWHC 2661 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Royal Courts of Justice
Strand, London, WC2A 2LL
The Hon. Mr Justice Lindsay
Case No: CH/2007/APP/0237
CH/2007/APP/0240
CH/2007/APP/0264
Mr Rupert Baldry (instructed by the Solicitor to HM Revenue and Customs) for the Appellants
Mr Christopher McCall QC (instructed by Speechly Bircham LLP) for the Respondents
Hearing date : 25 th October 2007
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
The Hon Mr Justice Lindsay:
Introduction
An additional rate of income tax is payable upon certain income arising to trustees of discretionary trusts but statutory provision is made such that in computing the amount of the income so liable such of the expenses of the trustees as are properly chargeable to income may, in effect, be deducted. It can thus behove trustees to claim that their expenses are regarded as income expenses whilst, conversely, it suits HM Revenue and Customs (“the Revenue”) to see them as outgoings of a capital nature.
On 27 th February 2007 the Special Commissioners had before them (for a decision in principle rather than one leading to a holding in a particular sum) a case between the Trustees of the Peter Clay Discretionary Trust (“the Trustees”) and the Revenue. The Commissioners held that whilst part of the Trustees' expenses in issue – investment management fees – were capital expenses not chargeable to income, some unspecified proportions of the Trustees' other expenses in the year ended 5 th April 2001 were properly chargeable to income, hence pro tanto reducing the amount of tax payable by the Trustees. The Special Commissioners adjourned to enable the parties to endeavour to agree the appropriate proportions. However, on 24 th April 2007 the Revenue (appearing both before the Special Commissioners and before me by Mr Baldry) lodged an Appellant's Notice; in deciding as they had, the Special Commissioners, said the Revenue, had erred in law in two main respects; one, as I shall explain, was said to be an error of principle and one more a question of timing.
The Trustees (appearing both here and below by Mr McCall QC) resist the appeal in both its aspects and raise a cross-appeal. These appeals, under section 56A of the Taxes Management Act 1970, raise questions as to the attribution to capital and to income respectively of trustees' expenses under the general trust law and questions also as to the interaction between that attribution under the general law and the particular statutory provisions as to income tax which regulate the area. It is to those statutory provisions that I first need to turn.
Statutory Provision
The Finance Act 1973 section 16 introduced a “charge to additional rate of certain income of discretionary trusts”. By the time of the relevant year of assessment the material provisions had become those of section 686 of the Income and Corporation Taxes Act 1988 which applies to certain income arising to trustees so far as it is “income which is to be accumulated or which is payable at the discretion of the trustees or any other person….”– section 686(2)(a). Such income is chargeable to income tax at the higher Schedule F trust rate (applicable to dividend income) or at the rate applicable to trusts. However, deduction therefrom is possible under section 686(2AA), which is the critical provision in the main part of the Revenue's appeal. It provides as follows:
“The rate at which income tax is chargeable on so much of any income arising to trustees in any year of assessment as—
(a) is income to which this section applies, and
(b) is treated in accordance with section 689B as applied in defraying the expenses of the trustees in that year which are properly chargeable to income (or would be so chargeable but for any express provisions of the trust),
shall be the rate at which it would be chargeable on that income apart from this section, instead of the rate applicable to trusts or the Schedule F trust rate (as the case may be)….”
It is not at this point necessary to set out section 689B.
Apart from the timing issue, which I shall come on to and which is concerned with differences between the point at which an expense is incurred on the one hand or defrayed on the other, the chief question before the Special Commissioners was how far the Trustees' expenses were “properly chargeable to income” within section 686(2AA) and how far to capital?
