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TMI Blog1967 (12) TMI 59X X X X Extracts X X X X X X X X Extracts X X X X ..... and maintenance of all or any of the testator's son John Travis Gartside, his son's wife or children (if any). The trustees were given an absolute discretion to apply any or all of the income of the fund as they thought fit and the income not distributed was to be added to the capital of the fund. They also had power to make advancements to any child of the son out of the trust fund, provided that such advancement did not exceed one-half of then presumptive share of that child. After the testator's son's death the trustees were to hold the capital and income on trust for the son's children who being male attained the age of 21 years or being female attained that age or married previously. On January 8, 1941, the testator died. On August 5, 1942, the testator's son married and on January 5, 1945, twin sons were born. For 20 years the trustees accumulated the income and distributed none of it. In May, 1961, they applied 786 of the income for the benefit of the testator's son and in June, 1961, they applied ? 50 for the benefit of his wife. On January 2, 1962, when the twin sons were aged 17, the trustees exercised their power of advancement. By tw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aggregate interests) of the whole group differ where (as here) the trustees can decide to accumulate the whole income? The difference is that the group as a whole comprise all the persons interested under the discretionary trust; in so far as the trustees, in the execution of that trust, determine to distribute the income, it must be distributed amongst one or more of the persons constituting the discretionary class. The trust must be executed, if at all, in their favour. The group as a whole are the only persons beneficially interested under the discretionary trust. But a single object among the group is only one of several persons beneficially interested. He is not the only person interested in the income as a whole, and he cannot be said to be solely interested in any part of the income. The quantum of his interest is not measurable. The judge applied the wrong test for determining whether the interest in question was in possession or in expectancy. The test is not whether the interest confers an immediate right to payment of income, but whether the interest is a present interest or a future interest. The judge confused two separate things, i.e., the interest of the discretio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in possession so that but for the disposition or determination the property would have passed under section 1 or would have been deemed to pass under section 2(1)(b). There are several cases in which it has been held that where a discretionary trust is limited to cease on the death of a person, followed either by a new discretionary trust for a different class or by an absolute trust of income or capital for one or more persons, there is a passing under sections 1 or 2(1)(b). These cases support the view that the interest under a discretionary trust is an interest in possession, and not an interest in expectancy. If the interest were in expectancy, there would have been no passing under section 1 or a deemed passing under section 2(1)(b), and the claim for duty (if any) would be under section 2(1)(d) in respect of the interest accruing or arising on death of the deceased: see Hanson on Death Duties, 10th ed. (1956), (p. 187); Scott v.** and is distinguishable on its facts, because (i) The question was whether Hubert's vested but defeasible estate in fee simple in the land was in possession, not whether he had an interest in possession under the trusts declared by the proviso. ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for which the Crown contends: see Scott v. Inland Revenue Commissioners(4); Burrell and Kinnaird v. Attorney-General(5); Coutts v. Inland Revenue Commissioners(6); In re Kirkwood(7) and Westminster Bank v. Inland Revenue Commissioners(8). It is accepted in this court that the objects of the discretionary trust have an interest within the meaning of the Finance Act, 1894; and that Attorney-General v. Farrell(9); In re Hodson's Settlement(10) and Westminster Bank v. Attorney-General(2) were correctly decided, although these points are being kept open for argument in the House of Lords should that be necessary. We are not concerned with the position of the objects of a discretionary trust where the whole income must be distributed among them and they therefore could, while all sui juris, decide how the income from time to time should be dealt with. Where, as in the present case, the trustees have a discretion as to the quantum, if any, of the total income to be applied for all or any members of the discretionary group, there is no material distinction between the interest of a discretionary object and the interest of the group. In such a case the discretionary object whet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rest in possession in the whole of the advanced funds would have been determined by the advancements and estate duty would be payable on the whole of these funds. But if the interests of only one of the groups was an interest in possession, it extended only to an indeterminate part of the income of the trust fund and so its cesser would not have attracted duty: In re Kirkwood(11) and Attorney- General v. Power(12). On the footing that the interest of only one of the two groups was an interest in expectancy, the two groups together could not be treated as a single group having an interest in possession. If the income of a fund is during a specified period held as to half in trust for group A and as to the other half in trust for X for life then for group B, group A and group B have not between them an interest in possession during the life of X. Maugham L.J. in Attorney-General v. Burrell* said that the discretionary objects in that case, together with a number of ascertained persons, could be treated as a single composite person for the purposes of section 2(1)(b) of the Finance Act, 1894. Though this dictum was quoted by Pennycuick J. in In re Holmden's Settlement Trusts**, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the advances were under the deeds poll to be held in trust for them contingently on their attaining that age: this must amount to non-exclusion of them. A benefit to a former life beneficiary by an associated operation is to be treated as non-exclusion for the purpose of sub-section (2): see section 43(2) and (3) of the Finance Act, 1950. These provisions would bring further inequitable consequences. Many advances must have been made in the past some long ago, from trust funds where the previously subsisting trust was a discretionary trust for a life. The discretionary class may have contained not only the advanced beneficiaries but also all their close relatives. The advanced funds may have been shares in private family companies which have remained unrealised and will be likely to be traceable indefinitely. In circumstances such as those, if discretionary trusts were within section 43, freedom from duty would only be obtained for an advance where not only the advancee but the entire class of relatives had been excluded from any benefit by any associated operation. Thus the five-year period would be started afresh by any benefit to any of them from any associated operation. Thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o one-half of the share of that grand- child in the fund. On the death of the grandfather on January 8, 1941, the trustees took possession of the trust fund. On August 5, 1942, the son married. On January 5, 1945, the son and his wife had twin sons (the two grandsons), but no other children. For 20 years after the grandfather died, the trustees accumulated all the income of the fund. They did not distribute any of it to the discretionary objects at all. None to the son or his wife or the grandchildren. Then in 1961 they paid ? 