GARTSIDE AND ANOTHER
v.
COMMISSIONERS OF INLAND REVENUE
Lord Reid
Lord Morris
of
Borth-y-Gest
Lord Hodson
Lord Guest
Lord
Wilberforce
Lord Reid
MY LORDS,
Thomas Gartside, the testator, died in January 1941. He left four children
and this case is concerned with the share of his estate which he bequeathed
for the benefit of his son John and his family. With regard to that share
he provided that it should be held by his trustees:
” Upon trust during the lifetime of my son John Travis Gartside to pay
” or apply the whole or such part as my trustees shall in their absolute
” and uncontrolled discretion think fit of the income of such fourth
” share for or towards the maintenance support or otherwise 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
” of 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 son 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 5th January, 1945. His wife and two
sons survived during the period relevant to this case.
John died on 8th May, 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 1st
January, 1962, the total accumulated income amounted to about £55,000.
On 2nd January, 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 amounted to nearly half the trust funds, apart from the
accumulations, and they were worth about £47,000 at the date of John’s
death.
It is admitted that estate duty was payable on John’s death on the whole
of these trust funds, including the accumulations, with the exception of
the £47,000 which had been advanced to his twin sons. The Respondents
claim that estate duty is also payable on this sum under the provisions of
section 43(1) of the Finance Act, 1940. That subsection provides:
” 43.—(1) Subject to the provisions of this section, where an interest
” limited to cease on a death has been disposed of or has determined,
” whether by surrender, assurance, divesting, forefeiture or in any other
” manner (except by the expiration of a fixed period at the expiration
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” of which the interest was limited to cease), whether wholly or partly,
” and whether for value or not, after becoming an interest in possession,
” and the disposition or determination (or any of them if there are more
” than one) is not excepted by subsection (2) of this section, then—
” (a) if, had there been no disposition or determination as aforesaid
” of that interest and no disposition of any interest expectant upon
” or subject to that interest, the property in which the interest sub-
” sisted would have passed on the death under section one of the
” Finance Act, 1894, that property shall be deemed by virtue of this
” section to be included as to the whole thereof in the property passing
” on the death ; or
” (b) if, had there been no disposition or determination as aforesaid
” of that interest and no disposition of any interest expectant upon
” or subject to that interest, the property in which the interest sub-
” sisted would have been deemed by virtue of paragraph (b) of sub-
” section (1) of section two of the said Act to be included to a particular
” extent in the property passing on the death, the property in which
” the interest subsisted shall be deemed by virtue of this section to
” be included to that extent in the property passing on the death.”
The case for the Respondents is that by making these advances the trustees
determined an interest or interests limited to cease on the death of John, and
that such interest or interests had before that date become interests in
possession. Until the trustees advanced these funds they were bound under
the testator’s will to decide, from time to time as income accrued, whether
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’s right to
require trustees of a discretionary trust to consider from time to time whether
or not to apply the whole or some part of the income of the trust funds
for his benefit is not an interest, and in any event is not an interest in
possession, in the whole fund or in any part of it within the meaning of this
section.
So the first and main question in this appeal is what is the meaning of
the word ” interest ” in this section. The 1940 Act provides that it has to be
construed as one with the Finance Act, 1894, and the two most closely allied
provisions of the latter Act are section 2(1)(b) and section 7(7). It seems clear
that the word ” interest” must have the same meaning in these three provi-
sions. The word ” interest”, as an ordinary word of the English language,
is capable of having many meanings, and it is equally clear that in” these
provisions its meaning cannot be limited by any technicality of English law.
Not only do these provisions also apply to Scotland, but they may have to be
applied where duty is claimed in respect of interests under deeds which
have to be construed under the laws of other countries.
But that does not mean that everything which the man in the street
might call an interest is covered by the word ” interest” in these sections.
A man might say that a son and heir has an interest in his father’s property
to which he might reasonably expect to succeed. But one can discard
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that meaning : the son not only has no right in or over his father’s property
but he has no right to prevent his father from dissipating it. The Respondents
admit that, to be an interest under these provisions, it must give to the
holder of it some right.
Then take the next step. A person, who has a contingent right to some
benefit from a trust fund in some future event, has a present right to prevent
the trustees from dissipating the fund. But that right is not an interest in
possession separate from and in addition to his contingent interest. That
is made clear by the decision in Coutts & Co. v. C.I.R. [1953] A.C. 267.