The Peter Clay Discretionary Trust
The Peter Clay Discretionary Trust was settled by Peter Robert Clay on 5 th December 1995. It is a broad discretionary trust under which almost all of the income is customarily accumulated. There are two “non-executive” Trustees in respect of whom only limited fees are claimed for time spent by them preparing for and attending Trustees' meetings. There is a family trust company (which does not charge) and an “executive” Trustee, Mr Ralph Stockwell, a former senior partner of Messrs Rawlinson & Hunter, accountants to the Trustees. He is engaged in managing this trust and other Clay family trusts. There are no beneficiaries with any prescribed or present entitlement to income but the Trustees have wide discretionary powers over both capital and income and, in particular, have power to pay or apply current income to a class of “Beneficiaries”, power to accumulate income and power to apply the accumulated income as if it was income arising in a current year.
The trust has an income of the order of seven figures but it was agreed below and remains the case that the precise amount of the income and of the capital of the trust fund is irrelevant. Mr Stockwell in the year in question was remunerated for his service to the trust as a partner in Rawlinson & Hunter; he divides up the cost of his time as between the various Clay trusts in respect of which he acts according to his best estimate of the amounts of time spent in dealing with each. Mr Stockwell's rôle was held by the Special Commissioners to be very active. As for investment management, written agreements with investment managers were produced to the Special Commissioners and the remuneration of each was based on a fee calculated by reference to capital value. The Special Commissioners, Mr Adrian Shipwright and Dr John F. Avery Jones CBE, received evidence from Mr Stockwell and from Mr Kevin Custis, a director of Rathbone Trust Company Limited, an expert on the practice of trustees generally in relation to the attribution of expenses between capital and income and on practices in relation to very large and actively managed trusts.
The Trustees' expenses
In the year ended 5 th April 2001 the Trustees incurred the following relevant expenses or outlays :
Trustee fees:
Executive £41,712.00
Non-executive trustees £5,000.00
Investment managers' fees £176,136.00
Bank charges £511.00
Custodian fees £38,024.00
Professional fees £33,488.00
Total fees £294,871.00
An even hand
Leaving aside bare trusts, trusts usually, perhaps invariably, create successive interests so that there is inevitably, says Mr McCall QC, on behalf of the Trustees, a possible conflict in all trusts between the interests of those who are in possession and those who are for the time being in remainder. Thus at a simple level a question might arise whether work to be done to settled landed property is a repair such that its cost should be paid out of income and thus at the expense of the life tenant or is, instead, an improvement which might benefit the estate as a whole and hence in fairness ought to be paid, at least in part, out of capital. In a more complicated case, if an estate includes an income-yielding wasting asset, one not specifically devised, would it not be unfair to keep it, thus benefiting only those interested in income, but be better to sell the same before it wasted further so that those interested in remainder might also derive benefit from it? In such a case, under the Court's long-established practice, a sale would be likely to be directed “to give everyone an equal chance”– Howe v Lord Dartmouth (1802) 7 Ves Jun 137 at 148–149. One might take as another example of the need for balance between conflicting interests a trust where its property included a valuable reversion which the trustees could have sold but which, instead, they had retained for some 19 years during which the life tenant derived nothing from its value. When it eventually fell into possession as a capital sum, ought not some compensation thereout to be payable to the tenant for life to reflect the years during which he had derived nothing from it? The task, said Sir John Romilly MR, was to devise a “fair mode of dealing with the case” as between tenant for life and remainderman – Wilkinson v Duncan (1857) 23 Beav 469 at 472; 53 ER 184 at 185–6. A complicated apportionment ensued—see also in Re Earl of Chesterfield's Trusts (1883) 24 Ch Div 643 where it had been urged in the successful argument that the power to postpone conversion was a power not to be exercised for the benefit of the tenants for life as against the remaindermen, or for the benefit of the remaindermen as against the tenants for life, but for the benefit of the estate “without disarranging the equities between the successive takers”. Again, a complicated division was required between the interests of capital and income. As yet another example, where a trust consisted of an aggregate made up of one solvent landed estate and another which was subject to mortgages created by its prior owner and was out of repair, the Court decided it would...
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