786 10s. to the son and ? 50 to his wife. Save for those two payments, they accumulated all the income of the trust fund and added it to the capital. In 1962 the figures were as follows: the original trust fund stood at ? 93,700, earning a gross income of ? 6,400 a year. The income which had accumulated over the years came to ? 55,185. On January 2, 1962, the trustees decided to exercise the power of advancement. The twin grandsons were then nearly 17 years of age. The trustees advanced each of them ? 23,500. These advances were made out of the original trust fund. The trustees did it by two deeds poll, one in favour of each grandson. By each deed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 4 are satisfied. I turn, therefore, to requisites 1 and 2. 1. Did the discretionary objects have an interest limited to cease on the son's death? This point is settled by authority. For 80 years now the courts have held that each one of the objects of a discretionary trust has an interest in the trust fund, even where there is power in the trustees to withhold it and accumulate the surplus for others: see Attorney-General v. Heywood*, followed in Attorney-General v. Farrell**. These cases have stood so long and so many transactions effected and I may add, so many statutes passed on the faith of them that we must abide by them. What is the reasoning underlying those cases? I think it is simply this: Every person who is an object of a discretionary trust has a right in respect of the trust fund, even when there is power to withhold it and accumulate the surplus. He has a right to be considered by the trustees as eligible for a payment to be made to him. This right is analogous to the right of a competitor for a prize. Like a girl who goes in for a beauty competition. Her entry must be taken into consideration. She has no right to any of the prizes but she has a right ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome of the funds of the settlement; and in Burrell v. Attorney-General* the trustees applied nearly the whole of the income (? 115,000) in paying the allowance to Harry. Surely when the whole income is paid to one of the discretionary objects, his interest is an interest in possession. There is nothing future about it at all. It is actually in hand. And he has the beneficial enjoyment of it. Next, take the case where very little is paid to one of the discretionary objects, as here, when only ? 786 was paid to the son and ? 50 to the wife. No valid distinction can be drawn between the case where the whole is paid out and only very little. The interest of everyone who receives something is an interest in possession. Next, take the case where some objects of the discretionary trust receive something and others receive nothing. It seems a little difficult to say that those who get nothing have an interest in possession. But be that as it may, it is plain that the group of all the discretionary objects, considered as one unit, have an interest in possession: because some of them at least have beneficial enjoyment of it. Lastly, take the case where the trustees distribute none of the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion is Fearne's Contingent Remainders, 10th ed. (1844), p. 2: An estate is vested in possession when there exists a right of present enjoyment. That definition is good for legal estates, but I do not think it apposite for equitable interests. At any rate, not for the interest in a discretionary trust. Fearne would probably not have regarded it as an interest at all. But we must do so. Being an interest, we have to inquire when it is in possession . I think it is in possession when the only people who are entitled to receive the income are the discretionary objects, considered as a composite unit. The only alternative is to say that no one is in possession of the income. Which is absurd. Someone must be in possession. And it is the group as a whole. In my opinion, so long as the whole income was distributable to the discretionary objects, it was an interest in possession, even though it was not in fact distributed to them. It was an interest in possession of the property as a whole. 3. Measurement. There is an established rule that, in a discretionary trust, the property does not pass on the dropping of one of the lives. The reason is said to be because the inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erwise for the benefit of my said son John Travis Gartside or during his life for his wife or children (if any) or any one or more exclusively of the other or others of them in such manner in all respects as my trustees shall in their absolute and uncontrolled discretion without being liable to account think fit and shall accumulate the surplus (if any) of the said income by investing the same and the resulting income thereof in manner hereinafter mentioned. To the intent that the accumulations shall be added to the fourth share and follow the destination thereof with power nevertheless for my trustees at any time to resort to the accumulations of any preceding year and apply the same for the maintenance support and benefit of my said on John Travis Gartside or (during his life) any wife or children of his or any one or more of them (b) Upon trust after the decease of my said son John Travis Gartside both as to the capital and income of the fourth share for all or any the children or child of my said son who being sons or a son attain the age of 21 years or being daughters or a daughter attain that age or previously marry and if more than one in equal shares absolutely. with remai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if he should attain the age of 21 years. There were further provisions purporting to defer the payment over of parts of the sum until the beneficiaries should attain 25 years and 30 years of age, but these provisions were, I think, invalid and each advanced grandchild can now call for the transfer of the whole fund to him absolutely, they having attained 21 years of age in January, 1966. The result of the two advances was two put an end, so far as the advanced funds were concerned, to the discretionary trust of income during the life of John Gartside and to all the remainders under the will of the testator. The Crown now claims duty on the two advanced funds. These, of course, did not pass on John Gartside's death and the Crown must rely on the fiction set up by section 