There beneficiaries had a right to require trustees to make payments of the
premiums necessary to keep up a life insurance policy. When the person
insured died that right of course ceased because no more premiums were
payable. This House rejected the contention that this right to control the
actions of the trustees was an interest, the cesser of which on the death gave
rise to a claim for estate duty. Lord Porter said (page 279): ” 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 dis-
tinction 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 farther I must examine section 2(1)(b) and section 7(7) of
the 1894 Act 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 deceased shall—
” (a) if the interest extended to the whole income of the property, be
” the principal value of that property ; and
” (b) 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.”
The first thing that strikes one is that these provisions must have been
intended to be coterminous. Section 2(1)(b) (read in conjunction with
section 1) only makes the cesser of an interest the cause of liability for estate
duty ” to the extent to which a benefit accrues or arises ” by the cesser.
And section 7(7) directs how the ” benefit accruing or arising from the
cesser ” shall be valued. On any ordinary principle or method of construction
I would infer that section 2(1)(b) is only intended to apply to those ” interests ”
the cesser of which causes ” a benefit to accrue or arise ” and therefore
creates a liability to pay estate duty. Why should section 2(1)(b) have set
out to deal with any other kind of right? There is nowhere any definition
of the word ” interest” : one must infer its meaning from the context. The
subsection plainly applies to every kind of right the cesser of which does
cause a benefit to accrue or arise, but I find nothing to indicate that it can
have been intended to apply or must be held to apply to any right or any
kind of right the cesser of which does not have that result. To find what
is meant by a benefit accruing or arising one must turn to section 7(1) for
again there is no definition of this phrase. It appears to me to be obvious
that section 7(7) was intended to provide a method for valuing every benefit
accruing or arising from any cesser of an interest within the meaning of
section 2(1)(b), and it is implicit in section 7(7) that every right which is an
” interest” within the scope of these provisions must ” extend ” either to
the whole or to a part of the income of the property in which the right
gave to its owner the ” interest”. The scheme appears to me to be perfectly
4
clear. If the deceased or any other person had a right which ” extended ”
(whatever that may mean) to the whole or to any part of the income of
any property and that right ceased on the death of the deceased, then estate
duty is to be due to an amount to be determined by section 7(7). If the
right of the deceased or other person did not ” extend ” to any part 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 1894
Act 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 and
after the cesser. So the right to receive the income will change hands, and
that is what happens when the property itself passes under section 1.
The Respondents seek to attach a much wider meaning to the word
” extend “. They argue that each one of the objects of a discretionary trust,
who may be numerous, has an interest extending to the whole income of
the trust fund because the trustees could if they chose give the whole
income to any one of the objects. If there are a dozen objects of the trust
then there would be twelve different interests each extending to the same
income. But they do not take that argument to its logical conclusion, for
if they are right I see no escape from the conclusion that when any one of
the twelve dies his interest ceases and there is therefore a cesser of an
interest which extended to the whole income. That would at once bring
section 2(l)(b) and section 7(7) into operation, and estate duty would have
to be paid on the whole trust fund. And the same would happen on the
death of another, and of a third, and of a fourth object before the end of
the discretionary trust. So in the course of a few years estate duty would
have to be paid on the whole trust fund as many times as there were
deaths of objects of the discretionary trust, even if those objects who had
died had never in fact received anything, the trustees having throughout
exercised their discretion in favour of other objects of the trust who had
survived. That would be a monstrous result which could never have been
intended. In fact the Respondents have never tried to claim estate duty
when one of several objects of a discretionary trust dies, but that is not
relevant in determining what is the true meaning of the word ” extend “.
If giving an extended meaning to a word in an Act, and particularly in a
taxing Act, leads to a wholly unreasonable result, that is a very strong
indication that the word was not intended to have that extended meaning.
And the strength of that indication cannot be diminished by the fact that
the Revenue Authorities have chosen to refrain from collecting tax which,
if their view of the law is right, they are entitled to exact.
