Lord Reid
Lord Morris
of
Borth-y-Gest
Lord Hodson
Lord Guest
Lord
Wilberforce
HOUSE OF LORDS
COMMISSIONERS OF INLAND REVENUE
v.
HOLMDEN and OTHERS
Lord Reid
my lords,
It has long been notorious that the Estate Duty legislation can cause great
injustice or hardship in many cases. An individual who is well advised can
often take action during his life which will diminish tax liability on his death.
But before 1958 no such action was possible with regard to trust funds,
except in the unlikely case where all who had vested or contingent rights were
of full age: then they could combine to require immediate payment of the
fund or alter the trust purposes. By the Variation of Trusts Act 1958 it
became possible to make application to the Court. Generally all of full
age combined to put forward an arrangement and, if it was otherwise
unobjectionable, the Court could approve the arrangement on behalf of
minor beneficiaries and of unborn persons who might become beneficiaries
if the arrangement was for their benefit. And an arrangement which would
avoid large payments of estate duty could hardly fail to be for the benefit
of such infant and potential beneficiaries.
In the present case an arrangement was approved by the Court in 1960.
The original settlement was made by the settlor Sir G. Holmden, in 1927.
He died in 1945, survived by his widow and two children. The position after
his death was that the trustees had power during the life of the widow to pay
or apply the whole or such part of the income of the trust fund as they should
in their uncontrolled discretion think fit for the benefit of the widow, the
children and any grandchildren or any of them. A provision in the settlement
for the accumulation of any surplus income not so paid or applied came to
an end at the death of the settlor and thereafter any surplus was not disposed
of by the settlement but belonged to the settlor’s estate. On the death of the
widow the discretionary trust came to an end and, subject to a power of
appointment given to the widow, half of the fund was to be held in trust for
each child and his or her family.
It was obvious that, if no alteration was made, estate duty would be pay-
able on the death of the widow. It is not disputed that the purpose of the
arrangement was to alter the trust purposes so that there should be no passing
of the property on the death of the widow. The arrangement provided that as
from 12th January 1960, the date of the Order of the Court, the discretionary
trusts of income should have effect during the life of the widow or the period
of twenty-one years from that date whichever should be the longer. The
arrangement also altered the rights of the children and grandchildren to
receive the capital at the end of the twenty-one-year period. The widow died
in 1962.
Estate duty is claimed on the ground that as regards rights to income the
arrangement did not come into operation until the death of the widow. But
in my opinion the whole arrangement did come into operation in 1960. I can
see no ground at all for the Appellants’ argument that until the death of the
widow the original settlement continued unaltered: the plain meaning of
the arrangement is that the whole of it came into operation at once. So the
discretionary trust set out in the arrangement came into operation in 1960
and continued in operation until after the widow’s death. The only change
at the widow’s death was that one of the objects of the discretionary trust
dropped out and admittedly such a change does not involve any liability for
estate duty.
But the Appellants also found on section 43 of the Finance Act 1940. Sub-
section (1) is as follows:
” (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, forfeiture or in any other manner
” except by the expiration of a fixed period at the expiration of which
” the interest was limited to cease), whether wholly or partly, and whether
2
” for value or not, after becoming an interest in possession, and the dis-
” position or determination (or any of them if there are more than one)
” is not excepted by sub-section (2) of this section then—
” (a) if, had there been no disposition or determination as afore-
” said of that interest and no disposition of any interest expectant
” upon or subject to that interest, the property in which the interest
” subsisted would have passed on the death under section 1 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 subsisted
” would have been deemed by virtue of paragraph (b) of sub-section
” (1) of section 2 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.”
Let me assume for the moment that the rights under the Settlement of the
objects of the discretionary trust were interests or an interest in possession
within the meaning of this section. The question then is whether such
interests were ” determined ” by the coming into operation of the arrange-
ment. If they were and the other express or implied requirements of the
section are satisfied then the trust fund must be deemed to have passed on the
death of the widow.
There are two ways of looking at the effect of the arrangement. One is
that it merely amended or varied the original settlement by writing in to
clause 2 (a) the alternative period of twenty-one years from 1960: other-
wise that clause remained unaltered. If that is an adequate statement of the
effect of the arrangement then there was no determination of the clause
or of the ” interest limited to cease ” on the death of the widow which it
contained. All that happened was that an alternative period of duration of
the interest was added, and in the event which happened, the death of the
widow within the twenty-one years, the alternative period prevailed.
The other way of looking at the effect of the arrangement raises the ques-
tion what was the true nature of the arrangement. Under the variation of
Trusts Act the Court does not itself amend or vary the trusts of the original
settlement. The beneficiaries are not bound by variations because the Court
has made the variation. Each beneficiary is bound because he has consented
to the variation. If he was not of full age when the arrangement was made he
is bound because the Court was authorised by the Act to approve of it on
his behalf and did so by making an order. If he was of full age and did
not in fact consent he is not affected by the Order of the Court and he is
not bound. So the arrangement must be regarded as an arrangement made
by the beneficiaries themselves. The Court merely acted on behalf of or
as representing those beneficiaries who were not in a position to give
their own consent and approval.