43 of the Finance Act, 1940, which has already in effect been read by my Lord and, which I need not repeat. It is agreed that each advanced fund constituted an interest limited to cease on the death of John Gartside which was disposed of or determined by the advances and that but for these advances the advanced funds, too, would have passed under section 1 like the rest of the share. All the conditions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest in possession existing immediately before the deeds executed; cf. the argument of Lord Russell in Burrell and Kinnaird v. Attorney-General*. I am, therefore, of opinion that there was what may properly by described as an interest in possession in the advanced funds taken as a whole before the date of the advancements. This is enough to settle the issue in favour of the Crown. A great many cases were cited to us but none of them is directly in point, and in my judgment the question depends purely on the true construction of the Act and its result is in my opinion to make the Crown's claim for duty good on the two advanced funds. I would allow the appeal accordingly. SALMON L.J.--The ward interest as used in the Finance Acts has a wider meaning than its strict conveyancing meaning. It is now well settled that those eligible to benefit under a discretionary trust, commonly called the discretionary objects, have an interest in the property from which the income, the subject-matter of the discretionary trust, is derived. This is so notwithstanding that there is a power of accumulation of surplus income and the trustees may never pay to or apply for the benefit of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iscretion of the trustees. And Greer L.J. concluded that that was an interest within the meaning of the Finance Acts. In the same case Romer L.J. said** that it was rightly decided in Attorney-General v. Heywood*** that the prospect of an object of a discretionary trust sharing in the income, the subject-matter of the discretionary trust, is an interest of that person in the property from which the income is derived. The only right which any discretionary object possesses in addition to his chance or prospect is the right that the trustees shall honestly add fairly, consider whether any, and if so what, part of the income shall be allotted to him. In a sense it may be difficult to appreciate how discretionary objects, who have only such a limited right and only such an uncertain chance or prospect of receiving anything, can be said to have any legally recognisable interest in the trust property. Once, however, it is conceded, as an authority it must be, that they have such an interest, it is even more difficult to see how that interest can properly be described as an interest in expectancy. They are in possession of the right and of the chance or prospect to which I have r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, the subject-matter of a discretionary trust, yields an income of ? 1,000 a year and there are, say, 10 discretionary objects, and the trustees have throughout the years distributed the whole income equally amongst them, there could be no difficulty in assessing the value of the interest of any discretionary object who died. Similarly, there would be no difficulty in assessing the value of such an interest if throughout the years the trustees had never paid the deceased or applied for his benefit any part of the income. Between these two extremes there are, of course, many cases in which the task of measuring the interest would be difficult but no more difficult than the task of assessing the imponderables which has to be performed every day in the common law courts. The rule, however, that, on the dropping of the life of one of the discretionary objects, no estate duty is payable because his interest is deemed to be immeasurable is so well established that it is now impossible to question it. The respondents argue that just as no estate duty is payable on the death of one discretionary object because his interest is immeasurable, so no estate duty is payable when the whole discr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce of the power by itself confers no separate interest upon the infant. His only interest is his interest in fee. The settlement in Attorney-General v. Power*** was in an unusual form. It vested the estate in fee upon the children of the marriage equally. When the eldest child was born, took he whole estate in fee subject to the birth of any other child or children. On the birth of the second child, half the estate was divested from the first child and went to the second, and so on. Should any child die under 21, his share became divested and divided equally amongst the others. There was also a proviso that during the minority of each child the trustees should hold the rents and profits of his share, which they had power to apply for his maintenance or benefit, and accumulate the surplus, but not for the infant. The surplus rents and profits was not the infant's property in any event, but was captured by the trusts of the settlement and, together with the infant's share of the capital, would go to the other children should the infant die under the age of 21. One of the children, Hubert Power, died an infant. The question was: had he an interest in possession in his sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterest in possession. At the time of the advancement, the interests of the accumulation beneficiaries were indisputably interests in expectancy. To combine one group of interests in expectancy with another group of interests in expectancy and thereby form a composite group of interests in possession involves an intellectual gymnastic feat which, no doubt, owing to a common lawyer's inexperience of the exercise, I cannot even follow, let alone perform. In my attempt to do so, I have found no help in In re Hodson's Settlement* or Westminster Bank v. Attorney-General**, which, so far as aggregation is concerned, seem to me to establish no more than that for the purposes of calculating the rate of estate duty payable, the values of different classes of interest may be aggregated. I do not think that it is necessary or even permissible to assume that there must always be some person or body or persons in possession of a beneficial interest in the trust property. If such an assumption has to be made, no doubt the nearest solution (when no interest in possession is otherwise discernible (is to call into existence a body in which are amalgamated all the beneficial interests in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t to distribute the whole income. The question raised in these proceedings is whether estate duty became payable on the advanced funds. They did not actually pass or change hands on the death and the issue is whether they were caught by section 43. They cannot have been so caught unless an interest in possession within the section arose under the discretionary provision or the accumulation trust or both combined. It is conceded that the persons who will get the capital of the accumulations have an interest in it, but it is not an interest in possession. It is submitted: (1) Nobody had an interest within section 43 