A & Ors v D & Ors, Court of Appeal - Chancery Division, September 12, 2017, [2017] EWHC 2222 (Ch)

Issuing Organization:Chancery Division
Actores:A & Ors v D & Ors
Resolution Date:September 12, 2017
 
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Case No: HC-2017-000781

Neutral Citation Number: [2017] EWHC 2222 (Ch)

IN THE HIGH COURT OF JUSTICE

CHANCERY DIVISION

Royal Courts of Justice

Strand, London, WC2A 2LL

Date: 12/09/2017

Before :

CHIEF MASTER MARSH

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Between :

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Giles Goodfellow QC (instructed by Clyde & Co LLP) for the Claimants

Edward Waldegrave (instructed by Fladgate LLP) for the First Defendants

Oliver Conolly (instructed by Fladgate LLP) for the Second Defendant

Hearing dates: 12 June and 28 July 2017

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JudgmentChief Master Marsh:

  1. By a claim form issued on the 21 April 2017, the claimants seek relief in connection with two settlements dated respectively 21st of March 2000 and 7 December 2004. On 19 April 2017 Deputy Master Pickering made an order directing that privacy restrictions should be put in place with immediate effect anonymising the identity of the parties to the claim and putting in place reporting restrictions. As a consequence, this judgement will refer to the parties using the convention that is set out in the heading with the claimants referred to as A, B, and C, the first defendants referred to as D, E, F and the second defendant referred to as G.

  2. A and B are the current trustees of the settlement dated 21 March 2000 (``the Childrens' Trust''). They are, with C, the current trustees of the settlement dated 7 December 2004 (``the M Trust''). I will refer to them together as the Settlements. A was the settlor of the Settlements. D, E and F are his three children. The three children are minors and their mother is their litigation friend. G is joined as a person appointed to represent a class of unborn beneficiaries who may have an interest in the outcome of this litigation. Giles Goodfellow QC appeared at the hearing for the trustees. Edward Waldegrave, instructed by their litigation friend, appeared for the minor children. Oliver Conolly appeared for the unborn children of A. I am grateful to counsel for their assistance and would only add that, although it may not strictly have been necessary for the unborn children to be represented, it was helpful to the court on the hearing of an application, which would otherwise have been unopposed, to receive submissions from their perspective.

  3. The claimants seek relief from the court in the alternative. Their initial claim is by way of construction of the deeds of appointment executed in relation to the Settlements on 10 March 2008 (``the Deeds of Appointment''). In the alternative, the claimants seek an order for the rectification of the Deeds of Appointment on the basis that they failed to implement the intention of the trustees at the time that they were executed. At the material time, the Childrens' Trust held assets with a value of approximately £2.5 million and the M Trust held assets with a value of approximately £16 million.

  4. The only other point of note by way of introduction is that the third trustee of the M Trust, C, is a solicitor. The firm in which he was a partner in 2008, Fladgate LLP, drafted both Deeds of Appointment and he was involved in the drafting process. It follows that in relation to the M Trust he had a dual role as a trustee and a lawyer implementing the trustees' instructions whereas in relation to the Childrens' Trust he only had the latter role.

    Background to the Deeds of Appointment

  5. The Settlements were drafted to qualify as accumulation and maintenance trusts (``A&M Trusts'') within the requirements of s.71 of the Inheritance Tax Act 1984 (``IHTA''), as they were at the dates of execution.

  6. Leaving aside differences of terminology, the provisions of the Childrens' Trust and the M Trust were broadly in the same form. A's children were the principal beneficiaries in each case. (The defined term for the class of beneficiaries is different in each case but I will use ``principal'' as a convenient shorthand). At the date of execution of the Childrens' Trust, only D had been born. By the date of execution of the M Trust, E and F had also been born. The class of principal beneficiaries included any children of the settlor who were born before the trusts closed.

  7. For the purposes of this judgment it is unnecessary to set out the terms of the Settlements in any detail. If suffices to record that they both made provision for the principal beneficiaries to acquire an interest in possession in a share of the trust fund at the age of 25. Each of the principal beneficiaries would become entitled to a life interest in the relevant trust fund contingent on attaining the age of 25. If there were more than one beneficiary, and in default of the trustees exercising a power to vary the presumptive shares, they would benefit equally.