So we have an alteration of the settlement which was not made by the
settlor or by the Court as being empowered to make it, but which was made
by the beneficiaries quite independently of the settlor or of any power,
express or implied, given or deemed to have been given by him. Is it
possible in those circumstances to say that, when the agreement of the
beneficiaries alters the settlement, it merely amends the settlement? Or is
the true position that, in so far as the arrangement alters the provisions
of the settlement, it brings to an end or ” determines ” those provisions
and substitutes for them new provisions arranged by the beneficiaries? Here
the settlor gave interests limited to cease on his widow’s death: the bene-
ficiaries substituted interests which probably would not and in fact did not
cease on her death. I do not find the point at all easy but I have come to be
of opinion that the effect of the arrangement was to determine the interest
3
provided by the settlor which was limited to cease on the widow’s death and
to substitute a different interest which was so limited that it might or might
not cease on her death.
But that is not an end of the matter. It is said that there cannot be a
determination within the meaning of this section unless those who previously
had the interests which have been determined lose something by reason of the
determination. If I had to decide this point I would not find it easy.
There are arguments both ways. But in my view the point was decided by
this House in In re Ralli’s Settlements v. C.I.R. [1966] A.C. 483. Lord
Upjohn said (at page 509) with regard to section 43: ” Subsection (2) of that
” section makes it clear beyond doubt there must be a determination or
” disposal in favour of some other party for the section to have any
” effect and here there was none”. That interpretation was accepted
by the majority of the noble Lords engaged in the case, and I see no
good reason for re-opening the question. In the present case none of the
beneficiaries whose interests were determined lost anything thereby and the
determination was not in favour of any other person. So section 43 has no
application and therefore I am of opinion that this appeal should be
dismissed.
Lord Morris of Borth-y-Gest
MY LORDS,
By the Order of the Court made on the 12th January, 1960, approval
was given to the arrangement which was scheduled to the Order. The approval
of the Court was given on behalf of all infant and unborn persons interested
under the trusts of the settlement. Those parties to the Originating Summons
before the Court who were not under any incapacity expressed their consent
to the arrangement. The Court gave its approval on behalf of the infant
and unborn persons by virtue of the power given to the Court by the
Variation of Trusts Act, 1958. That was ” An Act to extend the jurisdiction
” of courts of law to vary trusts in the interests of beneficiaries and sanction
” dealings with trust property “. The power may be exercised in respect of
any arrangement varying or revoking all or any of the trusts arising under
any will, settlement or other disposition or enlarging the powers of the trustees
of managing or administering any of the property subject to the trusts.
The first question now arising concerns the effect of the arrangement which
was made and approved. This I regard as a question of construction. In
my view, the effect of Clauses 2 and 3 of the arrangement was that as from
the 12th January, 1960, the provisions of Clause 2(d) of the Settlement were
varied in one respect. The period of the discretionary trusts was varied.
Those trusts were to have had effect (as was then known) during the life of
Lady Holmden. The variation was that they were to have effect during the
life of Lady Holmden or until the 12th January, 1981, whichever of those
periods should be the longer. In my view, the result was that there was
one single discretionary trust which would have effect (subject to Clause
6) during the trust period as varied. The variation became effective as from
the date of the Order of the Court. The destination of any income which,
after the death of the settlor, was not applied among the discretionary objects,
was not affected. No new discretionary trusts were to begin on Lady
Holmden’s death. As from the 12th January, 1960, it was arranged that
the discretionary trusts would continue during the newly agreed period.
Lady Holmden was one of the objects of the discretionary trust but her death
(when it occurred on the 22nd December, 1962.) was no more than the
dropping of one of the lives within the discretionary class and did not result
in a passing of property under the provisions of the Finance Act, 1894.
The question then arises whether the provisions of section 43 of the
Finance Act, 1940. are applicable. Was there an ” interest” (or were
there interests) limited to cease on a death which had been disposed of or
had determined? Was such ” interest” (or were such interests) ” in
” possession “?