under the discretionary provision; (2) if that is held to be wrong, then any interest under this provision was not an interest in possession; (3) if, contrary to these contentions, there was an interest in possession under the discretionary provision, but only an interest in expectancy under the accumulation provision, duty cannot have become payable as a result of the determination of the discretionary provision, since (a) that provision did not extend to the whole or any measurable part of the income of the advanced funds and (b) an interest in possession cannot b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... technical sense, it has a legal flavour and is not used in a purely popular sense. For example, if land was limited to A for life and then to his heir at law in fee simple, an almost unlimited number of persons during A's life might have an interest in the popular sense, since any of them might become his heir at law if all nearer potential claimants predeceased A. Possibly for this reason, the law does not recognise a potential heir at law as having any interest whatsoever in the legal sense or give him any rights during A's life. The term interest in the Act cannot include a relative's chance of ultimately becoming entitled to the property under a settlement of this type. It is not an interest in law. Even the fact that a person has an interest which the court will protect does not necessarily give him an interest within section 2(1)(b); see Coutts Co. v. Inland Revenue Commissioners(1). An interest for this purpose must be (a) an interest in property; (b) one which can be measured under section 7 of the Act of 1894 and (c) one which is enforceable; so that an interest under a discretionary trust is not enough: see In re J. Bibby Sons Ltd. Trust Deed(1), ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t to definite payments under the settlement, even if he had not in fact received any such payment. Even if Heywood's case(9) and Farrell's case* were rightly decided, they are distinguishable from the present case because they were solely concerned with the meaning of interest in section 38(2)(c) of the Customs and Inland Revenue Act, 1881, and, even though that section was incorporated in section 2(1)(c) of the Act of 1894, interest there did not have the same meaning as in section 2(1)(b). Heywood's case** is also distinguishable on an additional ground: the primary trust there was to pay money for the benefit of the settlor and his family jointly and the relevant discretion was merely a discretion to exclude him. Under section 2(1)(b) duty is not payable unless the relevant interest could be measured under section 7(7). Accordingly, section 43 of the Act of 1940 would not have imposed duty on the termination, shortly before the death of a discretionary object, of his chance of being benefited in exercise of the discretion. A discretion to distribute income must be exercised in a reasonable time. Here, if the trustees failed to exercise their discretion within ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the trust fund remain unchanged. (f) The determination of a discretionary provision only determines the possibility of the discretionary objects benefiting under a future exercise of the discretion, but the possibility is at no time an interest in possession. Words must be used in their legal sense unless a contrary intention appears: Commissioners for the Special Purposes of the Income Tax v. Pemsel*. When there is a technical conveyancing term used to describe an interest, nothing entitles one to adopt any other construction. In Attorney-General v. Power**, Palles C.B. rightly said that estate duty would not be payable on the death of an infant who had been entitled to property contingently on attaining 21 and had in the meantime had the benefit of the usual power of maintenance. The same considerations apply to the discretionary provision in the present case: see also In re John's Will Trusts*** and Attorney-General v. Coole#. It would be contrary to the scheme of the Act of 1894 as to accountability if a person who was not entitled to receive, and might in practice never receive, any property under the trust should nevertheless be accountable for the duty; but ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... they might have an interest in possession, because they could demand the whole income. A person who only has a hope has no right of present enjoyment. P.W.E. Taylor following: The expression interest in possession in section 43, lacking precision, should be so construed as to exclude discretionary trusts because: (1) a doubt or ambiguity in a taxing Act should be resolved against the Crown by limiting the extent of the tax: see Adamson v. Attorney-General###, (2) surprising and inequitable results would follow if discretionary trusts were included. In construing any statute the object is to find the intention of Parliament from the words used and any other admissible material. These results in particular, show that Parliament could not consciously have intended discretionary trusts to fall within section 43. Section 43(2) contains an exemption from or limitation of the charge in section 43 and creates the well-known five-years period. If discretionary trusts or powers confer interests in possession, section 43(2) would seldom enable a fund to escape duty after the determination of a discretionary trust or power (however long before the death the determination occurred) s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been made in the past, some long ago, from trust funds where the prior trust was a discretionary trust for life. Some of these would have been for wide discretionary classes containing not only the advanced beneficiaries but also all their close relatives. The advanced funds may be shares in family companies which will remain unrealised and traceable indefinitely. If discretionary trusts were within section 43, then in such circumstances freedom from duty would only be obtained for an advance if, not only the advancee, but the entire class of relatives had been excluded from any benefit from any associated operation. The five-year period would be started afresh by any benefit to any of the relatives from an associated operation. This would include any disposition affecting the advanced property, whether originally contemplated or not. Thus if the advancee died and left his property to one of the relatives by a will, a five-year period would start a new and attract duty on the death within that five years of the person for whose life the discretionary trust was limited, although the advance had been made years before. These harsh results suggest that the legislature could not ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... discretion was exercised in his favour in respect of that sum. H.E. Francies Q.C. and J.P. Warner for the respondents. It is submitted: (1) The interests with which the House of Lords is concerned are the interests in the trust fund, not in any particular piece of income: see the language of section 43. A particular piece of income in the hands of trustees does not become the subject of an interest of the beneficiaries until it is paid over to them. That is not