Re Holmden's Settlement Trusts
| Jurisdiction | England & Wales |
| Judge | THE MASTER OF THE ROLLS,LORD JUSTICE RUSSELL |
| Judgment Date | 12 May 1966 |
| Judgment citation (vLex) | [1966] EWCA Civ J0512-3 |
| Court | Court of Appeal |
| Date | 12 May 1966 |
[1966] EWCA Civ J0512-3
In The Supreme Court of Judicature
Court of Appeal
From Mr. Justice Pennycuick
The Master of the Rolls
(Lord Denning)
Load Justice Harman and
Lord Justice Russell
In the Matter of The Trustsofa Settlement dated 28th December 1927 and made between Sir Osborne George Holmden and Others
In the Matter of The Administrationofjustice (Miscellaneous Provisions) Act 1933
MR. W. A. BAGMALL, Q.C. and HA J.P.F. WARMER (instructed by the Solicitor of Inland Revenue) appeared as Counsel for the Appellants.
MR. J.A. BRIGHTMAN, Q.C. and MR. SW. TEWPLENAN, Q.C. (instructed by Messrs MacFarlane) appeared as Counsel for the Respondents.
On 28th December, 1927, Sir Osborn Helm- den made a settlement for his wife, Lady Holden, and his son George and daughter Mary. I will call it the settlement. By it, he transferred a large number of shares to trustees upon these trusts: Clause 2(a) contained discretionary trusts of income. During the lives of Sir George and Lady Holden and the life of the survivor, the trustees were to pay the income, as in their uncontrolled discretion they thought fit, for this class of persons: Lady Holden, George, Mary, and the issue of George and of Mary. Clause 2(b) contained trusts of capital. These were trusts as to the capital, after the death, of the survivor, in favour of George and of Mary and of their issue.
On 16th April, 1945, Sir George died. Lady Holden survived him. In 1960 she was aged 84. Her son George had married twice and had three daughters. Her daughter Mary had married twice and had two daughters. One of these daughters had married and was expecting her first child (who was to be the first great-grandchild of Lady Holden). She has since had two other children.
In 1960 it was obvious that, if nothing was done, when old Lady Holden died, estate duty would be payable on her death under Section 2(l)(b) of the Finance Act, 1894: because the interest of the beneficiaries under the discretionary trust was an interest which would cease on Lady Holmden's deat hand a benefit would accrue by reason of the cesser of that interest: and the value of it would be the value of the shares coining to George and Mary.
In order to avoid this imminent liability to estate duty, steps were token to vary the trusts of the settlement. There is nothing wrong about this. We discussed it in Chapman v. Chapman, 1953 Chancery, p. 218: 1954 Appeal Cases, p. 529. I said then that "Just as people of full age and understanding are entitled to arrange their affairs so as to reduce the incidence of death duties on their successors, so also the Court will permit the receiver of a lunatic to do it. If the Court goes thus far, there is no reason why it should not give its consent to a scheme on behalf of infant for the like purpose", see 1953, 1 Chancery at p. 276. The House of Lords, in its judicial capacity, thought otherwise. Lord Morton of Henry ton said that "if the Court had power to approve, and did approve, schemes such as the present scheme, the way would be open for a most undignified game of chess between the Chancery Division and the Legislature", see 1954 Appeal Cases at p. 468. But despite these forebodings, Parliament a few years later did give the Court power to vary or revoke trusts, even though the avowed purpose was to avoid death duties, see the Variation of Trusts Act, 1958. Ever since that Act was passed, the Chancery Courts have spent much of their time sanctioning the variation of trusts, the principal object of which is to avoid death duties. The lawyers have become magicians who perform conjuring tricks. Sometimes they succeed, as in Morgan v. Inland Revenue Commissioners, 1963, Chancery, p. 468. and Re Ralli's Settlements, 1966, 2 Weekly Law Reports, p. 119. At other times they fail, as in Re Kirkwood, 1966, 2 Weekly Law Reports, p. 136. It has become indeed a game of chess, played by each, side with a subtle-y and skill worthy of the schoolmen. But in the long run the Legislature is bound to win. It can offset all these devices. It can call off the game.