4
Even if it could be said that there was an interest in possession limited
to cease on a death I cannot think that there is any ground for saying
that the interest of the discretionary class under the settlement trusts had
been “disposed of”. There was nothing like an assignment. There was
no new receiving hand. The effect of the arrangement was not to get
rid of the discretionary trust but to preserve it for a longer period. This
circumstance makes it equally difficult to say that the discretionary trust
was in some manner (either by surrender, assurance, divesting, forfeiture or
in some other manner) ” determined “. The arrangement of the 12th January,
1960, did not bring about the ending of the discretionary trust; it brought
about its prolongation. In my opinion, the arrangement did not either dispose
of or determine an interest limited to cease on a death, even if it be assumed
that there was such an interest within the meaning of section 43. Furthermore,
I consider that in the context of the section what is contemplated is a disposi-
tion or determination in favour of some other party. Though subsection (2)
is an exception subsection, the references in (a) to ” the person becoming
” entitled by virtue of or upon the disposition or determination ” and to ” the
” person who immediately before the disposition or determination had the
” interest ” seem to me to be references to the kind of disposition or determina-
tion with which the section as a whole is dealing. Being of this opinion I
find it unnecessary to express a view in this case on the question whether
there was an interest in possession limited to cease on a death.
I would dismiss the appeal.
Lord Hodson
MY LORDS,
The questions argued on this appeal were two.
First: Was the trust fund—which passed on the death of Lady Holmden
liable to estate duty under section 2(l)(b) of the Finance Act, 1894?
Second: Since the trust fund was property in which the beneficiaries under
the discretionary trust declared by clause 2(a) of the Settlement of the 28th
December, 1927, made by the late Sir Osborn Holmden, had an interest limited
to cease on the death of Lady Holmden, was it disposed of or determined by
the Arrangement made on the 12th January, 1960, so as to make estate duty
exigible under section 43(1) of the Finance Act, 1940, as amended?
The first question depends on the construction of the Arrangement and in
particular of clause 3 thereof which reads:
” 3. The discretionary trusts of income declared by clause 2(a) of
” the Settlement shall have effect during the life of Lady Holmden or the
” period of 21 years from the Operative Date whichever shall be the
” longer. . . .”
The operative date was the date of the approval of the Arrangement by the
Court pursuant on the provisions of the Variation of Trusts Act, 1958, viz. the
12th January, 1960.
The contention of the Crown is that on the true construction of the Order
the Settlement trusts continued until the death of the widow and were then
succeeded by new trusts under the 1960 Arrangement so that there was a
passing of property under section 2(1)(b) of the Act of 1894 as in In re
Kirkwood [1966]A.C. 520.
In my opinion, the effect of the Arrangement varying the Settlement was,
as Harman L.J. pointed out, to re-write the Settlement from the date of the
Order in the terms proposed and approved by the Court. Clause 2(a) of the
Settlement which sets up the discretionary trust must then be read as taking
effect, not only during the life of the widow, but from twenty-one years from
the date of the Order, if she died before that period expired, as she did. There
was no passing within the meaning of section 2(1)(b) on Lady Holmden’s
death for that was only the dropping of one of the lives in the discretionary
trust, this interest being of no ascertainable value under section 7(7) of the
Finance Act, 1894.
5
Second: If section 2(1)(b) is out of the picture, is duty payable under section
43 of the Act of 1940? In order to bring this section into operation there must
be a disposition or determination of an interest. I am, again, in agreement
with Harman, L. J., of opinion that the effect of the Order was neither to
dispose of nor to determine the discretionary trust. The Order enlarged or
extended the trust and did not bring it to an end.
The scheme of the Variation of Trusts Act, 1958. provides for the continua-
tion of the old settlement as if the original settlor were himself a living party
and the giving effect to proposals by whomsoever made ” varying or revoking
” all or any of the trusts, or enlarging the powers of the trustees of managing
” or administering any of the property subject to the trusts “. (See section 1(1)
of the Variation of Trusts Act, 1958.)
The intervention of the Court under the Variation of Trusts Act approving
the Arrangement which had been proposed did not prevent the continued
existence of the Settlement made by the settlor notwithstanding the variations
which flow from the Arrangement. As counsel for the Respondents puts it
in his argument, the settlor in making the Settlement made it subject to any
legislative hazards. This particular Act is only one example of such a hazard.
There is a further difficulty in the way of the application of section 43 of
the Act of 1940 which, in my opinion, is conclusive. Assuming that there is
a relevant interest the whole language of subsection (1) of section 43 is consis-
tent with a shifting of the interest to another person for the benefit of that
other, rather than with the adding to that interest some additional benefit
derived from the same source. Here none of the beneficiaries lost anything
and the disposal was not in favour of any other person. I appreciate the
force of the opinion expressed by the Master of the Rolls that this is a
charging section and is not necessarily to be controlled in its interpretation
by the exceptions which are contained in the succeeding subsection, namely,
43(2); nevertheless I think that the taxpayer is supported in his argument
by the undoubted fact that the exceptions are all dealing with determination
or disposal in favour of some other person. I conclude that this was the
kind of determination or disposal with which the whole section is concerned
and that the language of section 43(1) by itself does not carry with it the
claim for duty for which the Crown contends. In other words ” dispose ”
and ” determine ” have the same meaning in both subsections.
