Leedale v Lewis
| Jurisdiction | England & Wales |
| Judge | Lord Fraser of Tullybelton,Lord Wilberforce,Lord Scarman,Lord Roskill,Lord Brandon of Oakbrook |
| Judgment Date | 14 October 1982 |
| Judgment citation (vLex) | [1982] UKHL J1014-2 |
| Date | 14 October 1982 |
| Court | House of Lords |
[1982] UKHL J1014-2
Lord Fraser of Tullybelton
Lord Wilberforce
Lord Scarman
Lord Roskill
Lord Brandon of Oakbrook
House of Lords
My Lords,
This appeal is concerned with the liability of beneficiaries for capital gains tax on gains realised by trustees of settled property who are not resident in the United Kingdom. It involves construing s.42 of the Finance Act 1965. Section 42 is in Part III of the Act, which is the part that introduced the long-term capital gains tax. Like income tax, it is chargeable individuals.
The main charging section is s.20(1) under which a person is chargeable to the tax "in respect of chargeable gains accruing to him in a year of assessment during any part of which he is resident in the United Kingdom, or during which he is ordinarily resident in the United Kingdom." (For brevity, I shall hereafter use "resident" to include ordinarily resident.) So far as trustees are concerned, s.25(1) provides that the trustees of a settlement are to be treated as being a single and continuing body of persons resident in the United Kingdom, unless the general administration of the trust is ordinarily carried on outside the United Kingdom and the trustees or a majority of them for the time being are not resident in the United Kingdom. The case of a United Kingdom settlement, the trustees of which are not resident here, is provided for in s.42. Plainly it required special provision because of the difficulty of recovering the tax from non-resident trustees. The solution adopted in s.42 is to impose the liability which would have been changeable on the trustees, if they had been resident in the United Kingdom, on the beneficiaries who are resident here. The beneficiaries are not just made responsible for paying tax which is chargeable on the trustees; the beneficiaries themselves are made directly chargeable. That is to say, the section provides machinery of charge and not machinery of collection. The issue in the appeal is whether persons who are merely objects of a discretionary power vested in the trustees are within the class of persons who are chargeable to the tax, if they are resident in the United Kingdom.
By subsection 42(1) it is declared that the section applies to capital gains accruing to trustees of the settlement if the trustees are not resident and if the settlor, or one of the settlors, is domiciled and resident in the United Kingdom or was so domiciled and resident when he made the settlement. There is no dispute that the section applies to the settlement in this appeal. The most material provisions of s.42 are subsections ( 2) and (3) which are as follows:
"(2) Any beneficiary under the settlement who is domiciled and � resident � in the United Kingdom during any year of assessment shall be treated for the purposes of this Part of this Act as if an apportioned part of the amount, if any, on which the trustees would have been chargeable to capital gains tax under section 20(4) of this Act, if domiciled and � resident � in the United Kingdom in that year of assessment, had been chargeable gains accruing to the beneficiary in that year of assessment; and for the purposes of this section any such amount shall be apportioned in such manner as is just and reasonable between persons having interests in the settled property, whether the interest be a life interest or an interest in reversion, and so that the chargeable gain is apportioned, as near as may be, according to the respective values of those interests, disregarding in the case of a defeasible interest the possibility of defeasance.
(3) For the purposes of this section�
( a) if in any of the three years ending with that in which the chargeable gain accrues a person has received a payment or payments out of the income of the settled property made in exercise of a discretion he shall be regarded, in relation to that chargeable gain, as having an interest in the settled property of a value equal to that of an annuity of a yearly amount equal to one-third of the total of the payments so received by him in the said three years, and
( b) if a person receives at any time after the chargeable gain accrues a capital payment made out of the settled property in exercise of a discretion, being a payment which represents the chargeable gain in whole or part then, except so far as any part of the gain has been attributed under this section to some other person who is domiciled and resident or ordinarily resident in the United Kingdom, that person shall, if domiciled and resident � in the United Kingdom, be treated as if the chargeable gain, or as the case may be the part of the chargeable gain represented by the capital payment, had accrued to him at the time when he received the capital payment."