the interest with which the House of Lords is concerned. (2) The House of Lords is not concerned with the accumulations fund built up before the deeds poll. It is only concerned with interests in the original trust fund created by the will of the testator and limited to endure till the death of his son. The nature of those interests did not change. There were alterations in the objects, at first only the son and later his children, but the nature of the interests remained the same. (3) The expressions group interest or class interest are only a convenient rubric for the totality of the several individual interests of the members of the group of discretionary objects. It is not submitted that there is a single i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the fund which accrued in the lifetime of the deceased someone must have had an interest. If it was not the discretionary objects, it must have been those entitled to the accumulations. The beneficial interest does not belong to the trustee, for it would be contrary to equitable doctrine to say that the whole legal and equitable ownership was in them. In the present case there have been beneficiaries at all material times. Suppose a fund was held in trust for persons to be appointed within 21 years and in the meantime the income was accumulated. The beneficial interest would then remain in the settlor until appointment. If created by will, it would remain in the residuary legatee or next-of-kin. The entire beneficial interest would not have been disposed of and there would be a resulting trust. In re Chance's Settlement Trusts can only be explained on the basis that the possible objects of the trust were persons who would be beneficially interested in the trust fund when they came into existence. It is sufficient if there are beneficial interests in expectancy. A contingent interest is an interest recognised by law as a beneficial interest. Though the objects of a power ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whether any and what part of it should be distributed among the discretionary objects. That is a continuing obligation. The counterpart is to require the trustees at convenient intervals to apply their minds to this question in regard to the whole of the income, and by reason of this discretionary object has the chance of receiving the whole or a part of it. If the discretion is exercised in his favour, the discretionary object has a title to receive and keep the sum appointed. The mere exercise of the discretion does not give a right to payment because it may be revoked. If there is an interest, it is not to be equated with the right to payment. In the case of an ordinary life beneficiary the right to payment is not the only right included in the interest; there is also the right to sell and the right to mortgage the life interest. A life tenant of a house or landed estate continues to have a life interest, even though he receives no income, because all the income has been applied by the trustees in repairs. Equally a person may have an interest, although he cannot alienate it, for example, in the case of the old restraint on anticipation or of non-alienable interests in Parliame ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterest , in the light of the scheme of the Act should have such a meaning as to catch an interest like that in the present case. Vestey's** turned merely on the conveyancing language of the Trustee Act, 1925, like In re Backett's Settlement***. These two cases are not in point because the interests with which the House of Lords is here concerned are not confined to conveyancing interests. The estate duty enactments do not use the word in the conveyancing sense only. Bibby's case# was not a decision directly on section 2(1)(b). Further, it was wrongly decided in so far as it was held that the widow had no beneficial interest, though the decision could have been justified on the ground that the interests had no value. As to the meaning of the words in possession , for estate duty purposes interests are either in possession or in expectancy, and this two categories are exhaustive: see section 5(3), 7(6) and 21(3) of the Act of 1894. If the appellants were right, the interest of an object of a present discretionary trust would be in the same category as that of an object of a future discretionary trust; but there must be some distinction as a matter of a legal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terest of the accumulation beneficiaries and the discretionary objects does so extend: In re Hodson's Settlement** and Westminster Bank Ltd. v. Attorney-General***. It is submitted: (1) The right in respect of the accumulations during the lifetime of the deceased constituted an interest in the trust fund because it was a beneficial right in regard to the income of the trust fund. It is beneficial because a fund is produced to the benefit of which the beneficiary may become entitled. (2) It was an interest in possession because it was enjoyed during the life of the deceased, being a beneficial right over current income. (3) The interest cannot be regarded in this case as being merely incidental to capital interests. The interests of the accumulation beneficiaries are not merely incidental to the capital interests because the accumulations fund could have gone to the husband and wife who were not interested in the capital at all. The right to have the interest accumulated, instead of going as on an intestacy, arises only by virtue of the trust for accumulation. Where the Act of 1940 refers to an interest it refers to an interest limited to cease on the death of the dece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... those cases. This would involve adopting the suggestion made in the Court of Appeal in the present case by Lord Denning M.R.(1) and Salmon L.J.(2) as to what should happen on the dropping out of one of the lives in a discretionary trust, satisfactory though it would be from the point of view of the Crown. Nor can one escape from Burrell's(3) and Scott's case,(4) by holding that they were pure section 1 cases, because that would be inconsistent with the Arnholz case (Public Trustee v. Inland Revenue Commissioners)(5) in the light of which every pre-1960 decision must now be re-examined and, if necessary, re-explained. That is what has been done with regard to Christie v. Lord Advocate(6): see the Coutts case(7) and the Ralli case(8). Nothing was said in Scott's case(9) or Burrell's case(10) which is not equally applicable in the present case. The principle applicable is that all the interest in possession at the time of the death came to an end and new interests came into being. G.A. Rink Q.C. in reply. It is not accepted that Scott's(11) and Burrell(12) would have been decided any differently on the Arnholz(13) basis. In the former case there was in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . So the interest of the objects under such a trust is akin to a defeasible interest. In Skinner's case(3) the House of Lords held in effect that for the purposes of duty under section 2(1)(b) on the death of an annuitant under the will of a testator whose estate is still in course of administration, the extent of the annuitant's