It would appear that in the case of the owner of a life interest acquiring
an absolute interest in remainder expectant on his life interest in property
no duty is in practice claimed by the Crown. I cannot understand the reason
for this unless the construction of the subsection contended for by the tax-
payer is correct; for I do not accept the Crown’s contention that in such a
case there is a sublimation of the life interest into one interest without a
merger in the sense of a drowning of one interest in the other.
This construction of section 43 was adopted by Russell, L.J., in the case
of In re Ralli’s Settlement [1965] Ch. 286 and by my noble and learned
friend, Lord Upjohn, with whom three of your Lordships agreed in the
House in the same case as reported in [1966] AC. 483 at pages 509 and 510.
Whether the opinion expressed was necessary to the decision of that case or
not, I would adhere to it after hearing the argument addressed to your
Lordships in this case.
I would dismiss the appeal.
Lord Guest
MY LORDS,
By a Settlement made on 28th December, 1927, the Settlor, Sir George
Holmden, appointed discretionary trusts (by clause 2(a) of the Settlement)
in relation to the income of the trust fund during the lives of the settlor and
of his wife and the life of the survivor in favour of Lady Holmden, his son
and daughter and their issue, with a direction to accumulate the surplus
income which might be distributed among the discretionary objects and, so
far as not distributed, to be added to capital. The settlor died on 16th April,
1945.
6
An Order was made under the Variation of Trusts Act, 1958, on 29th
October, 1959, by Danckwerts, J., in the Chancery Division approving of
an Arrangement varying the trusts of the Settlement. The parties to the
application included all the living beneficiaries under the Settlement and the
Trustees. Clauses 2 and 3 of the Arrangement were in the following terms:
” 2. As from the Operative Date the Settlement shall have effect
” subject to the variations which are hereinafter set forth.
” 3. The discretionary trusts of income declared by clause 2(a) of the
” Settlement shall have effect during the life of Lady Holmden or the
” period of 21 years from the Operative Date whichever shall be the
” longer (hereinafter called ‘ the Trust period ‘) “.
It is not necessary for the present purpose to refer to the other provisions in
the Arrangement varying the Settlement. Lady Holmden died on the 12th
December, 1962.
Upon an Originating Summons in the Chancery Division Pennycuick, J.,
held that the trust fund did not become liable to estate duty upon the death
of Lady Holmden. The Court of Appeal by a majority (Lord Denning,
M.R., dissenting) confirmed that decision.
It is not necessary to refer to the opinion of Pennycuick, J., as his
decision has been overtaken by the judgment of this House in Ralli and
In re Kirkwood [1966] A.C. 483 and 520. The opinions of the House were
not available at the time the judgment was given.
The argument for the Crown was presented in the form of a dilemma.
It was said that upon the death of Lady Holmden the discretionary trust
of the Settlement came to an end and was succeeded by a new discretionary
trust under the Arrangement until 12th January, 1981 ; in which case it was
said that estate duty was payable on the death of Lady Holmden under
section 1 or section 2(1)(b) of the Finance Act, 1894. If that was not the
effect of the Arrangement, then it was argued that the old discretionary trust
determined on 12th January, 1960, the date of the Order approving the
Arrangement, and a new discretionary trust arose ; in which case it was
said that the trust fund was liable to estate duty under section 43 of the
Finance Act, 1940.
The argument for the Crown depends upon the proper construction of
the Settlement and of the Deed of Arrangement. I have no doubt that the
majority of the Court of Appeal were right in holding that as from the
operative date in the Arrangement, 12th January, 1960, the old settlement
was varied so far as affecting this case to the effect that the term of the
discretionary trust extended until the date of Lady Holmden’s death or
until 12th January, 1981, whichever was the later, just as if the original
settlement had contained the variation. There was not, as Lord Denning
held, a continuance of the old settlement until Lady Holmden’s death to
be succeeded on her death by a new discretionary trust. There was, at the
date of Lady Holmden’s death, a single discretionary trust operating from
the date of the Settlement until 12th January, 1981. Upon the death of
Lady Holmden the only change which took place was the dropping of one
life from the class of discretionary objects ; otherwise the trust continued
unimpaired, the fund was the same and the beneficiaries were the same.
The Crown argued that the effect of the Settlement and of the Arrange-
ment was to create a charge to duty as occurred In re Kirkwood [1966] A.C.
520, but in that case the reversioner was the only party to the variation and
he could only assign his interest after his mother’s death. He could not
assign any income prior to his mother’s death which was dealt with by the
settlement. The effect was that a different interest arose upon the death
resulting in a passing under section 1 of the Finance Act, 1894. In the
present case all the beneficiaries were parties to the Arrangement either by
themselves or through the approval of the Court under section 1 of the
Variation of Trusts Act, 1958. At the date of the Arrangement they could
competently deal with the whole income in which they were beneficially
interested. Under the Arrangement the income was dealt with in such a
way that on the death of Lady Holmden the same trusts continued, the only
7
difference being the dropping of one life. If this be so, the case is within
the ratio of the concession by the Crown that the dropping of one life from
the objects of a discretionary trust does not result in a passing under section 1
(see Attorney-General of Ceylon v. Chettiar [1957] AC 513).