  8. The Settlements, prior to the introduction of the Finance Act 2006 (``FA 2006''), operated under the then tax regime for the purposes of inheritance tax (IHT) in the following way:

    i. Until a principal beneficiary obtained an interest in possession in his or her share of the trust fund, that share would not form part of any individual's estate for IHT and would not be subject to the ``relevant property'' regime, which normally applied to settled property which did not form part of a person's estate. Under the relevant property regime, settled property would be subject to an IHT charge at rates of up to 6% on every tenth anniversary of the settlement - known as the periodic or 10 yearly charge - and to exit charges.

    ii. On obtaining an interest in possession in a share of the trust fund, the capital value of that share would be deemed to be part of the principal beneficiary's estate for IHT purposes. There would be no exit charges as a result of the property ceasing to be held upon non-interest in possession trusts.

  9. The A&M regime was the preferred means of holding assets on trust for beneficiaries up to the age of 25 and beyond prior to the FA 2006 because of the benign tax regime that was applicable.

  10. The budget announcement in March 2006 stated that the special IHT treatment of A&M Trusts would cease to apply after 6 April 2008. This created a period of considerable uncertainty during which the trustees considered the options that were open to them. If no change was made to the trusts prior to 6 April 2008, the settled property would become relevant property and remain relevant property until such time as one or more of the beneficiaries became absolutely entitled to it. During this period the settled property would be subject to IHT charges on each 10th anniversary of the Settlements and subject to exit charges on a beneficiary becoming absolutely entitled - (Sections 64 and 65 IHTA). For the purposes of the rectification claim it will be necessary to consider in some detail the course of the trustees' deliberations, the advice they received and the manner in which the Deeds of Appointment were prepared and executed.

  11. FA 2006 introduced two new privileged settlements which provided some relief for A&M Trusts:

    i. Conversion into a new A&M Trust. This required one or more beneficiaries to become absolutely entitled to the trust property on or before their 18th birthday.

    ii. Conversion into an 18 to 25 Trust in accordance with the requirements of s.71D(3) to (7) of IHTA as amended by FA 2006. If those requirements were met, the settled property would not be relevant property after 5 April 2008 and a special exit rate would be applicable when s.71D ceased to apply.

  12. Alternatively, the trustees could appoint the settled property upon bare trusts for the beneficiaries. This would have the effect of each beneficiary immediately acquiring an absolute equitable interest in the income and capital of his or her share but each beneficiary would not be entitled to call for a transfer of property until the age of 18. The intended effect was that the appointed property would cease to be settled property and therefore be outside the relevant property regime for IHT purposes. But it was subject to the obvious limitation that the beneficiary's right to control and dispose of the beneficial interest could not be deferred after he or she had attained the age of 18.

  13. To put the Trustees deliberations into their relevant context, as at 6 April 2008 A's three children would have been aged 8, 6 and 4 respectively.

    Section 71D IHTA

  14. The Settlements fell within the initial threshold criterion under s.71D(1) because under both settlements property was held on trust for the benefit of persons who had not obtained the age of 25.

  15. The remainder of s.71D, so far as is relevant, provides that:

    ``(3) Subsection (4) has effect where -

    (a) at any time on or after 22nd March 2006 but before 6th April 2008 ... any property ceases to be property to which section 71 above applies without ceasing to be settled property, and

    (b) immediately after the property ceases to be property to which section 71 above applies -

    (i) it is held on trusts for the benefit of a person who has not yet attained the age of 25, and

    (ii) the trusts secure that the conditions in subsection (6) below are met.

    (4) From the time when the property ceases to be property to which section 71 above applies, but subject to subsection (5) below, this section applies to the property (if it would not apply to the property by virtue of subsection (1) above) for so long as -

    (a) the property continues to be settled property held on trusts such as are mentioned in subsection (3)(b)(i) above, and

    (b) the trusts continue to secure that the conditions in subsection (6) below are met.

    ...

    (6) Those conditions are -

    (a) that the person mentioned in subsection (1) (a) or (3)(b)(i) above (``B''), if he has not done so before attaining the age of 25, will on attaining that age become absolutely entitled to -

    (i) the settled property,

    (ii) any income arising from it, and

    (iii) any income that has arisen from the property held on the trusts for his benefit and been accumulated before that time,...

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