Neutral Citation Number: [2011] EWCA Civ 810
Case No: A3/2010/2608/CHANF
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM The High Court of Justice Chancery Division
Mr Justice Vos
[2010] EWHC 2900 (Ch)
Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 14/07/2011
Before :

THE CHANCELLOR OF THE HIGH COURT
LADY JUSTICE HALLETT
and
LORD JUSTICE AIKENS
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Between :

	BARCLAYS BANK TRUST COMPANY LIMITED AS TRUSTEES OF THE CONSTANCE MARY POPPLESTON WILL TRUST & ANR	Appellants	
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	THE COMMISSIONERS FOR HM REVENUE AND CUSTOMS	Respondents	

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Mr Stephen Arthur (instructed by Addleshaw Goddard LLP) for the Appellants
Mr Matthew Slater (instructed by HMRC Solicitor's Office) for the Respondents

Hearing date: 28 June 2011
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Judgment

The Chancellor: 
Introduction

1.	The issue on this appeal from the order of Vos J made on 15th October 2010 is whether s.89(1) Inheritance Tax Act 1984 applies to the residuary estates of the late Constance and William Poppleston now held by the appellant (“the Bank”) as the sole trustee of their wills both dated 4th June 1990 on the trusts declared by clauses 7 and 8 thereof.  If, as Vos J considered, it does then their son, Edwin, is to be treated as having been beneficially entitled to an interest in the property comprised therein.  If it does not then the respondent HMRC are liable to repay to the trustee £158,963 with interest.

2.	S.89 provides, so far as material, as follows:
89.—(1) This section applies to settled property transferred into settlement after 9th March 1981 and held on trusts -
(a) under which, during the life of a disabled person, no interest in possession in the settled property subsists, and
(b) which secure that not less than half of the settled property which is applied during his life is applied for his benefit.
(2) For the purposes of this Act the person mentioned in subsection (1) above shall be treated as beneficially entitled to an interest in possession in the settled property.

3.	Constance and William Poppleston had one child, a son Edwin who was born in 1948.  In about 1963 the retina in each of his eyes became detached.   At all material times thereafter he was a disabled person within the meaning of that expression contained in s.89(4).

4.	On 4th June 1990 both Constance and William Poppleston made their wills.  Each of them appointed the Bank to be sole executor and trustee.  Each made bequests with which the appeal is not concerned.   So far as relevant to this appeal each provided for his or her residuary estate to be held by the Bank on the usual trusts for sale and conversion and for the surviving spouse to enjoy the income thereof for his or her life.  In clause 7(iii) the will of each continued as follows:
“(iii) From and after the death of my said [husband/wife] the Trust Company shall hold the residuary trust fund (or so much thereof as shall not have been paid or applied pursuant to any trust or power affecting the same) upon trust as follows:  
(a) Upon trust to pay or apply the whole or such part (if any) as the Trust Company may think fit of the income thereof and/or the whole or such part (if any) as the Trust Company may think fit of the capital thereof to or for the benefit of my said son EDWIN GEORGE POPPLESTON (hereinafter called 'the Beneficiary') during his life with power to pay such income or capital or any part thereof to any person hospital or organisation for the time being having the care of the Beneficiary without seeing to the application thereof.  
(b) The Trust Company shall accumulate any surplus income of the residuary trust fund at compound interest by investing the same and the resulting income thereof in any of the investments hereby authorised during the period of Twenty one years from my death if the Beneficiary shall so long live but the Trust Company shall have power at any time or times to apply such accumulations as if the same were income of the then current year.  
(c) After the expiration of the said period of Twenty one years during the remainder of the life of the Beneficiary the Trust Company shall pay or apply any income of the residuary trust fund not paid or applied to or for the benefit of the Beneficiary to the persons or for the purposes to or for which the same would be payable or applicable if the beneficiary were dead. 
(d) Subject as aforesaid I DIRECT that after the death of the survivor of myself my said husband and the Beneficiary the Trust Company shall stand possessed of the residuary trust fund (or so much thereof as shall not have been paid or applied pursuant to any trust or power affecting the same) and the future income thereof and all accumulations (if any) of income thereof respectively Upon trust for ALL or ANY the CHILD or CHILDREN of my said son EDWIN GEORGE POPPLESTON who shall be living at the death of the last survivor of myself my said husband and my said son and shall attain or shall have attained the age of Twenty one years and if more than one equally between them. 
(e) If no children of my said son EDWIN GEORGE POPPLESTON shall be living at the death of such last survivor and attain the age of Twenty one years then I DIRECT that subject as aforesaid the Trust Company shall stand possessed of the residuary trust fund (or so much thereof as aforesaid) and the future income thereof and all accumulations (if any) of income thereof respectively upon trust for such of the CHILDREN of my said nieces Cecilia Ruth Stone Margaret Aileen Smart and Mary Christine Melarkey as shall be living at the death of such last survivor and shall attain or shall have attained the age of Twenty five years and if more than one in equal shares per capita."  