I turn now to what has been described as the other horn of the dilemma.
The dilemma argument is seldom a satisfactory ground of decision and, in
my view, in this case there is no true dilemma. To enable the Crown to
succeed upon this point they must bring this case within section 43 of the
Finance Act, 1940, which is in the following terms:
“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, forfeiture or in any
” other manner (except by the expiration of a fixed period at the
” expiration of which the interest was limited to cease), whether wholly
” or partly, and whether for value or not, after becoming an interest in
” possessing, 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 disppsition of any interest expectant upon
” or subject to that interest, the property in which the interest subsisted
” 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 subsisted
” would have been deemed by virtue of paragraph (b) of subsection (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 Crown argued that as from the operative date, 12th January, 1960, the
life interest under the Settlement determined after becoming an interest in
possession and that the trust fund was deemed to pass under section 1 of
the Finance Act, 1894.
Before dealing with this argument, it is necessary to dispose of one
preliminary point. This involves the proper construction of the Variation
of Trusts Act, 1958. This Act of which the long title reads ” An Act to
” extend the jurisdiction of course of law to vary trusts in the interests of
” beneficiaries and sanction dealings with trust property ” provides as follows:
” 1.—(1) Where property, whether real or personal, is held on trusts
” arising, whether before or after the passing of this Act, under any
” will, settlement or other disposition, the court may if it thinks fit
” by order approve on behalf of—
” (a) any person having directly or indirectly, an interest, whether
” vested or contingent, under the trusts who by reason of infancy
” of other incapacity is incapable of assenting, or
” (c) any person unborn,
” any arrangement (by whomsoever proposed, and whether or not there
” is any other person beneficially interested who is capable of assenting
” thereto) varying or revoking all or any of the trusts, or enlarging
” the powers of the trustees of managing or administering any of the
” property subject to the trusts:
” Provided that except by virtue of paragraph (d) of this subsection
” the court shall not approve an arrangement on behalf of any person
” unless the carrying out thereof would be for the benefit of that
” person.”
8
The Act followed closely upon a decision of the House in Chapman v.
Chapman [1954] AC 429, where the House refused to extend the jurisdiction
of the Chancery Division in varying settlements beyond the cases mentioned
by Lord Asquith of Bishopstone at page 469. The power of the Court under
the 1958 Act is to approve of an arrangement inter alia ” varying or revoking
” the trusts “. It must be a matter of construction in each case whether the
arrangement in question varies or revokes the trusts. While there may be
cases where an arrangement revokes the trust, I have no doubt in the present
case that the arrangement merely varied the original trust by inserting an
extended terminal date for the exercise of the discretionary powers. The
question thus arises whether this variation was, within the meaning of
section 43, a determination of the life interest of the discretionay beneficiaries
under the Settlement. A variation might have the effect of determining the
life interests, but, with respect to those who hold the opposite view, I do not
consider that the approval by the Court of an arrangement under the 1958
Act necessarily determines any pre-existing life interest. It was argued that
because the Order of the Court was the approval of an Arrangement by
the beneficiaries, this was a new trust and that the previous beneficial interests
were determined. In other words, the Arrangement was contractual, effecting
a compromise by the beneficiaries, approved of by the Court for a re-settlement
of the trust fund. But, in my view, the arrangement merely varies the trusts to
the extent already stated. Section 1 of the Act enabled the Court to
give approval to an Arrangement on behalf of such persons as were unable
by incapacity or otherwise to give their approval. The Court thus supplied
the capacity which the incapax lacked. This Arrangement did not, in my
view, create a new trust, but merely varied the old settlement.
Turning next to the construction of section 43, the effect of the Arrangement
was not, in my view, to determine the life interests but to enlarge them
so that the terminal date was extended. It would be a misuse of language
to say that the interest ” determined ” when all that happened was that the
beneficial interests were increased. The life interests under the settlement
did not come to an end or cease to exist after 12th January, 1960. They
continued for a period up to 12th January, 1981, if Lady Holmden pre-
deceased that date. This must be the only logical justification for the view
of the Crown that where the life tenant acquires the reversion there is no
charge to duty under section 43. Alternative justifications put forward by
the Crown for the alleged concession were, in my view, not substantiated.
It is no concession at all ; it is the logal result of a proper construction of
section 43.
If the beneficial interest did not determine under section 43 it is
unnecessary to consider the further point which was raised in Ralli’s
Settlement [1966] A.C. 483 by Lord Upjohn at page 509 where he said:
” Section 43 of the Finance Act, 1940, can have no possible applica-
” tion, for, as I have already said, as a matter of construction the life
” interest under the 1895 settlement continued until Mrs. Ralli’s death
” and was never determined or disposed of. Subsection (2) of that
” section makes it clear beyond doubt that there must be a determination
” or disposal in favour of some other party for the section to have any
” effect and here there was none.”