There are in some of the cases indications of a view that, while each of
the objects of a discretionary trust has an interest in the trust fund, this
interest does not extend to the whole or any part of the interest 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 personality, the incorpora-
tion can of course have a single right different from the rights of any of its
5
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 dis-
cretionary 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 their
discretion. But you can say with absolute certainty that the individual rights
of the beneficiaries when added up or taken together will extend to the
whole income. You can have an equation x+y+z=100 although you do
not yet know the value of x or y or z. And that may lead to important
results where the trust is of that character. But that is not this case.
There was also an intermediate argument that, although an object of a
discretionary trust has an interest in the whole of the trust fund, he does
not have any interest in either the whole or any part of the income accruing
from the fund. That argument is too subtle for me to understand it. No
object of a discretionary trust has, as such, any legal right to or in the
capital. His sole interest, if it be an ” interest” within the scope of these
provisions, is with regard to the income: he can require the trustees to
exercise, in bona fide, their discretion as to how it shall be distributed, and
he can take and enjoy whatever part of the income the trustees choose
to give to him. I cannot see any ground for holding that he can have any
” interest” in the capital if he has no interest in the income. As I have
already explained his right to prevent misappropriation of the capital is not
a separate interest.
There is one other matter which I think throws light on these provisions.
It may be that in 1894 discretionary trusts were not so common that the
draftsman of the legislation must have had them in mind. But provisions
authorising trustees to apply the whole or a part of the trust income for
the maintenance of an infant who had a contingent but not a vested right
to capital were extremely common. In such a case the infant (or his
guardian) had a present right to make a claim for payment for maintenance
and a right to require the trustees to exercise in bona fide their discretion
whether or to what extent they would apply trust income for that purpose.
If, as the Respondents contend, the right of an object of a discretionary
trust to have the trustees consider his case is an ” interest” within the
meaning of these provisions, what about the similar right of an infant with
regard to maintenance? The Respondents do not contend that such an
infant has any ” interest ” and the draftsman and Parliament cannot possibly
have intended that these provisions should apply on the death of such an
infant before majority. 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 ” interests ” in the trust
fund but an infant which a claim for maintenance has not.
In my judgment an examination of the relevant provisions of this legis-
lation 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 possession ” introduce
the technicality that any interest which is not ” in expectancy ” must be an
6
interest ” in possession “. To have an interest in possession does not merely
mean that you possess the interest. You also possess an interest in expectancy
for you may be able to assign it and you can rely on it to prevent the
trustees from dissipating the trust fund. ” In possession ” must mean that
your interest enables you to claim now whatever may be the subject of the
interest. For instance, if it is the current income from a certain fund your
claim may yield nothing if there is no income, but your claim is a valid claim,
and if there is any income you are entitled to get it. But a right to require
trustees to consider whether they will pay you something does not enable
you to claim anything. If the trustees do decide to pay you something you
do not get it by reason of having the right to have your case considered:
you get it only because the trustees have decided to give it to you. Even
if I had thought that objects of discretionary trusts have interests, I would
not find any good reason for holding that they have interests in possession.
So it is now necessary to consider whether I am in any way precluded
by authority from giving effect to these views. The Respondents relied
principally on four cases in this House and I have not found in any of the
other cases cited in argument any very illuminating discussion of the
meaning of the word ” interest” in section 2(1)(b) or of the phrase ” interest
” in possession ” in the 1940 Act.
In Scott v. C.I.R. [1937] A.C. 174 before the relevant death ” the persons
” beneficially interested in the income of the property . . . were … the
” various persons who were objects of the discretionary trust and the person
” who might ultimately benefit by the accumulations and discharge of in-
” cumbrances ” (per Lord Russell at page 181). After the death the seventh
Earl Cadogan became entitled to receive the whole income. If the seventh
Earl had not been one of the objects of the discretionary trust it would
seem that the property which yielded the income passed on the death. Enjoy-
ment of the income changed hands on the death. It was held that the
fact that he had been one of those objects made no difference. I do not
think it useful to examine Lord Russell’s phraseology because no question
was raised under section 2(1)(b). But, if one does 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 cesser of an interest extending
to the whole income within the meaning of sections 2(l)(b) and 7(7). Con-
fusion 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 [1937] A.C. 286 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
” prevailed at Harry’s death is sufficient to shew that the beneficial interest
” of the heir at law and next of kin in the property was microscopic ….
