Summary

The court considered various matters arising under the trusts of an inter vivos settlement dating from 1940 including the arithmetical approach and the proportionate approach to dealing with hotchpot and its jurisdiction under the Trustee Act 1925 s.57 to introduce powers of partition and appropriation.

Facts

The claimant trustees (T) applied to the court for directions, authorisations and extra powers under the trusts of an inter vivos settlement of which the defendants (X) were beneficiaries. The settlement had been created in 1940 by four brothers. It provided that the settlement income was to be paid equally to the brothers and, after their deaths, to their children and successive generations per stirpes. There was no dispute that the trust was a "Freeston" trust, named after Freeston's Charity, Re (1978) 1 WLR 741 CA (Civ Div) and that it had been operated by T on the basis that X were entitled to proportionate shares of the income of an undivided fund. Problems determining the incidence of tax had arisen where beneficiaries with life interests had died because those deaths had generated liabilities to estate duty and capital transfer tax. T had dealt with the problem by reducing the settlement income paid to the others in the same stirp to reflect the fact that the tax was treated as having been paid out of a sum notionally attributed to that stirp. T asked the court (i) to retrospectively sanction, via a direction, its calculation of distributable income and its bringing of sums into hotchpot in an arithmetical manner and to condone a move from an arithmetical basis to a proportionate basis; (ii) to introduce powers of partition and appropriation into the settlement so as to permit the constitution of a sub-trust to avoid the adverse consequences of double taxation for some of X who lived in America and to ease conflicts of interest; (iii) to introduce a set of modern trust administration provisions.

Held

(1) At the present time, while there was no challenge by X to the arithmetical basis on which the hotchpot issue had been resolved, there was no reason not to direct that T were not required to revisit their historical approach. That approach had been prima facie within the bounds of reasonableness, fairness and T's powers. It had been adopted for years and had a respectable basis in authority. It was not, however, immune from scrutiny for all purposes and for all time. The trust was complex and it could not be ruled out that a beneficiary would require it to be revisited in future. Regarding the future calculations, in wishing to move from an arithmetical to a proportionate basis of calculation, T was seeking absolute discretion to determine how future inheritance tax impacted on the various beneficial interests under the settlement. The question of how such matters should be approached was probably a matter of mixed law, fact and discretion, and it would be wrong in principle to give T an absolute discretion to decide the point. T might be advised to act on the opinion of senior Chancery counsel when the point next arose, which would provide an opportunity to deal with the matter without suffering the cost of an application for directions. (2) Whether or not a power of appropriation could be vested in T depended on the remit of the Trustee Act 1925 s.57. An appropriation would undoubtedly be "expedient" within the meaning of that section for multiple reasons. It was however established legal authority that a power of appropriation could be conferred or exercised where the prime purpose was administrative and managerial and where any effect on the beneficial interests was incidental, Thomas, Re (1930) 1 Ch 194 Ch D, Chapman's Settlement Trusts, Re (1954) AC 429 HL, MEP v Rothschild Trust Cayman Ltd Unreported October 20, 2009 considered and Freeston followed. There was no inconsistency between Freeston and those other cases, but the position in Freeston, like the position in relation to the instant trusts, was different to the situation in the other cases: in Freeston and in the instant case it was undisputable that an apportionment would not merely divide out an otherwise undivided share, but it would alter the very nature of the beneficial interest. For that reason, an appropriation was regretfully outside the powers of s.57. The same result could be achieved by a variation of the trusts under the Variation of Trusts Act 1958. (Obiter) Had the power of appropriation been granted, the most advantageous outcome could be achieved if the sub-trust could be made to fall within the description in the Taxation of Chargeable Gains Act 1992 Sch.4ZA. In the instant case, the proposed advancements did not fall within s.32 of the 1925 Act because it related to an "interest" under the trust and such an interest was not "trust property" for the purposes of that section. (3) Additional powers were conferred on T under s.57 with the exception of a power entitling T to pay tax liabilities relating to the settlement trusts even though such liabilities were not enforceable against them.

Application granted