A majority of their Lordships, of which I was one, concurred in his opinion.
I remain of the same opinion. To elaborate on Lord Upjohn’s opinion,
it is only necessary to state that “determination” in subsection (1) and
subsection (2) must be used in the same sense. If a determination under
subsection (2) requires a determination in favour of some other person then
a determination under subsection (1) must equally be in favour of another
person. As in this case there was no determination or disposition in favour
of another person, section 43 has, in my opinion, no application.
In view of my opinion as to the construction of section 43, it is unnecessary
to deal with the question whether the interests of the discretionary beneficiaries
had become in this case ” interests in possession ” within the meaning of
section 43. Both parties appeared to leave this question upon the decision
9
of the case of Gartside v. C.I.R. but as the terms of the two settlements arc
dissimilar I prefer to reserve my opinion upon this point.
Upon the whole matter I would dismiss the appeal.
Lord Wilberforce
MY LORDS,
In this case the Crown claims estate duty on the death of Lady Holmden
under section 43 of the Finance Act, 1940: This case has some similarity
with those previously considered in this House In re Kirkwood ([1966] A.C.
520) and In re Ralli’s Settlements ([1966] A.C. 483).
The trusts by virtue of which the property would have passed, if certain
transactions in 1960 had not taken place, were established by a Settlement
dated 28th December, 1927, made by Sir Osborn George Holmden, Bt. whose
widow Lady Holmden was. Under this settlement a trust fund was, before
those transactions, held upon discretionary trusts during Lady Holmden’s
life for a class which comprised Lady Holmden, her children and their issue.
The Trustees had a discretion as to the amount (if any) of income they
might distribute in any year to any one beneficiary or to the class as a
whole. Any surplus not distributed was to be accumulated. The capital
was to be held after Lady Holmden’s death, subject to a special power of
appointment exercisable by Lady Holmden, upon trusts under which each
of her two children George and Mary took life interests in one half with
remainders to their respective children. At the relevant date both George
and Mary were living; George Holmden had three children, two of whom
were infants ; Mary Shearer had two, both of full age.
The period of permissible accumulation, as regards surplus income, came
to an end on 16th April, 1945, when the settlor, Sir O. G. Holmden died, and
thereafter any surplus income not distributed under the discretionary trust
became payable to his legal personal representatives as part of his estate.
It appears that the persons interested in this estate were Lady Holmden,
George Holmden, Mary Shearer and her children.
On 29th October, 1959, an originating summons was taken out in the
Chancery Division seeking the approval of the Court to a variation of the
trusts of the Settlement under the Variation of Trusts Act, 1958. The
application was made by Lady Holmden, and the Respondents included all
living beneficiaries under the settlement and the Trustees. On 12th January,
1960, an Order was made by which the Court approved the Arrangement
on behalf of all infant and unborn persons interested under the trusts of
the Settlement. It was recited in the Order that all adult beneficiaries had
consented to it.
The Arrangement was scheduled to the Order. After defining ” the opera-
tive date ” as the date of the Order, the Arrangement provided in paragraphs
(2) and (3) as follows—
” 2. As from the Operative Date the Settlement shall have effect
” subject to the variations which are hereinafter set forth.
” 3. The discretionary trusts of income declared by clause 2(a) of the
” Settlement shall have effect during the life of Lady Holmden or the
” period of 21 years from the Operative Date whichever shall be the
” longer (hereinafter called ‘ the Trust Period ‘) “.
Paragraphs 4 and 5 of the Arrangement contained provisions varying the
trusts as to capital, the details of which are not material. Paragraph 6
conferred power on the Trustees at any time after Lady Holmden’s death
by deed to bring the Trust period to an end and the trusts as to capital into
operation. The remaining paragraphs contained provisions as to other
trusts and administrative matters which have no relevance on the present
appeal.
Lady Holmden died on 22nd December, 1962, i.e. during the currency of
the Trust Period and the question is whether estate duty falls to be paid on
her death in respect of the settled funds. The claim for duty is put on
two alternative grounds: either that the settlement funds must be deemed
to pass under section 2(l)(b) of the Finance Act, 1894, on the basis that.
10
notwithstanding the Arrangement of 1960 there was a cesser of an interest
or interests limited to cease on Lady Holmden’s death; or alternatively that,
if that is not so, there must have been a disposition or determination of such
interest(s) by the arrangement of 1960 so that section 43 of the Finance Act,
1940, comes into play. The Crown’s main argument was that the taxpayer
was faced with a dilemma: either the original limited interest continued to
exist after 1960, in which case section 2(1)(b) applies; or, if it did not
continue to exist, it must have been disposed of or determined so as to
attract section 43.