5.	Clause 8 contained a number of supplemental provisions for the purpose of each will.  Those contained in sub-clause (v) and (viii) are relevant to this appeal.  They are in the following form:
“(v) Sections 31 (relating to maintenance and accumulation) and 32 (relating to advancement) of the Trustee Act 1925 shall apply hereto with the following variations:  ... 
(b) Section 32 shall have effect as if the words 'one half of' were omitted from proviso (a) to sub-section (1) thereof."  
…
“(viii) No power or provision herein contained shall be capable of being exercised or operating in any manner such that (if the same were capable of being so exercised or operating) the existence of such power or provision would either:  
(a) prevent any person who would (in the absence of such power or provisions) have had an interest in possession (within the meaning of the Inheritance Tax Act 1984) in any fund or part or share of a fund from having such an interest in possession as aforesaid or 
(b) prevent Section 71 of the Inheritance Tax Act 1984 from applying to any trust to which (in the absence of such power or provision) the said Section would have applied.”  

6.	Constance died on 28th November 1990 and William on 8th December 1992.  Probate of their respective wills was duly granted to the Bank out of the Manchester District Probate Registry on 21st February 1991 and 7th April 1993.  At the dates they made their respective wills and of their deaths they had six nephews and nieces and seven great nephews and great nieces.  Edwin died on 23rd July 2005 without having married or had issue.

7.	On 17th December 2008 HMRC determined under s.221 that, having regard to ss.5, 49 and 89 the residuary estates of both Constance and William formed part of Edwin’s estate because s.89 required Edwin to be treated as if he had had an interest in possession in each of them.  It was and is common ground that the terms of clause 7(iii)(a) precluded Edwin from having an interest in possession as that term is defined in ss.5 and 49.  The Bank appealed to the High Court under s.222(3)(a).  It contended that the condition imposed by s.89(1)(b) that the trusts on which the residuary estates of Constance and William Poppleston were held by the Bank should secure that not less than half of the settled property applied during the life of Edwin should be applied for his benefit were not satisfied because:
(1) clause 7(iii)(a) permitted the payment of income or capital to any person, hospital or organisation having his care;
(2) clause 7(iii)(b) permitted income arising in Edwin’s lifetime to be accumulated and then paid to his children or the nephews and nieces after the 21 year accumulation period had expired; and
(3) clause 8(v)(b) permitted the whole of the capital of the residuary estates to be advanced to any child of Edwin or, if none, the nephews and nieces.

8.	The Bank’s appeal was dismissed by Vos J on 15th October 2010.  In summary he concluded that payments under clause 7(iii)(a) had to be for the benefit of Edwin even if paid to the person, hospital or organisation having his care, clause 7(iii)(b) only permitted payment of such accumulations to Edwin and that clause 8(viii)(a) prevented the exercise of the power of advancement so as to exclude the application of s.89.  The Bank now appeals to this court on each of those three grounds with the permission of Lloyd LJ.  In its appellant’s notice it included a fourth ground to the effect that as Edwin had been free in his lifetime to assign his interest to another it could not be said that the trusts ‘secured’ that at least half the settled property which was applied in his lifetime was applied for Edwin’s benefit.  Lloyd LJ adjourned the question whether permission to appeal should be given on that ground to the court hearing the appeal.  I will deal with those four issues in that order.

Clause 7(iii)(a)

9.	The submission for the Bank is that the power included at the end of clause 7(iii)(a) “to pay such income or capital…to any person hospital or organisation for the time being having the care of” Edwin, if exercised, permits income or capital to be applied in payment to any such person, hospital or organisation otherwise than for the benefit of Edwin.     If that submission were well made it would mean that to that extent s.89(1)(b) is not satisfied and the determination of HMRC would be wrong in law.