This case is an illustration of one of the more recent inventions of Lincoln's Inn. It is the "grafting operation". You take an interest which is going to come to an end when an old lady dies. You treat it like the branch of a tree. Yougraft on to it an off-shoot which will continue after her death. By this means you avoid Section 2(l)(b) of the 1894- Act. But it needs great skill to perform this operation successfully. You must be careful not to cut off the branch itself. For if you do, you may find that the interest has been determined; and estate duty will be payable under Section 43 of the Finance Act 1940.
In an endeavour to avoid estate duty, this settlement was varied by means of an arrangement sanctioned by an order of Mr. Justice Danckwerts (as he then was) on 12th January, 1960. I will call it the arrangement.
The material terms of the arrangement were these: "2: As from the operative date (12th January, 1960) the settlement shall have effect subject to the variations which are hereinafter set forth".
3: The discretionary trusts declared by Clause 2(a) of the settlement shall have effect during the life of Lady Holden or the period of 21 years from the operative date (12th January, 1960), whichever shall be the longer.
5; (contains new trusts of the capital in piece the trusts in Clause 2(b)).
Lady Holden died on 22nd December, 1962, The trustees before her death paid the income to her and the grandchildren: and after her death to her daughter Mary, to her grandchildren and great-grandchildren.
Now the question is whether estate duty is payable on the death of Lady Holden: or whether it has been successfully averted by reason of the arrangement made under the order of Court.
Section 2(l)(b)
If the old discretionary trust in the settlement continued until the death of Lady Holden; and then came to an end; and was succeeded by a now discretionary trust under the arrangement for the period until 12th January, 1981, then estate duty would be payable under Section 2(l)(b); The case would be governed by Re Kirkwood, 1965 Chancery, p. 286: 1966, 2 Weekly Law Reports, p. 656.
But if the interest under the discretionary trust in the settlement was extended by a grafting operation so as to become a single discretionary trust for a period from 12th January, 1960, during the life of Lady Holden, or until the 12th January, 1981, whichever was the longer, then estate duty would not be payable under Section 2(l)(b): because the falling of one life under a single discretionary trust does not give rise to a claim under Section 2(l)(b), seeing that, being discretionary, the interest is of no ascertainable value under Section 7(7).
The choice being these two alternatives is a matter of construction of the arrangement. I am much impressed by the clear words in clauses 2 and 3 that the settlement and the old discretionary trust "shall have effect" as from 12th January, 1960. These words "shall have effect" seem to me to poke the settlement itself continue until the death of Lady Holmden: in which case it must be succeeded on her death by a new discretionary trust under the arrangement. On that construction the case is covered by Re Kirkwood.
If I am wrong about this, then the only alternative is that, by reason of the arrangement, there was a new discretionary trust as from 12th January, 1960: in which case I turn to consider Section 43.
Section 43:
If there was a new discretionary trust for a period starting from 12th January, 1960, I think it follows that the old discretionary trust determined on 12th January, 1960. Yon could not have the two the new and the old running at the same time. This determination of the old trust seems to me to come directly within the words of Section 43(1) of the 1940 Act, which says that "where an interest limited to cease on death has been disposed of, or has determined, whiter by surrender, assurance, divesting, forfeiture or in any other manner after becoming an interest in possession", the property in which the interest subsisted is (to put it shortly) deemed to pass on the death.
The interest of the discretionary class under the old settlement was, I think, clearly an interest in possession limited to cease on the death of Lady Holden. I agree with Mr. Justice Pennycuick on this point. That interest was "determined" on 12th January, 1960, when the new trust took effect. It was determined "in any other manner". So it comes within the words of the charging sub-section (1) and estate duty is payable.
It is said, however, that we cannot come to this conclusion. We are prevented, it is said, by Roll's case, recently decided by the House of Lords. When that case was in this Court, Lord Justice Russell said (1965, 1 Chancery at p. 353) that Section 43 applies "only when the transaction operates wholly or partially to confer a benefit on another or others at the expense of the life tenant". When that case reached the House of Lords, this statement won the approval of Lord Donovan, 1966; 2 Weekly Law Reports at p. 131. And Lord Upjohn said in terms, 1966, 2 Weekly Law Reports at p. 127, that "there must be a determination or disposal in favour of some other party for the section to have any effect". This was agreed to by Lord Guest and Lord Morton of Henry ton.
It was argued before us that the statement of Lord Upjohn was one of the reasons for the decision of the House and is binding on this Court. I do not agree. As I read his speech, the reason for the decision was simply that, as a matter of construction, the life interest of Mrs. Ralli was never...
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