” their interest is so minute and so remote that it may for our present purpose
” be ignored “. So the case was decided on the footing that the trustees
were to devote the whole income to making payments to one or more of
the discretionary objects. That seems to me to be what Lord Russell
meant when he said with regard to the objects of the discretionary trust:
” It is true that no one of them could claim to be beneficially interested
” in any defined share of or to any defined extent in the property: but
” the six together constituted the only people who could, while Harry was
” alive, obtain any benefit from the property or have any beneficial enjoy-
” ment of the property “. He then said that those who became interested
after the death of Harry were a new group becoming interested under a new
trust and fulfilling a new qualification as a condition of membership. So
7
he held that the title to the beneficial interest in the property as a whole
changed hands on the death notwithstanding that some of the members of
the two groups were the same persons. That this case is no direct authority
on the construction of section 2(1)(b) is shewn by the fact that the Court
of Appeal had relied on that section but their Order was varied in this House
so as to strike that out.
Counsel for the Respondents put his case so high as to argue that these
cases shew that, whenever there is a primary discretionary trust followed by
a direction to deal with any surplus not paid to the discretionary objects
by accumulation or otherwise, the Court must disregard any such direction
and treat the case as if the trustees had been directed to divide the whole
income among the discretionary objects. I can find no basis and no rational
justification for any such artificial rule. The present case must be decided
in accordance with the fact that neither individually nor collectively were
the objects of this discretionary trust entitled in any year to receive any
part of the trust income: that is shewn by the fact that in only one out of
twenty years did any of them receive any part of the income.
Then it was argued that, although the construction and effect of section
2(l)(b) was not considered in this House in either of these cases, the effect
of the decision in Public Trustee v. C.I.R. [I960] A.C. 398 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 subsection even though that property may fall
” also within the wide words of section 1 ” (per Lord Simonds at page 416).
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 case removed a much more fundamental and long standing misunder-
standing than any with which we have to deal in the present case. I can
repeat the words of Lord Radcliffe (at page 417): “I can only say that
” at the end of the day I am relieved to find that we are not constrained
” by any authority to impose upon ourselves a construction of taxing
” provisions which seems to me as much contrary to the plain meaning of
” the Act as it would be frivolously capricious in its result”. Here I would
only omit the word ” frivolously “.
Next I must deal with Ralli Brothers v. C.I.R. [1966] A.C. 483 and
Public Trustee v. C.I.R. (in re Kirkwood) [1966] A.C. 520. In the Ralli
case both section 2(1)(b) and section 43 were considered but I do not think
that any of the observations regarding these provisions throws any light
on the questions now before the House. The matters for decision with
regard to these provisions do not arise in this case. The Kirkwood case,
however, does require fuller examination. There was a settlement under
which the income went to a discretionary class until the death of the
testator’s daughter: she was a member of that class. On her death her son,
John, became entitled to the fund. In 1961 John assigned to the trustees
the income until 1968. His mother was still alive so he could only effectively
assign any income which might accrue after his mother’s death and before
1968. The trustees were to apply this income for the same discretionary
trust as that which then existed but, of course, the objects could not be the
same because the mother would have dropped out before this new trust
could take effect. The mother died a few days after John had made this
assignment. So what happened on her death was that the discretionary
trust under the original settlement then came to an end and the new
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discretionary trust set up by John took effect. It was held that the property
passed under section 1 because on the death there was a passing of the
right to the income to a new trust set up by a new settlor for the benefit
of a new class of discretionary objects. There was little said about section
2(1)(b). My noble and learned friend, Lord Guest, merely said: “It thus
” follows that the beneficial interest ceased on the mother’s death for the
” benefit of a class different from that group which had the beneficial
” interest before 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 section 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 there 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 shewing 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 provision which was obviously passed to deal
with a different problem. The Customs and Inland Revenue Act, 1881,
required certain property to be brought in although it had ceased to belong
to the deceased at the date of his death. This included the case where a
settlor in making a settlement had reserved an interest in the settled property.
