Pearson v Commissioners of Inland Revenue
| Jurisdiction | UK Non-devolved |
| Judge | Viscount Dilhorne,Lord Salmon,Lord Russell of Killowen,Lord Keith of Kinkel,Lord Lane |
| Judgment Date | 01 May 1980 |
| Judgment citation (vLex) | [1980] UKHL J0501-1 |
| Date | 01 May 1980 |
| Court | House of Lords |
[1980] UKHL J0501-1
Viscount Dilhorne
Lord Salmon
Lord Russell of Killowen
Lord Keith of Kinkel
Lord Lane
House of Lords
My Lords,
The only question to be decided in this appeal is whether Fiona Pilkington and her two sisters, Serena and Julia, were after they were 21 and before the 27th March 1974, entitled to interests in possession in settled property. The respondents say that they were and the Revenue says that they were not.
By a Settlement made on the 30th November 1964 the settlor, Sir William Pilkington, transferred to trustees 13,333 Ordinary shares of £10 each in Pilkington Brothers Ltd. Clause 2 of the Deed established a trust in relation to the capital and income of the trust fund under which the trustees had power to appoint capital and income for the benefit of all or any one or more of the 'Discretionary Objects' of the trust. 'Discretionary Objects' was defined as meaning the principal beneficiaries, their children and remoter issue and the respective wives, husbands, widows and widowers of the principal beneficiaries and their children and remoter issue. The principal beneficiaries were all the children of the settlor.
Clause 3 provided, inter alia,:—
"In default of and until and subject to any appointment made under the last foregoing clause the Trustees shall hold the capital and income of the Trust Fund upon the following trusts, that is to say:—
( a) During the Trust Period or the period of Twenty-one years from the execution hereof (whichever shall be the shorter period) the Trustees shall accumulate so much (if any) of the income of the Trust Fund as they shall think fit …
( b) Subject thereto the Trustees shall hold the capital and income of the Trust Fund upon trust for such of the Principal Beneficiaries as shall attain the age of Twenty-one years or marry under that age and if more than one in equal shares absolutely."
Clause 14 read as follows:—
"The Trustees shall in respect of any property subject to the trusts hereof have all the powers of management and exploitation of an absolute beneficial owner …".
Clause 21 was in the following terms:—
"The Trustees may at any lime or times apply any income of the Trust Fund in or towards the payment or discharge of any duties taxes costs charges fees or other outgoings which but for the provisions of this clause would be payable out of or charged upon the capital of the Trust Fund or any part thereof."
Fiona and her sisters had all reached the age of twenty-one by the end of February 1974. The position then was that, subject to the trustees' power of appointment under clause 2 and their power to accumulate income under clause 3( a) and the possibility of partial defeasance on the birth of further children to the settlor, the trust fund was held in trust for Fiona and her sisters in equal shares.
By a Deed of Appointment made on the 20th March 1976 the trustees appointed that £16,000 should be held on trust to pay the income thereof to Fiona during her life or during the trust period whichever should be the shorter.
The Finance Act 1975 introduced the capital transfer tax under which tax is charged "on the value transferred by a chargeable transfer". Subject to certain exceptions, a transfer of value is any disposition made by a person as a result of which the value of his estate immediately after the disposition is less than it would be but for the disposition: and a chargeable transfer is any transfer of value made by an individual after the 26th March 1974 (ibid: section 20 (2) and (4)).
Schedule 5 to the Act has effect with regard to settled property. This Schedule draws a distinction between what may be called fixed interest trusts and discretionary trusts. A person entitled to an interest in possession in settled property is in general treated as if he was beneficially entitled to the property in which his interest subsists. If during his life his interest in possession comes to an end, there is a charge to tax as if he had himself made a transfer of value and the value transferred had been equal to the value of the property in which his interest subsisted (Sched: 5 para: 4(2)). If he dies and is then entitled to an interest in possession, tax is charged as if immediately before his death he had made a transfer of value equal to the value of his estate (section 22) of which his interest in possession formed part. On the other hand, if he becomes absolutely entitled to the property in which he had an interest in possession, there is no charge to tax; nor is there if his interest in possession comes to an end but on the same occasion he becomes entitled to another interest in possession in the property (Sched: 5 para: 4(3)).