interest must be determined on the same basis as if the annuity arose under a fully constituted trust. In Livingston's case(4) Lord Radcliffe took a different view on this point, but his judgment casts no light on the effect of section 2(1)(b) in relation to the interest under a trust where there is no question of a continuing administration by personal representatives. As to Costabadie's case(5) the basis of the judgment was that the daughter was entitled to a substantial payment, though the amount was left in the discretion of the wife. Chance's case(6) is poorly reported and nothing useful can be got out of the words employed. As to the duty of the trustees in the case of a discretionary trust, it is accepted that the statement in In re Gestetner Settlement(7) is correct. In re Greaves(8) was a case of a discretion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... John Travis Gartside or (during his life) any wife or children of his or any one or more of them. When the testator died John was unmarried. The next year he married and he had two sons, twins, born on January 5, 1945. His wife and two sons survived during the period relevant to this case. John died on May 8, 1963, and the present case raised the question whether estate duty is payable on his death in respect of sums which the testator's trustees had advanced to his twin sons prior to his death. From the testator's death until 1960 his trustees accumulated the whole income of John's share by virtue of the provision which I have already quoted. In 1961 they paid out of income sums of ? 786 for the benefit of John and of ? 50 for the benefit of his wife and accumulated the balance. By January 1, 1962, the total accumulated income amounted to about ? 55,000. On January 2, 1962, when the twin sons were nearly seventeen years of age the trustees, by virtue of a power to advance, executed two deeds poll whereby they declared that certain investments should be held in trust for each of the twin sons if he attained the age of twenty-one years. These two advances together am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and to what extent that income should be applied for the benefit of John, his wife and his two sons or any of them. After the advances had been made they were no longer entitled to deal with the income from the advanced funds in that way. If the advances had not been made the trustees would still have been bound from time to time to decide whether to exercise that discretion until the death of John when other trust provisions would have come into operation. The argument for the respondents was that the duty of the trustees to exercise that discretion from time to time gave to each of John, his wife and his two sons an interest in the fund, that that interest extended to the whole fund because the trustees could at any time have given the whole of the income from it to any one of them, and that these interests were interests in possession. They say that it is immaterial whether or not the trustees ever at any time in fact gave to any of these beneficiaries any sum or other benefit : they each had interests in possession of the whole fund even if none of them ever received anything from it. If that were right then the section would apply. But the appellants argued that a person&# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stees was an interest, the cesser of which on the death gave rise to a claim for estate duty. Lord Porter said**: I cannot think that in any ordinary sense the interest is the right to have the premiums paid. But the respondents' argument is that there is a distinction between such a right and a right to require trustees to consider whether to exercise a discretion in favour of the particular beneficiary. Before I go further I must examine section 2(1)(b) and section 7(7) of the Act of 1894, which are as follows: 2. (1) Property passing on the death of the deceased shall be deemed to include the property following, that is to say:...(b) Property in which the deceased or any other person had an interest ceasing on the death of the deceased, to the extent to which a benefit accrues or arises by the cesser of such interest; but exclusive of property the interest in which of the deceased or other person was only an interest as holder of an office, or recipient of the benefits of a charity, or as a corporation sole;... 7. (7) The value of the benefit accruing or arising from the cesser of an interest ceasing on the death of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the income, then it was not an interest within the meaning of these provisions. It appears to have been assumed in some cases that a right can be an interest within the meaning of section 2(1)(b), although its cesser does not cause any benefit to accrue or arise, or that it is sufficient that the cesser causes some benefit to accrue or arise although the interest does not extend to any part of the income of any property. I can find nothing either in the words or in the apparent purpose of these provisions to justify such an extension of the meaning of the word interest in section 2(1)(b). It may well be that the word interest in other provisions of the Act of 1894 has a different or wider meaning, but I must return to that. Next comes the question of what is meant by an interest extending to the whole or a part of the income of certain property. Normally that must mean that the owner of the interest is entitled to receive that income. In that case, apart from the method of valuation of the interest, those provisions are in line with the general scheme of the Act. On the cesser of that interest, someone else will become entitled to receive the income accruing from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t accruing from the fund. But, on the other hand, all the objects together have a single class or group interest which does extend to the whole interest of the fund. Counsel for the respondents in the clear and well reasoned argument expressly declined to adopt that view and I think he was well advised in taking that course. Where a number of persons are members of a company or other incorporation which has a separate legal personalty, the incorporation can of course, have a single right different from the rights of any of its members. But otherwise two or more persons cannot have a single right unless they hold it jointly or in common. But clearly objects of a discretionary trust do not have that: they each have individual rights: they are in competition with each other and what the trustees give to one is his alone. I think that this idea of a group or class right must have arisen in this way. Where the trustees are bound to distribute the whole income among the discretionary beneficiaries and have no power to retain any part of it or use any part of it for any other purposes, you cannot tell what any one of the beneficiaries will receive until the trustees have exercised thei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... But the only distinction which counsel for the respondents was able to suggest was that trustees are bound to consider the position of discretionary objects without waiting for the objects to make a claim, whereas trustees are not bound