In Attorney-General v. Heywood 19 Q.B.D. 326 the settlor had provided
that the trustees had a discretion to apply the trust income for the benefit
of himself his wife and children or any one or more of them. It was, I
think, rightly decided that he had reserved an interest within the meaning
of that provision. It is always proper to construe an ambiguous word or
phrase in light of the mischief which the provision is obviously designed to
prevent, and in light of the reasonableness of the consequences which follow
from giving it a particular construction. Here, if ” interest ” were given a
narrow or technical meaning it would be very easy to defeat the obvious
purpose of the provision by setting up a discretionary trust and choosing
trustees who might be expected to exercise their discretion in favour of the
settlor. And on the other hand no unreasonable consequences would follow
if the word were given a wider meaning so as to include possible benefit that
would come to the settlor in a certain event—in the event of the trustees
deciding that he should have the whole or part of the income.
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 ; where they are dealing with the same problem
the presumption is very much stronger. There is here the special feature
that the 1894 Act, by section 2(1)(c), picks up and slightly amends that pro-
vision in the 1881 Act. But I see no reason why there should be any strong
inference from that fact that, when the 1894 Act goes on to deal with
quite a different problem, the word ” interest ” must be given the same
meaning as it had in the 1881 Act. In the absence of good reason to the
contrary one would attach the same meaning. But the reasons which I have
stated for giving a different meaning to the word in section 2(1)(b) and
section 7(7) appear to me greatly to outweigh any presumption which there
might otherwise be for adopting the same meaning. The Respondents also
founded on Attorney-General v. Farrell [1931] 1 K.B. 81 but that case does
not appear to me to throw any additional light on the present question.
I would allow this appeal.
9
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 Wilbetforce. 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 would allow the appeal.
Lord Wilberforce
MY LORDS,
The Testator, Thomas Edward Gartside, by his will dated 8th February,
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 dis-
cretion 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 accumulations at any time during
the son’s life and to use them for the maintenance etc., of the same class
of persons. After the death of John Travis Gartside the share was to be
held for such of his children as should attain 21 or, if daughters, marry. There
was a power of advancement in favour of any grandchild up to one-half
of his or her presumptive or vested share.
The Testator died on the 8th January, 1941, so that the period of permissible
accumulation came to an end on 7th January, 1962. On 2nd January, 1962,
just before the termination of that period, the trustees made advances to the
twin sons of John Travis Gartside, then aged 17, out of the capital of the
one-fourth share, of a value of about £23,500 each. On 8th May, 1963.
John Travis Gartside died.
The Crown claims estate duty on his death on the advanced funds under
section 43 of the Finance Act, 1940. The conditions laid down by that
section for a charge of estate duty are stated in the words—
” where an interest limited to cease on a death has been disposed of
” or has determined . . . after becoming an interest in possession ; “.
It is relevant to add that paragraphs (a) and (b) of subsection (1) proceed
to deal separately with the cases where (a) if the interest had not been
determined the property in which the interest subsisted would have passed
on the death under section 1 of the Finance Act, 1894, and (b) if, on the
same hypothesis, that property would have been deemed by virtue of section
2(1)(b) of the Finance Act, 1894, to be included to a particular extent in the
property passing on the death, imposing a total or partial charge as the
case may be.
The decision in this appeal turns upon the meaning of the words ” interest ”
and ” interest in possession “. In the Courts below it was generally accepted,
following certain authorities, that the beneficiaries had ” interests”; the
debate was, in the main, concentrated on the question whether they had
” interests in possession”. But the prior question is whether they had
” interests ” at all and to that I now turn.
10
At the relevant date, i.e. just before the death of John Travis Gartside,
the potential beneficiaries under the discretionary trusts (for convenience
called “the discretionary beneficiaries”) were four, namely, John Travis
Gartside himself, his wife and his two sons. Under the trusts of income
which applied during his life, no one of these beneficiaries 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 grandchildren 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 not distribute, which might be the whole, for the possible
benefit of persons unborn. To describe them as ” the only people who could
during the relevant period obtain any benefit from the property or have
any beneficial enjoyment of it” may be misleading, unless one bears in
mind that, singly or collectively, they had no right in any year to receive a
penny.
I can now consider the language of section 43 of the Finance Act, 1940.