It follows that if Fiona had an interest in possession in the 13,333 shares settled by her father, she would not have become liable to capital transfer tax on the appointment to her of the £16,000. On the other hand, if there was no interest in possession of the settled property when that appointment was made, the position is very different. Paragraphs 6(1), (2) and (4) of the Fifth Schedule read as follows:—
"6(1) Where a distribution payment is made out of property comprised in a settlement and at the time the payment is made no interest in possession subsists in the property or in the part of it out of which the payment is made, the payment is in this Schedule referred to as a capital distribution.
(2) Where a person becomes entitled to an interest in possession in the whole or any part of the property comprised in a settlement at a time when no such interest subsists in the property or that part, a capital distribution shall be treated as being made out of the property or that part of the property; and the amount of the distribution shall be taken to be equal to the value at that time of the property or, if the interest is in part only of that property, of that part …
(4) Tax shall be charged on any capital distribution as on the value transferred by a chargeable transfer where—
( a) the value transferred less the tax payable on it is equal to the amount of the capital distribution; and
( b) …"
So if Fiona became entitled to the £16,000 at a time when no interest in possession subsisted in that, a capital distribution of £16,000 has to be treated as having been made. Further every ten years from the date of the relevant transfer occurring after the 1st April 1980 tax is charged at the rate of 30% of the rate which would otherwise be chargeable on the value of the property in the settlement in which no interest in possession subsists (Sched: 5 para: 12). Where a settlement was made before the 27th March 1974, the tax chargeable on any capital distribution made before the 1st April 1980 (now extended to 1982) is reduced (Sched: 5 para: 14). This provision recognises that some hardship and injustice may result from the abolition of estate duty and its replacement by capital transfer tax in relation to a settlement where there is no interest in possession and provides an opportunity for securing a variation of the trust before the full extent of the tax has to be borne.
The meaning to be given to the words 'interest in possession in settled property' is thus of vital importance in ascertaining liability to capital transfer tax.
For the purpose of interpreting paragraphs 6-10 of the 5th Schedule 'interest in possession' is defined as meaning inter alia "an interest in possession to which an individual is beneficially entitled" (Sched: 5 para: 11(10)). This definition which does not apply to paragraph 3(1), would be of no assistance if it did.
Schedule 5 paragraph 1(9) states that in the application of the Schedule to Scotland, any reference to an interest in possession in settled property is a reference to an interest of any kind under a settlement actually being enjoyed by the person in right of that interest. By the Finance Act 1976 Sched: 14 para: 10 the words "actually being enjoyed by the person in right of that interest" were deleted and replaced by 'by virtue of which the person in right of that interest is entitled to the enjoyment of the property or would be so entitled if the property were capable of enjoyment.'
It was contended on behalf of the Revenue that 'interest in possession' in the Finance Act 1975 should be construed with the amended definition of those words for the purpose of the application of the 5th Schedule to Scotland made by the Finance Act 1976. In Kirkness v. Hudson [1955] A.C.696 the question whether it was legitimate to seek guidance from a later Act in construing an earlier one, and, if it was, what light the later Act threw upon the earlier one arose for consideration. Lord Simonds at p.711 enunciated the proposition that it was only where there was an ambiguity in the earlier Act that recourse might be had to a later Act for its construction. He pointed out that it would be easy to say there was such an ambiguity as to justify recourse to a later Act to resolve it if judicial opinion differed as to the meaning of the words in the Act but that the House had decided in Ormond Investment Co. Ltd v. Betts [1928] A.C.143 that that was not so. Lord Simonds went on to say:—
"…each one of us has the task of deciding what the relevant words mean. In coming to that decision he will necessarily give great weight to the opinion of others but if at the end of the day he forms his own clear judgment and does not think the words "are fairly and equally open to divers meanings" he is not entitled to say that there is an ambiguity. For him at least there is no ambiguity and on that basis he must decide the case."
Lord Reid was of the same opinion. He said at p.735:—
"A provision is not ambiguous merely because it contains a word which in different contexts...
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