to consider whether any sum should be applied towards the maintenance of an infant until a claim is made. That is a very narrow distinction and cannot in my view justify a conclusion that objects of a discretionary trust have interest in the trust fund but an infant with a claim for maintenance has not. In my judgment, an examination of the relevant provisions of this legislation leads to the clear conclusion that objects of a discretionary trust do not have interests extending to the whole or any part of the income of the trust fund and it must follow that they do not have interests in the fund within the meaning of section 2(1)(b). And when one comes to section 43 of the 1940 Act, a fortiori they do not have interests in possession. It does not seem to me to be a reasonable method of construction to say first that you must disregard technicalities when considering what interest means and then, with regard to the rest of the phrase in poss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... look at it, he said in the passage which I have quoted that the objects of the discretionary trust were beneficially interested in the income of the property. He did not invent the idea of a group right: he must have meant that each object was beneficially interested in the income. But I think that he would have been extremely surprised if he had been told that it necessarily followed that each object had an interest extending to the whole income so that on the death of any one of the objects there was a cessor of an interest extending to the whole income within the meaning of sections 2(1)(b) and 7(7). Confusion will generally result if one tries to apply language adequate for the point under discussion to a problem which was not in the mind of the speaker--however eminent may have been the person who used the language. I do not regard this case as a compelling authority on the present question. In Burrell v. Attorney-General* there was a discretionary trust and a provision that any surplus income not used for that purpose was to be carried forward and could be used for the reduction of capital charges. But Lord Russell said**: In my opinion the state of affairs which pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the decision in Public Trustee v. Inland Revenue Commissioners* was to make them in some way authorities on the proper construction of that section. I do not think that this decision had any such effect. What the case did was to decide that sections 1 and 2 are not mutually exclusive and that the excepting words in section 2(1)(b) are operative in regard to property which falls within that sub-section even though that property may fall also within the wide words of section 1 (per Lord Simonds **). We are not bound by the decision nor do I think that we are bound by the reasoning to hold that in every case of settled property where there is a passing of the property there must also be the cesser of an interest within the meaning of section 2(1)(b). It could only be on that footing that earlier cases where it was decided that there was a passing under section 1 must now be regarded as authorities on the scope and meaning of section 2(1)(b). But the Public Trustee case* is relevant here in another way. If I take the view that for a long time there has been considerable misunderstanding with regard to section 2(1)(b), I need not hesitate to say so because this House in that c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore the death, in which case there would be a passing under section 2(1)(b). , Lord Morton of Henryton said## that if the share did not pass under section 1, Class A had an interest in the Kirkwood share which ceased on the death of Mrs. Pattisson, and on her death a benefit accrued to Class B to the extent of the whole of the share. The property passing on the death of Mrs. Pattisson must, therefore, be 'deemed to include' the Kirkwood share and the case falls within 2(1)(b) of the same Act. Lord Upjohn dealt with the matter at somewhat greater length, but he was under a misapprehension as to the discretionary trust; he thought there was a power to accumulate any surplus income but that power in the original settlement had come to an end before the relevant period. He accepted the view of the Inland Revenue that their is no claim for duty when one member falls out of a class of discretionary objects. I cannot read the speeches in that case as showing that this house came to any clear decision as to the meaning of the word interest in section 2(1)(b). But then the respondents founded on two decisions on the meaning of the word interest in a different provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded on Attorney-General v. Farrell,* but that case does not appear to me to throw any additional light on the present question. I would allow this appeal. LORD MORRIS OF BORTH-Y-GEST. My Lords, I have had the advantage of reading the opinion of my noble and learned friend, Lord Reid. I agree with it, and would allow the appeal. LORD HODSON. My Lords, I have had the advantage of reading the opinion of my noble and learned friend, Lord Wilberforce. I agree with it, and would allow the appeal. LORD GUEST. My Lords, I have had the opportunity of reading the speech of my noble and learned friend, Lord Reid. I agree with it and I would allow the appeal. LORD WILBERFORCE. My Lords, the testator, Thomas Edward Gartside, by his will dated February 8th, 1934, gave one-quarter of his residuary estate to his trustees upon trusts during the life of his son John Travis Gartside to pay or apply the whole or such part as his trustees should in their absolute and uncontrolled discretion think fit for or towards the maintenance, support or benefit of his said son or the son's wife or children and to accumulate any surplus income. The trustees had power to resort to the accumulatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ficiaries had any right to receive any income. The trustees had an absolute discretion to distribute or to withhold distribution of the income of any year, and, as regards any income they decided to distribute, to give all or none of it to any one beneficiary. Any undistributed income had, during the permissible period, to be accumulated, i.e., added to capital. The accumulations so made could subsequently be distributed in the same way as current income -no beneficiary having any right to any such distribution--and subject to this power were held by the trustees upon trusts under which the two grand- children had contingent interests only. I have said that no one of the discretionary beneficiaries had at the relevant time any right to receive any income, but this is not the whole of the matter. It is also necessary to appreciate that the discretionary beneficiaries taken together had no right to receive any or, a fortiori, all of the income. Two of them were infants but even if they had been of age they could not, with their parents, have called upon the trustees to pay them the income of any year; the reason being that the trustees had power to accumulate so much as they did n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, then, contemplate that some definite portion of the property should be ascertainable