Subsection (1) starts by referring to an “interest” limited to cease on a
death but neither this section nor any section of definition, whether in the
Finance Act, 1940, or in the Finance Act, 1894, gives any guidance as to
the meaning of this word. Some limit is placed upon the scope of the
enquiry by the later words ” after becoming an interest in possession ” :
these suggest, if not compel, the conclusion that the ” interests ” with which
the subsection is dealing are such as are capable of being described as
” interests in possession “. Whatever exactly that means, it is safe I think
to say that ” interests in possession ” are, in this legislation, contrasted with
” interests in expectancy”: so that one may say this of the “interests”
with which the subsection is concerned, that one would expect these to fit
within this classification. I return later to this point.
This is not all the guidance one may get as to the meaning of ” interest”.
Section 43 of the Finance Act, 1940, is to be construed together with the
Finance Act, 1894. Both its structure and its language are related to those
of the earlier Act. The parent provision in the Finance Act, 1894, is evidently
section 2(1)(b) which deals with interests ceasing on the death and there
cannot be any doubt that ” interest limited to cease on a death ” in section 43
must refer to the same kind of interest: in section 2(l)(b) the interest has
ceased, in section 43 it was limited to cease but has not done so because
some event or action has prevented this result.
What, then, can one say of “interest” as used in section 2(1)(b)? Two
indications are given. The first is in the subsection itself which says that
the property is deemed to pass ” to the extent to which a benefit accrues or
” arises ” by the cesser of the interest. We are concerned here with a taxing
act, and if one thing is necessary about taxes it is that the amount of them
should be ascertained with precision. The subsection must, then, contem-
plate 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,
” be the principal value of that property ; and
11
” (b) 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 extended 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 considers them collec-
tively they had no right to any income because the trustees could accumulate
the whole of it. This makes it unnecessary and indeed otiose to consider
whether the discretionary beneficiaries had ” interests in possession “, but
the use of these words in the subsection do provide a cross check as to the
meaning of ” interest “. As is well illustrated by the judgments in the Courts
below, it is exceedingly difficult to fit the rights of the discretionary bene-
ficiaries either into the category of ” interests in possession ” or into its
statutory counterpart ” interests in expectancy “: to say that as it is not one
it must be the other is not a very satisfactory solution (the categories though
mutually exclusive need not be exhaustive) especially if this technique can
be used—as it has been used by the Courts below—either way. Rather,
the difficulty of giving either answer endorses the conclusion that this is not
an ” interest “, within the meaning of this section at all.
So much as regards the discretionary beneficiaries. Before I deal with
the position of the accumulation beneficiaries I must deal with some argu-
ments presented to us. The Crown sought to establish that a wide meaning
should be attributed to the word ” interest”, wide enough to include the
interest of a beneficiary under a discretionary trust, by three main arguments.
First, it was said that the expression ” interest” itself is one of complete
generality: in the context of the Estate Duty legislation it should be given a
popular rather than a conveyancing meaning. Secondly, when one analyses
a beneficiary’s rights under a discretionary trust, the conclusion must be
that he has an interest even in a technical legal sense of the word. Thirdly,
the point was said to be settled by authority, in particular by two decisions,
Attorney-General v. Heywood 19 O.B.D. 326 and Attorney-General v. Farrell
[1931] 1 K.B. 81. These arguments were substantially accepted by the Court
of Appeal but I do not find them persuasive.
(1) It can be accepted that “interest” is capable of a very wide and
general meaning. But the wide spectrum that it covers make it all the more
necessary, if precise conclusions are to be founded upon its use, to place it
in a setting: Viscount Radcliffe, delivering the Board’s judgment in Com-
missioner of Stamp Duties (Queensland) v. Livingston [1965] A.C. 694, 712
shows how this word has to do duty in several quite different legal contexts
to express rights 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 taxed. This may be illustrated by reference to
12
the decision in Attorney-General v. Skinner [1940] A.C. 350 on which the
Crown relied. Whatever may be the correct explanation of that case, the
existence of the element of extent was clearly apparent. In the present case
its absence is equally noticeable, so that merely to show that ” interest” in
section 2(1)(b) has a “popular” meaning—as Lord Greene M.R. described
it in the Court of Appeal [1939] Ch. 131, 141, s.v. Re White deceased—fails
to meet the critical difficulty in the Revenue’s way.