My Lords, I cannot accept this method of reasoning. A man is not
to be taxed by a dilemma: he must be taxed by positive provision under
which the Crown can satisfactorily show that he is fairly and squarely taxed.
There is no presumption in taxing law that two sections, however comple-
mentary they appear, are exhaustive: there may always be a no man’s land
between them which the subject does not have to define but on which he
can take his stand. In the present case, and I suspect that this is generally
true, at any rate in the field of taxation, the supposed dilemma is not a
true one. The original limited interest may not be in existence at the
relevant death, and yet it may not have been either disposed of or determined
within the meaning of the taxing section. That I believe to be the case here.
I proceed, as I venture to think one must, by considering the first limb
of the Crown’s argument. Did the interest limited to cease on Lady Holmden’s
death by the Settlement continue in existence after the 1960 Arrangement?
I use the word ” interest ” in the present discussion to describe the trusts
declared by the Settlement during Lady Holmden’s life, so that the question
relates to those trusts.
On this question the rival views are as follows. The Crown contend
that all that was done in 1960 was to add to the existing trusts declared during
Lady Holmden’s life fresh trusts to operate for an additional period. If this
is right, it is clear that this case is indistinguishable in result from In re
Kirkwood, and that the Crown must succeed. The Respondents contend
that the effect of the Arrangement was to bring into existence a new single
discretionary trust of income terminating on the death of Lady Holmden or
on 12th January, 1981, which date should be the later, in which case, on the
principle accepted in Attorney General of Ceylon v. Chettiar ([1957] A.C.
513) no duty would be payable.
I can deal with this issue shortly because I am in complete agreement, as
to it, with the majority of the Court of Appeal. If all the beneficiaries
under the Settlement had been sui juris, they could, in my opinion, have
joined together with the Trustees and declared different trusts which would
supersede those originally contained in the Settlement. Those new trusts
would operate proprio vigore, by virtue of a self-contained instrument—namely,
the Deed of Arrangement or variation. The original Settlement would
have lost any force or relevance. The effect of an Order made under the
Variation of Trusts Act, 1958, is to make good by act of the Court any
want of capacity to enter into a binding arrangement of any beneficiary not
capable of binding himself and of any beneficiary unborn: the nature and
effect of any arrangement so sanctioned is the same as that I have described.
So far there is really no dispute: the difference between the Crown and the
Respondents and between the two views in the Court of Appeal is on the
question whether this is in fact what the Arrangement has done. I have
set out Clauses 2 and 3 above: to my mind, they cannot be read as an
affirmation of the trusts of the settlement plus an addition: they can only be
read as a true ” variation ” —the substitution by binding agreement of a new
period (the Trust Period) for the old. One may test this by asking
what the trusts as to income were after the Arrangement and before Lady
Holmden’s death: were they the same as before, or were they different? In
my opinion, they were clearly different: the Trustees, after 1960, could
and should have exercised their discretion as to distribution of income on
the basis (theretofore not existing) that the discretion might continue (at
least) till 1981—a basis which might materially affect the policy they chose
11
to adopt. I reach the conclusion on this point that a new single trust
was created in 1960, extending the previous limited “interest”, which
therefore did not cease on Lady Holmden’s death. In this case, the
parties have been able, with the assistance of the Court, to do what the
reversioner alone could not do in the case of In re Kirkwood, so that
they succeed where he failed.
The second question is whether the Arrangement of 1960 brought about,
or was, a disposition or determination of the previous limited interest
within the meaning which those expressions have in section 43 of the Finance
Act, 1940.
It now becomes relevant to ask whether there was an ” interest” in
the statutory sense to be disposed of or determined. I find some difficulty
in answering this question. The argument in this appeal took place after
the argument was completed in Gartside v. Commissioners of Inland Revenue
but before the decision was given in that appeal, so that Counsel were
unaware of the manner in which the meaning of ” interest” was to be
dealt with in this House. The trusts of income in the Holmden settlement
are not identical with those with which the Gartside case was concerned,
because in the present case the trust for accumulation had come to an end and
any surplus income had to be distributed to ascertained persons. This circum-
stance possibly distinguishes the present case from Gartside’s, but your
Lordships heard no argument on the point. Being as I am of opinion that
the Crown’s case under section 43 fails on other grounds, I prefer to leave
the question undecided.
The argument that, even assuming that there was a relevant ” interest”
here, section 43 of the Finance Act, 1940, has no application can be put in
two ways. The first, which may for convenience be described as that based on
commonsense (I am not using this as an argument for its adoption) is to
say that the subsection, when dealing with ” dispositions ” or ” determina-
” tions ” must surely contemplate a transaction by which the owner of the
limited interest gives up or is deprived of something: it cannot have been
intended to impose a charge where he acquires something more than he had,
or where his ” limited ” interest is enlarged. The second, directed perhaps
to more sophisticated minds, is to suggest that the section as a whole only
deals with cases where there is a disposition or determination in favour of
some other person: this argument is supported by reference to section 43 (2).
