Case No. EWHC-1566-(Ch)

This is an application for a declaration that the deed of appointment made by the trustees of a settlement is void pursuant to the so-called Hastings-Bass principle, or alternatively for rectification of the deed. There is also in the alternative a claim for a determination of the true construction of the effect of the deed and the Settlement in the events which have happened.

The claimants are the two surviving trustees of a settlement made on 31 January 1992 by Ian Low (“the Settlement”). The third original trustee, Mr David Foster, is deceased. The defendants are the two children of the settlor and Angela Low, and they are the only “Primary Beneficiaries” under the Settlement. The first defendant, Matthew, was born on 14 September 1979; the second defendant, Katie, was born on 23 November 1981. There is a wider class of beneficiaries or potential beneficiaries, including any children of Matthew and Katie yet to be born. At the outset of these proceedings, I made an order that Matthew should for the purpose of these proceedings represent the wider class of beneficiaries.

The Settlement is in what I am told was at the time a common form of accumulation and maintenance settlement. It specifies a “trust period” which prima facie is 80 years from the settlement date, and a “closing date” which prima facie is 30 January 2017. The trustees have certain powers to appoint by deed a different date in each case but no such dates have been appointed.

Clause 4(a) of the Settlement sets out the primary trust of capital and income. The trustees are given an overriding power of appointment exercisable before the closing date among the class of beneficiaries (including the power to appoint discretionary trusts) subject to the following proviso:

Subject to and in default to the exercise of the power of appointment under clause 4(a), clause 4(b) provides that the Trust Fund shall be held upon trust for, taking it shortly, the Primary Beneficiaries, but this is subject to the provisions of clauses 5 and 6 that apply to the share or presumptive share in the Trust Fund of a Primary Beneficiary.

Clauses 5 and 6 declare default trusts for, respectively, Primary Beneficiaries under 25 and Primary Beneficiaries over 25. Clause 5 declares accumulation and maintenance trusts that apply while a Primary Beneficiary should be living under the age of 25 with express power by revocable or irrevocable deed to accelerate into possession his or her income entitlement. Clause 6 declares default trusts over the share of each Primary Beneficiary living and over the age of 25. Under clause 6(a), the Primary Beneficiary is entitled to the income of his or her share. Under clause 6(b), the trustees have power to pay or apply the capital of the share to or for the benefit of the Primary Beneficiary. Clause 6(g) contains a wide power of appointment over the share among the class of all the beneficiaries subject to a proviso:

The assets of the Settlement essentially comprise two farms in Essex: Lodge Farm of 267 acres, and Rouses Farm of 95 acres which was acquired by the Settlement in July 1999 at a price of £2,806 per acre. The planning use of the land at Rouses Farm was at that time agricultural. However, in May 2004 the local District Council identified some 27.35 acres of that land as part of its district housing provision, thus creating the possibility of very significant development value. By way of indication, on 20 October 2004, a professional valuation of the land as at that stage of the planning process was in the amount of £1.641 million (ie £60,000 per acre), although the valuers stated that if final planning permission were granted, the value could be very significantly higher.

On 1 September 2004, the three trustees executed a deed as supplemental to the Settlement (“the Deed”). The Deed is a short document and the essential provisions comprise two paragraphs:

At the time of the execution of the Deed, all the trustees appreciated the significant potential development value of the land within Rouses Farm, although the planning process at that stage had not been completed. But the entry into the Deed was prompted in particular by the imminence of Matthew’s 25^th birthday. That is clear from the witness statements of the two claimants and also Mr Foster’s note of a meeting held by the trustees together with their solicitors and the settlor and his wife on 14 July 2004. Mr Foster, who was an accountant and consultant with the firm of Scrutton Bland, advised that the trustees needed to make an appointment under the Settlement to Matthew and/or Katie before his 25^th birthday in order to create “interests in possession”. Mr Foster’s note records him explaining that this involved giving “one or both of the beneficiaries a right to the income of the Trust”. He recorded that it had earlier been hoped that Matthew’s birthday would provide an opportunity to end the Trust completely but that this could not now be done because of the potential for up to 35 acres [sic] of the land in Rouses Farm acquiring a significant value. Neither the trustees nor the settlor and his wife were comfortable with “suddenly appointing outright to Matthew and Katie what might be substantial sums of money”. It was for that reason, and also to secure what in Mr Foster’s view was the most favourable outcome in terms of capital gains tax (“CGT”), that it was decided to appoint entitlements equally to Matthew and Katie of all the trust income. Mr Foster’s note concluded:

It was on that basis that instructions were given on behalf of the trustees to their solicitors, Messrs Thompson Smith & Puxon, to prepare a draft deed. It appears that the form of draft that was produced was copied from a precedent book. Mr Foster expressed himself happy with the draft and the Deed was duly executed.

In about 2005, the trustees received advice that the grant of an “irrevocable” and unlimited appointment of the income to the beneficiaries is tantamount to an absolute appointment of capital. If that is so, the appointment constitutes for CGT purposes a deemed disposal of the whole trust fund. Given the potential hope value of the land in Rouses Farm as at the date of the Deed, this would give rise to a significant chargeable gain.