10.	The submission was rejected by Vos J in paragraph 23 of his judgment.  He said:
“The word "benefit" in section 89(1)(b) is a wide word:  see re Halstead's Will Trust [1937] 2 All ER 570 per Farwell J., and Viscount Radcliffe at p.627 in Pilkington v. IRC [1962] 3 All ER 622.  It seems to me relatively clear that these words in clause 7(iii)(a) of the Will Trusts are not intended to allow the trustees to buy equipment or make gifts to hospitals or institutions that happen to be caring for Edwin.  Rather, the words, read sensibly in their context, must mean that what is envisaged is that the hospitals or institutions caring for Edwin can be paid directly by the trustee for his care if that is a more administratively convenient course.”

11.	Counsel for the Bank submits that the judge was wrong.  He points out that the clause exonerates the Bank from any obligation to see to the proper application of any money paid to any such person, hospital or organisation.  He submits that there is nothing in the wills to preclude the Bank as the sole trustee from paying money to a hospital in which Edwin was confined for the time being with which to carry out medical research or to provide for equipment unconnected with Edwin’s disability or need.

12.	I do not accept those submissions.  The power to pay income or capital to any person, hospital or organisation caring for Edwin is an addition to the trust for “the benefit of my son Edwin” in the sense of providing an additional means of applying such property for Edwin’s benefit.  In such a context the trust colours the purpose of the power.  I agree with Vos J that in context the power can only be exercised for the benefit of Edwin.  In addition it has not been suggested that the word “benefit” in clause 7(iii)(a) has any different meaning in the context of s.89(1)(b).  It follows that the power in clause 7(iii)(a) does not prevent the application of s.89(1)(b).

Clause 7(iii)(b)

13.	The accumulation of income for which this clause provides is not an application of settled property for the purpose of s.89(1)(b).  But a payment after the expiration of the 21 year accumulation period of the previously accumulated income to either Edwin’s children or the children of the named nieces under clauses 7(iii)(d) or (e) would constitute its application.  HMRC contended that the power to apply previously accumulated income contained in clause 7(iii)(b) could only be exercised in favour of Edwin under clause 7(iii)(a).  This was disputed by counsel for the Bank.

14.	The judge agreed with counsel for HMRC.  In paragraphs 30 to 32 he said:
“30. Returning then to the proper meaning of the power in clause 7(iii)(b), it seems to me that the clause is only contemplating distribution of the accumulated income to Edwin in accordance with the governing clause 7(iii)(a) and is not contemplating that income accumulated during the first 21 years could be distributed in years 22 and beyond to other beneficiaries in the way that the unaccumulated income of those subsequent years is to be distributed under clause 7(iii)(c).  
31. This result requires a purposive construction, but one that is necessary, in my judgment, to give effect to the obvious intention of the Will Trusts, which was for the primary benefit of Edwin.  Whilst ingenious, [counsel for the Bank]'s construction would deprive the Will Trusts of their obviously intended effects.  The power in clause 7(iii)(b) must be referring backwards to clause 7(iii)(a) rather than forwards to clause 7(iii)(c) in years 22 and following.  The words "as if the same were income of the then current year" must therefore be read as referring to clause 7(iii)(a) only.  
32. I am fortified in this result by a consideration of the likely intentions of the testatrix and the testator.  I think it unlikely that they would have intended to provide for Edwin in such a way as allowed a 10-yearly charge to inheritance tax to depreciate that provision.  It is far more likely that they would have preferred to take the larger hit of a charge to IHT upon Edwin's death since they plainly had a greater concern for the care of their son than for the gifts over to nieces and nephews.  Thus, as it seems to me, subject to the next issue concerning advancement, the Will Trusts do indeed secure that more than half of "the settled property which is being applied during [Edwin's] life is applied for his benefit" within section 89(1)(b).”

15.	Counsel for the Bank submits that the judge was wrong.   He suggests that there is no scope for a purposive interpretation of the Will and no evidence at all that the draftsman or the testator or testatrix sought to ensure that s.89 applied.  He fastens on the use of the word “but” and contends that, in accordance with its normal use as an adversative conjunction, it introduces some contrast with what went before.   The contrast, he submits, is between the accumulation in one of the first 21 years and the application of such accumulated income in one of the following years as income of that year.  