In discussion of these arguments reference was made by both sides to the
fact that in practice no duty is claimed under the words we are dealing with
when the owner of a life interest acquires the absolute interest in remainder,
expectant on his life interest. The taxpayer says that this practice can only
be justified if the legal position is as it suggested above. The Crown seeks
to find some other and more special support for it which does not involve
acceptance of the taxpayer’s argument.
My Lords, I find myself persuaded by the two submissions of the taxpayer:
these seem to me interrelated and mutually supporting. I think that they
justify and that they alone can justify the practice I have mentioned. Purely
on subsection (1) and considering the whole of its language (“disposed of
” or has determined, whether by surrender, assurance, divesting, forfeiture
” or in any other manner . . . whether for value or not “) I find it hard
to believe that a duty was to be imposed in cases where the owner of the
limited interest acquires, and adds to that interest, a further interest in the
property. I am not in this influenced by technical considerations as to merger,
nor by the use of metaphorical expressions such as ” drowning “, or ” sub-
” limation ” or the recently criticised ” enlargement”: I find it more helpful
to consider the purpose of this enactment. That seems to me fairly clearly
to be to bring within the charge cases where a limited interest, on the cesser
of which a charge would otherwise arise, has been got rid of. The width of
the language used in subsection (1), which I have quoted, finds sufficient
justification in the variety of mechanisms which might be employed in order
to achieve this end without making it necessary to give up this basic con-
ception. That is, moreover, to my mind, confirmed by the presence of sub-
section (2) which applies the familiar five-year rule accompanied by total
12
exclusion, fitting enough if the conception is that of parting with or depriva-
tion of an interest, but inappropriate by reference to transactions of acquisi-
tion. The language, too, of that subsection, by mentioning ” the person ”
seems to show that it rests upon the assumption that, in a transaction to
which subsection (1) applies, there is a person who becomes entitled by virtue
of or upon the disposal or determination.
It was forcefully pointed out, and this argument is reflected in the judg-
ment of Lord Denning M.R., that subsection (2) takes the form of an
exception to subsection (1). It is said that it is faulty reasoning to
construe a rule by an exception to it: the presence of an exception in
favour of broadly gifts to another made outside five years does not mean
that subsection (1) is confined to this case: it shows at most that the sub-
section includes it.
With the general proposition I would certainly agree: there is no presump-
tion that an exception and a rule cover the same ground. But after the full
examination which was made in argument of the antecedents of this legis-
lation, I am persuaded that in this case the exception does do this.
I shall not weary your Lordships with an enumeration of the various
sections which preceded the Finance Act, 1940. The original provision
was section 38(2)(a) of the Customs and Inland Revenue Act, 1881: then,
after certain decisions, surrenders of life interests were dealt with by the
Finance Act, 1900. In section 11 of that Act the charge and the exception
were united in the same subsection: the charge only arose, as did the
exception, where there was a disposition lo or for the benefit of a person
entitled to remainder or reversion. Later, cases involving dispositions to com-
panies were covered by the Finance Act, 1930: this, too, in section 35,
referred to dispositions to or for the benefit of a company, and the (then)
three-year exemption mentioned the company, evidently the company to
which the disposition had been made. So it appears that up to this time the
legislation invariably contemplated a disposition to someone and that the
exemption covered part of the same ground. In the Finance Act, 1940, there
was a further expansion of the type of disposition etc. covered, notably by
addition of ” forfeiture ” ; the language was generalised so as to include not
only persons entitled in remainder or reversion but companies or individuals
who at the time of the disposition had no interest in the property, and
the exemption was segregated in a distinct subsection. It is always possible
that changes of this character are designed to effect changes in substance, but
it is for the Crown either to show that the language used clearly achieves this,
or, at least, to demonstrate some mischief as revealed in previous decisions,
which Parliament must have intended to correct. It did not convince me of
either. I think that, as before, subsection (1) deals with dispositions and
determinations which result in some other person (or company) becoming
entitled and that subsection (2), as before, exempts those dispositions or
determinations if the stated conditions are complied with.
Lastly there is the practice I have referred to above: the best that the
Crown could do to explain it was to say that, when the reversion is acquired
by a life tenant, the life interest is not determined because otherwise there
would be no basis on which the life tenant would remain entitled to the
income during his life. But there is no precision in this proposition unless
one adds to it the word ” only “, in which case the failure of the argument
at once appears. On the other hand, not only does the interpretation of
subsections (1) and (2), which the Respondents suggest give ample sense and
justification for the practice, but the practice itself, so supported, seem to fit
logically into the legislative scheme.
I would add that the opinion I have just expressed coincides entirely
with that which, as I understand it, was accepted after argument by their
Lordships in the Ralli case and with that both originated and (correctly)
followed by Russell L.J. in the Court of Appeal.
I would dismiss the appeal.
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