Moreover, the Deed had a further adverse tax consequence as regards Katie. Even if the Deed did not constitute the disposal of capital, any transfer of capital from the trust fund thereafter in favour of Katie would not qualify for holdover relief for the purpose of CGT. The availability of holdover relief as regards agricultural property is governed by the complex interaction of the provisions of the Taxation of Chargeable Gains Act 1992 (“TCGA”) and the Inheritance Tax Act 1984 (“IHTA”). In particular, by reason of section 165(1), (4) and (5) TCGA, the availability of relief in respect of agricultural property is governed by Schedule 7, para 1, which in turn makes the relief dependent upon whether or not, on an actual or deemed chargeable transfer for inheritance tax purposes, there would have been a reduction in the value of the property for the proposes of inheritance tax under sections 116-117 IHTA. A disposal or presumptive disposal of her one-half share of the trust fund to Katie would not qualify under those provisions because the conditions of section 117 IHTA are not satisfied in her case. However, the income appointed in favour of Katie, because she became entitled to it before 22 March 2006, will be treated for inheritance tax purposes as if she were absolutely beneficially entitled to her share. By contrast, a presumptive disposal to Matthew, if it were made after his 25^th birthday on 14 September 2004, would qualify for holdover relief.

Although it derives its name from a decision of the Court of Appeal in 1975, the principle was comprehensively analysed and articulated more recently by Lloyd LJ, siting as a judge of the High Court, in Sieff v Fox [2005] EWHC 1312 (Ch), [2005] 1 WLR 3811. He formulated the principle as follows (at [119]):

Applying that test, it is clear on the evidence before the court that the trustees, in deciding to execute the Deed, did not consider either that this might well constitute a disposal of capital because of the “irrevocable” terms in which it was expressed, or that it would have the effect of precluding a claim for holdover relief from CGT on any presumptive disposal of capital to Katie. Although Mr Foster is of course not able to give evidence, that emerges clearly from the witness statements of the claimants, who are the two surviving trustees. Moreover, the first claimant, Mr Jiggens, says in his witness statement that if he had been made aware of these potential effects of the Deed, and in particular the CGT consequences, then “I have no hesitation in saying that we would not have signed it”. He makes clear that he saw the Deed as setting up a temporary arrangement and that he did not intend to give the capital to the children at that time. The second claimant, Mr English, gives evidence in his witness statement to equivalent effect.

In my view, it is clear that the tax consequences are indeed very relevant matters and I have no reason to doubt the evidence of the surviving trustees that if they had not misunderstood the effect of the exercise of their power of appointment, they would have acted differently. Even adopting a stringent application of the test set out above, in my judgment the conditions which it prescribes are satisfied.

On that basis, the claimants invoke the Hastings-Bass principle to apply to the court for a declaration that the Deed is void. On behalf of the defendants, and the wider class of beneficiaries whom she represents, Ms Reed supports that application. A copy of the application has been served on HM Revenue and Customs, and by letter of 21 April 2010 they state that they do not wish to be joined in these proceedings. That letter also asks that the attention of the court, as regards the alternative claim for rectification, should be drawn to the decision of the Court of Appeal in Allnutt v Wilding [2007] EWCA Civ 412.

In these circumstances, I consider that the conditions of the Hastings-Bass principle are clearly satisfied in this case. For that purpose, I do not consider it necessary to determine whether on its true construction the wording of the Deed renders it an absolute appointment of capital. In my view, it is sufficient that there is a significant risk of that being the result, such that if advised accordingly the trustees would not have executed the Deed. Furthermore, the adverse effect on holdover relief as regards Katie is independent of that issue.

In Sieff v Fox, there is discussion, without any final decision, as to whether the effect of application of the principle is to render the act to which it applies void or voidable. However, in Re Futter, Norris J held that it rendered the transaction void, essentially because the basis of the rule lies in the law relating to the invalid exercise of a power by trustee and not the law relating to mistake. I respectfully agree, and in the present case there is no particular difficulty in holding that the Deed is void from the outset. Although Matthew has received the income of his half-share from the date of the Deed on 1 September 2004, he would have received that in any event from his 25^th birthday on 14 September 2004 pursuant to clause 6(a) of the Settlement. Katie would have been entitled to the income from her share from her 25^th birthday on 23 November 2006. And as regards the income which she was paid between 1 September 2004 and 23 November 2006, the trustees could have made those payments in any event pursuant to their power under clause 5(a)(i). Therefore, the difficulties about possibly having to seek repayment of sums paid out under a transaction being set aside that confronted Lightman J when applying the principle in Abacus Trust Co (Isle of Man) v Barr [2003] Ch 409 do not arise in the present case.

In the light of my finding as regards the application of the Hastings-Bass principle, the alternative claims for rectification of the Deed or a declaration of the effect of the Deed and the Settlement in the events which have happened accordingly do not arise. I would only note that the rectification claim, even if it were successful, while resolving the problem of a deemed disposal of capital by reason of inclusion of the “irrevocable” term in the Deed, would not address the additional adverse consequence of the preclusion of holdover relief as regards Katie.

In conclusion, therefore, I declare that the Deed is void.