Later subsections of s.42 have only an indirect bearing on the question in this appeal. Section 42 has been replaced, for any year of assessment beginning on or after 6th April 1981, by different machinery provided in the Finance Act 1981 s.80, but s.42 continues to apply to any cases arising in earlier years of assessment.
The trust with which this appeal is concerned is an inter vivos trust set up on 16th March 1968 by a lady who was domiciled and resident in the United Kingdom. Her husband contributed additional funds to the trust after it had been set up. The sole trustee has always been a company registered in Bermuda, originally a bank, later a trust company. The law of Bermuda is expressed to be the law of the settlement. The trust purposes may be summarised sufficiently for the present appeal as follows. The settlement defines a Specified Class consisting of the grandchildren and remoter issue of the settlor and their spouses, widows and widowers, whether already living or born before a perpetuity day defined by reference to royal lives. Clause 2 of the settlement confers on the trustees a power of appointment over the capital and income of the trust fund, exercisable before the perpetuity day in favour of the members of the Specified Class. Until the perpetuity day, and subject to any such appointment, Clause 3 of the settlement provides that income shall be accumulated. By Clause 4 the trusts which will come into force on the perpetuity day, subject to any prior appointment, are in favour of the grandchildren and remoter issue of the settlor living on the perpetuity day and, subject thereto, in favour of the children of the settlor living at the date of settlement, in equal shares. No appointment had been made at the material times under Clause 2 of the settlement, nor had any distribution of capital or income been made. Five grandchildren of the settlor were in life at the material dates and they were the only members of the Specified Class then in existence.
During the years 1968/ 69 and 1969/70, the trustee made certain capital gains on which it would have been chargeable to capital gains tax if it had been resident in the United Kingdom. During those years, and at all material times, all five grandchildren were minors, and all were resident in the United Kingdom. The respondent Inspector of Taxes apportioned the gains of the trustee equally among the five grandchildren. Three of them are children of the appellant who, as their parent, is liable for their tax�see Taxes Management Act 1970, ss. 73 and 77. The question is whether that apportionment was in accordance with s.42.
The Special Commissioners decided that it was not, and they allowed an appeal by the present appellant. They held that the possibility of participation in any distribution of the unappointed residue under Clause 4 of the settlement was so remote and of so little (if any) value that it ought to be ignored, and that the rights of the grandchildren as objects of the trustee's discretionary power did not amount to "interests" in the settled funds. From that decision Dillon J. allowed an appeal by the present respondent by way of case stated. The learned judge held that, although the rights of the grandchildren as objects of the discretionary power did not amount to "interests", they were enough to make it just and reasonable to apportion the gains equally among them. The court of Appeal (Lawton, Brightman and Fox L.JJ.) held that the grandchildren's rights did amount to "interests" in the settled funds, and they affirmed the order of Dillon J.
The main question is what is the meaning of the word "interests" in s.42(2). It is a word that is capable of many meanings, the appropriate meaning depending on the context. In A.-G. v. Heywood (1887) 19 Q.B.D. 326 the settlor had provided that trustees had a discretion to apply the trust income for the benefit of himself and his wife and children or any one or more of them. It was held that he had reserved an "interest" within the meaning of the Customs & Inland Revenue Act 1881. But in Gartside v. I.R.C. [1968] A.C. 553 this House decided that a beneficiary under a discretionary trust did not have an "interest" in the sense of s.43 of the Finance Act 1940. Lord Reid expressed approval of the decision in Heywood, supra, but distinguished it because of the different context in which "interest" was used in the 1940 Act. He said (at p.612) "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; �". Lord Wilberforce, after referring to Heywood and also to A.-G. v. Farrell [1931] 1 K.B. 81, declined to treat those cases as having settled the meaning of "interest" in the different setting of the Finance Act 1940. He said (at p.617) "No doubt in a certain sense a beneficiary under a discretionary trust has an 'interest'; the nature of it may, sufficiently for the purpose, be spelt out by saying that he has a right...
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