16.	I agree with counsel to this extent that caution is required in construing wills, such as these, which are intended to be effective over three generations in imputing a purpose over and above what the words used, in the light of the surrounding circumstances, fairly reflect.  Clause 8(viii) shows that the draftsman/testator was concerned for inheritance tax consequences of the dispositions made in the wills.   For the reasons given in paragraphs 22 to 24 below, in my view, those consequences included the application of s.89.  

17.	Clause 7(iii)(b) is self-contained.  It is limited to the period of 21 years from the death of the testator/testatrix.  In its context the power to apply accumulated income as though it were income of the current year is limited to the same period.  The contrast introduced by the word ‘but’ is between accumulation and application, not the first 21 years and later years.  Nor would there be any need to have such a power in later years.  The accumulated income would be capital of the trust.  It could be paid to Edwin, if still alive under clause 7(iii)(a), or if dead to his children under clause 7(iii)(d) or the children of the nieces under clause 7(iii)(e).   Accordingly, I do not accept the submission of counsel for the Bank that the judge was wrong on the effect of the power to apply past accumulations of income.

Clause 8(v)(b)

18.	This provision removes the restriction contained in s.32 Trustee Act 1925 on the exercise of the power of advancement therein contained to one half of the trust fund.   The modifications contained in clause 8(v) of both s.31 and s.32 are conventional, but the effect of the modification of s. 32 is that s.89(1)(b) cannot be satisfied because if that power were exercised in full during the lifetime of Edwin no capital of the settled property could be applied for the benefit of Edwin.  That possibility means that the trusts on which the Bank holds the property do not ‘secure’ that not less than half the capital is applied for Edwin in his lifetime.

19.	Counsel for HMRC submitted that this problem is overcome by clause 8(viii) precluding any such exercise of the power of advancement.  The Bank contended that it did not apply to the extended power of advancement.  The judge accepted the submission for HMRC.  In paragraph 36 of his judgment he said:
“Again, in my judgment, Barclays' argument proves too much and would, if correct, destroy the clear purpose of the Will Trusts.  It is true that clauses 8(v)(b) and 8(viii)(a) do not operate seamlessly, but the intention of the draftsman is sufficiently clear, in my opinion, from the words that he used.  The extended power of advancement had a useful purpose, as I have illustrated, but it was indeed expressly overridden by clause 8(viii)(a) insofar as the trustees sought to exercise it to prevent Edwin, who would otherwise have been treated as having an interest in possession under section 89(2), from having such an interest.  This construction does not deprive clause 8(v)(b) of all its effect but allows the two clauses to co-exist whilst still giving effect to the overwhelming purpose of the Will Trusts, namely to provide for the care of Edwin in his remaining years.”

20.	Counsel for the Bank submits that the judge was wrong.  He contends that clause 8(viii)(a) cannot apply because, absent the power of advancement, Edwin would not “have had an interest in possession (within the meaning of the Inheritance Tax Act 1984)” anyway.  He points out that s.89(2), if applicable, only requires the disabled person to be “treated” as beneficially entitled to an interest in possession.   He contends that clause 8(viii) does not include any such deemed interest in possession.  He suggests that such a construction avoids an apparently unavoidable contradiction between clause 8(v)(b) and 8(viii)(a).

21.	It is common ground that Edwin did not have an interest in possession in either of the Will Trusts, not because of the existence of the modified power of advancement but because of the trusts contained in clause 7(iii)(a) and (b).  No one has suggested that either of them is “a power or provision” to which Clause 8(viii) applies.   So clause 8(viii) can only apply to the extended power of advancement if the reference therein to “an interest in possession (within the meaning of the Inheritance Tax Act 1984)” includes a reference to an interest in possession a person is to be treated as having had by s.89(2).  It is clear from paragraph 36 of the judgment of Vos J that he considered that it did.

22.	In my view he was right to do so.   The inheritance tax treatment of settlements with an interest in possession is different from the treatment of settlements where there is no such interest.   In very general terms, in the case of the former the person so entitled is treated as being beneficially entitled to the property in which the interest subsists.  Inheritance tax is charged on any transfers of value of such property including the termination of that limited interest.  In the case of the latter, tax is charged every ten years on a percentage of value of the settled property.  It is evident that the purpose of s.89 is to include in the former category settlements for the benefit of disabled persons which, because of their disability, conferred on them something less than full interests in possession.  In the latter case the disabled person is to be ‘treated’ as having an interest in possession so as to fall into the former category when, by definition, he did not.  Such treatment avoids any depletion of the trust property in his life by the imposition of the periodic charge.