The Master of the Rolls and Salmon L.J. in the Court of Appeal were
persuaded by an argument which was suggested to meet this difficulty. The
beneficiary’s right, it was claimed, is analogous to that of a competitor in a
beauty competition ; she has a right to be considered for the prize: if she
is excluded, she can be awarded damages which a jury can assess. The
analogy was inevitably left at some distance because it could hardly be
suggested that a charge for estate duty could be assessed by any similar
procedure: and it is clear enough that it fails at the critical point, namely,
of establishing that a person with a chance of success has an interest,
in more than the broadest popular sense, in the fund.
-
-
-
Returning to the nature of the beneficiary’s right, the Crown is met
with the difficulty that as a matter of long established acceptance, and also
of authoritative decision (Attorney-General v. Chettiar [1957] AC 513
per Viscount Simonds L.C.) no charge for duty arises when one of a dis-
cretionary class dies. Lord Denning M.R. regarded this as a special rule
whose rationale was unsatisfactory and which should not be extended and
Salmon L.J. said that it was difficult to understand. I do not so regard it:
it seems to me an inevitable and necessary, and I am tempted to add
reasonable, consequence of the method of taxation laid down by section
2(1)(b) and section 7(7) of the Finance Act, 1894. This was in fact the
ground on which it was put by Viscount Simonds L.C., when he said:
” I find it impossible to conceive of a basis of valuation which in relation
” to such an ‘ interest’ would conform to the scheme prescribed by section
” 17(6)” (corresponding to section 7(7) of the Finance Act, 1894). But if,
as seems indisputable, the exemption from duty which 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. -
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 3 months of the death,
property held on join 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 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)
applied. The judgment of Wills J. contains the following passage:
-
-
” The word ‘ interest’ is capable of different meanings, according to
” the context in which it is used or the subject-matter to which it is
” applied. If the contention for the defendants is right nobody has any
” interest in the property settled, and yet the whole fund was to be held
” for the benefit of three classes of persons—the husband, the wife,
” and the children ; and the sum of the benefits conferred on all these
” three classes taken together, being the sum of three nothings amounts
” to nothing, whereas, on the other hand, it must necessarily comprehend
” the whole interest in the fund. This is simply a reductio ad
” absurdum. The application of the word ‘ interest’ is not confined to
” a vested or a necessarily contingent interest. The Act was meant to
” cast a wider net than such a construction would imply.”
13
When this decision was followed in Attorney-General v. Farrell section
38(2)(c) of the Act of 1881 (as amended in 1889) had been incorporated
by the unhappy technique of reference into section 2(l)(c) of the Finance
Act, 1894—” as if therein enacted “. This case, too, was concerned with a
settlement which contained a discretionary trust of income for the settlor
and other persons. The Court of Appeal, not without hesitation, held that
duty was payable and that Attorney-General v. Heywood ought to be
followed. Lord Hanworth M.R. expressed himself as unwilling to dissent
from a case which had stood for so long and been acted upon: Greer L.J.
considered that but for Attorney-General v. Heywood the case would have
presented great difficulty. Romer LJ. both applied and approved the
previous decision.
The Appellants invited your Lordships to overrule these cases. The Crown
supported them and urged that they should be treated as governing the
meaning of “interest” in the present case. I see no need to take either
course. Perhaps Attorney-General v. Farrell could have been decided the
other way on the ground that once section 38(2)(c) had been embodied in
the Finance Act, 1894, section 2(1), the word ” interest ” in the earlier section
should be given a meaning similar to that which it bears in paragraphs (b)
and (d), each of which involved the conception of extent. But this was not
done and one can appreciate why not. For section 38(2)(c) is concerned,
broadly, with the case 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 under-
standable, 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 extent 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 one object is disposed of or determined (if that can be done).
But there is also the case of a ” closed class ” i.e. a class of discretionary
objects, no one of whom is entitled to any income, but who between them
can claim to be entitled, in each year, to the whole. It may well be possible
to apply section 2(1)(b) of the Finance Act, 1894, or section 43 of the Finance
Act, 1940, (as the case may be) to such a situation, as some of their Lordships
who decided the recent appeal In re Kirkwood [1966] A.C. 520 suggest. I
do not find it necessary to pursue this particular argument since we are not
concerned with a closed class.
I now consider the position as regards the surplus income in each year,
i.e., the amount of income not distributed among the discretionary class.