when an interest ceases. The second indication is given by section 7(7) which deals precisely with this point: it reads: 7. (7) The value of the benefit accruing or arising from the cesser of an interest ceasing on the death of the deceased shall--(a) if the interest extended to the whole income of the property, by the principal value of that property, and (d) if the interest extended to less than the whole income of the property, be the principal value of an addition to the property equal to the income to which the interest extended. This shows that for the cesser of an interest to give rise to a charge for duty, it must be possible to say of the interest that it extend to the whole income, or to a definite part of the income. This notion of definite extension is, in my opinion, vital to the understanding and working of section 2(1)(b) and consequently of section 43 of the Act of 1940. It must follow that the discretionary beneficiaries under the settlement had no interest within the meaning of the section: no single member of this class had any right to any income: even if one con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te different legal context to express right of very different characters and that to transfer a meaning from one context to another may breed confusion. 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 to be considered as a potential recipient of benefit by the trustees and a right to have his interest protected by a court of equity. Certainly that is so, and when it is said that he has a right to have the trustees exercise their discretion fairly or reasonably or properly that indicates clearly enough that some objective consideration (not stated explicitly in declaring the discretionary trust, but latent in it) must be applied by the trustees and that the right is more than a mere spes. But that does not mean that he has an interest which is capable of being taxed by reference to its extent in the trust fund's income: it may be a right, with some degree of concreteness or solidity, one which attracts the protection of a court of equity, yet it may still lack the necessary quality of definable extent which must exist before it can be t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arises in such cases as these arises directly from the legislative scheme, it becomes a task of great difficulty for the Crown to suggest a definition of interest which, omitting the exempted case, will cover the present situation. No formulation suggested in argument was in fact able to achieve this. (3) I now come to the decisions in Attorney-General v. Heywood* and Attorney-General v. Farrell**. Attorney-General v. Heywood*** was decided in 1887 upon section 38(2)(c) of the Customs and Inland Revenue Act, 1881, when what was levied was a stamp duty on property included in an account. The 1881 Act defined various categories of property to be included in an account, viz., property included in a gift made within three months of the death, property held on joint tenancy, and (under paragraph (c)) settled property in which a limited interest was reserved to the settlor or over which the settlor reserved a power of revocation. Attorney-General v. Heywood(3) was concerned with a voluntary settlement under which the trustees had a discretion to apply income, during the settlor's life, for a class including the settlor and it was held by a Divisional Court that section 38(2)(c) a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of persons who settle their property, yet wish to benefit from it so long as they live. To tax them in such a case is perfectly understandable, however large or small the reserved benefit may be and whether it is defined in extent or undefined. No definition is necessary, because the measure of the charge is the whole value of the property. So naturally no reference is made to extent --the mere fact of reservation is enough. I think, therefore, that the decisions in principle are acceptable. But--this is the other limb--acceptance of them does not carry the present case. In section 2(1)(b) of the Finance Act, 1894 (and the same is true of section 2(1)(d) a duty is imposed the quantum of which is related to the extend of the interest and I see no difficulty in saying that the element of extent is relevant under the two sections but not under the third: the distinction is both made in the language and is necessary if the tax is to work. Before leaving the subject of discretionary trusts I must consider one further point. When one object of a discretionary class dies, there is no charge for duty: the same must follow (under section 43 of the Finance Act, 1940), if the interest of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the benefit of persons with contingent interests. That, in fact, is this case and the fact that it is so prevents the section from attaching. Finally, I must now say something of certain authorities, First, there are two cases in this House the authority of which was invoked by the Crown: these are Scott v. Inland Revenue Commissioners** and Burrell v. Attorney-General***. In each of these cases income was held on trust for a class of discretionary beneficiaries who, singly and collectively, had no right to receive any income in any year. In Scott's case# the surplus income, during the relevant life (of the Sixth Earl Cadogan) was to be accumulated and applied in the discharge of debts or incumbrances affecting the estates and subject thereto as capital money. The capital of the estate was held upon trust for a person (the Seventh Earl Cadogan) who had an interest in expectancy. It was held that on the death of the Sixth Earl the property as a whole passed under section 1 of the Finance Act, 1894. In Burrell's case, the trusts were more elaborate and cannot accurately be described except by repeating in full the analysis of Lord Russell of Killowen. However, but for o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly come within one of the subsections of section 2 if it did not fall within section 1. This House having now in the Arnholz case (Public Trustee v. Inland Revenue Commissioners#) departed from this view of the matter and having held that section 2 is definitive of section 1 by exclusion and inclusion , Scott's## and Burrell's### cases must, it was said, now be regarded as decisions under section 2(1)(b) and so as decisions that an interest or interests existed. I find this argument totally unacceptable. I know of no principle by which an expressed ratio decidendi can be converted into another ratio decidendi merely because (if such is the case) the first is founded upon a principle which has been superseded by a new principle which would support the second. One cannot have authority by translation. The impossibility, indeed, of such a process is shown by the fact that in Burrell's case* not only did Lord Russell of Killowen expressly decide that the case fell not within section 2(1)(b) but within section 1, but this House rescinded the order of the Court of Appeal which was based on the former section and restored that of Finlay J. which was based on the latter. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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