There is no difficulty here; in the first place (one may call this the primary
trust) this income had to be added to capital and held upon trusts under
which the Testator’s grandchildren had contingent interests. In the second
place (one may call this the secondary trust) the Trustees had power to resort
to any accumulations and to apply them as income, i.e., to distribute them
between the discretionary beneficiaries. The interests of the accumulation
beneficiaries under the primary trust was, in the terminology of the Finance
Act, 1894, an interest in expectancy (as contrasted with an interest in posses-
sion): the discretionary beneficiaries under the secondary trust had, for the
reasons already given, no ” interest” at all. So it is impossible to say that
when, by the advances, the trust for accumulation of the surplus income was,
pro tanto, determined, there was any determination within the section. In
the Court of Appeal, Harman L.J., while accepting that the rights of the
accumulation beneficiaries taken by themselves were in expectancy and that
14
those of the discretionary beneficiaries, taken by themselves, were not such
that duty would be chargeable, came to the conclusion that taking all the
rights together, an interest in possession could be found. ” Somebody “,
he said, ” must have an interest in possession “. I would, respectfully, agree
with his judgment but for the latter point: for, at any rate for the purposes
of estate duty, cases may exist where, at the relevant time, no ” interest in
” possession ” can be found: one such is where the whole income is being
validly accumulated for 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. Commissioners of Inland Revenue [1937] A.C. 174 and
Burrell v. Attorney-General [1937] A.C. 286. 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 one complicating factor, the case would be
a simple one, as it was then regarded by this House and has since been
regarded, namely, as a case where before the relevant death the income was
held for a discretionary class (” A “) and after the death for a distinct but
overlapping discretionary class (” B “) in neither case either any individual,
nor the class collectively, having a right to any, or the whole income. The
decision was that in such a case there was a passing of the property under
section 1. The complicating factor was that if and only if the whole
income was not distributed to class A, or to class B, or applied by the
trustees in paying off certain portions actually charged and other portions
which might be charged or in paying off capital charges, there might, at a
date in the future (i.e. when all possible allowances were dead or the entail
barred) be an ultimate trust for the heir at law or next of kin of the
Testator. This consideration was relied on by the taxpayer to support an
argument that there was no passing, because the whole estate legal and
equitable remained in the heir at law and next of kin except to the extent
that the trustees decided to distribute. It is not surprising that this argument
did not succeed. Lord Russell of Killowen disposes of it by showing how
remote in time and also in reality (” so remote and so minute “) the interest
was and called it ” microscopic “. I cannot regard the position of the heir
at law or next of kin as other than a special factor which neither had any
bearing on the decision of Burrell’s case nor any relevance by analogy to the
present. This matter apart, the nature of the two decisions is clear. They
were both decisions on a passing within section 1 of the Finance Act, 1894,
on the footing that the property as a whole changed hands, and, if so, neither
the decisions, nor any phrases in which the unavoidable word ” interest”
was used can be used as authority that the discretionary class in either case,
or any member of it, or aggregate of any other persons had an ” interest”
within section 2(1)(b). Counsel for the Crown sought to adapt them for
this purpose. The argument was that they were decided at a time when
(following Lord Macnaghten’s opinion in Cowley v. Commissioners of Inland
Revenue [1899] A.C. 198) sections 1 and 2 of the Finance Act. 1894, were
thought to be mutually exclusive, so that a case could only 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. Commissioners of
Inland Revenue [1960] A.C. 398) departed from this view of the matter
and having held that section 2 is definitive of section 1 by ” exclusion and
15
” 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 im-
possibility 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(l)(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. It may be
permissible, or even necessary, if a case similar to Burrell’s case arises for
decision, to consider whether, after the Arnholz case the new decision should
be put on the same or on another ground: what one cannot do is to force
on those who gave the decision of the House of 1937 reasoning which they
did not accept.
The remaining authority is that of Attorney-General v. Power [1906] 2 I.R.
272. I need say no more of this case than that I agree with the analysis
of it by Ungoed-Thomas J. and with his observations ([1966] 3 W.L.R. 778)
that it shows that the Crown’s contention in the present case would involve
the consequence that duty could be claimed on the death under twenty-one
of an infant contingently entitled, if there was a discretionary power of
maintenance, a conclusion for which the Crown did not contend.
I would allow the appeal and restore the judgment of Ungoed-Thomas J.
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