23.	It is clear from the terms of clause 8(viii) as a whole that the draftsman of the will was concerned with the inheritance tax consequences of the dispositions made by the wills.   He was evidently aware of the different inheritance tax treatment of those settlements where there is an interest in possession and those where there is not.  He was also aware (clause 8(viii)(b)) of the special treatment of accumulation and maintenance settlements where, by definition, no interest in possession subsists.  It would be capricious not, also, to attribute to him knowledge of the terms of s.89, particularly as the will was intended to make provision for a person known to be disabled.

24.	In my view, given all those surrounding circumstances, the expression “an interest in possession (within the meaning of the Inheritance Tax Act 1984)” used in clause 8(viii)(a) must be read as including an interest in possession a person is treated as having had by s.89.  So read, the exercise of the unlimited power of advancement in favour of either the children of Edwin or of the named nephews and nieces during Edwin’s lifetime is prevented by clause 8(viii).  It follows, as the judge thought, that that clause does ensure that both will trusts satisfy the condition specified in s.89(1(b).   For these reasons I would reject this part of the Bank’s appeal also.

Assignment

25.	This point was not raised before the judge and permission to appeal has not been given in respect of it.  Nevertheless we invited counsel for the Bank to advance his argument on the merit of the point, not merely whether permission to appeal should be given.

26.	Counsel for the Bank points out, correctly, that unlike a conventional protective trust there is no provision restricting Edwin from disposing of such interest as he has.  He submits, again correctly, that if he did so then no income of the settled property could be applied for his benefit.  Counsel for the Bank suggests that the consequence must be that s.89 does not apply to either will trust.

27.	I do not agree.  S.89(4), (5) and (6) each demonstrate that the time at which the conditions for the application of s.89 must be satisfied is “when the property was transferred into the settlement”.  At that time the trusts on which the property was held did “secure” that not less than half the settled property applied during his life was applied for the benefit of Edwin.  The fact that at some later time Edwin disposed of his interest so that thereafter property could not be applied for his benefit is nothing to the point.  As Edwin will then be treated as though he did have an interest in possession at the time he made the disposal inheritance tax would then be payable in respect of that disposition on that basis.   In my view permission to appeal in respect of this point should be refused.

Conclusion

28.	For all these reasons I would dismiss this appeal.
Lady Justice Hallett
29.	I have had the opportunity to read the judgments of both the Chancellor and Aikens LJ in draft. I agree that the appeal should be dismissed for the reasons given by the Chancellor. I did at one stage share the concern expressed by Aikens LJ in paragraph 33, but I too was persuaded by the force of the Chancellor’s observations. 
Lord Justice Aikens
30.	I agree with all that the Chancellor has said in relation to the arguments raised on behalf of the Bank on clauses 7(iii)(a) and (b) of the wills and the “assignment” point.   
31.	I have had rather more doubts about the argument concerning clause 8(v)(b) and clause 8(viii)(a) of the wills.  Section 32(1)(a) of the Trustee Act 1925 limits the application of the power of advancement to one half of the trust property concerned.   But the effect of that provision has been altered by clause 8(v)(b) of the wills.   I agree with the Chancellor that the effect of clause 8(v)(b) is that it grants to the Bank the power to use the whole of the capital of the settled property during the lifetime of Edwin for the advancement of the other beneficiaries,  although that would require the consent of Edwin as the life tenant: see s.32(1)(c) of the Trustee Act 1925.   I also agree that the effect of clause 8(v)(b) is that the trusts on which the Bank holds the settled property would not “secure” that not less than half of the settled property is applied for Edwin in his lifetime.   Therefore, without any further provision in the wills, the requirement of s.89(1)(b) would not be fulfilled.  Thus Edwin could not be treated as “beneficially entitled to an interest in possession in the settled property” within s.89(2).   
32.	The Bank and HMRC agree that Edwin does not, in fact, have any interest in possession in the settled property, because of the terms of clause 7(iii)(a) and (b) of the wills.     But, (given our conclusions on the Bank’s other arguments) if there had been no clause 8(v)(b) then Edwin would be “treated as having an interest in possession of the settled property”  within s.89(2) because the requirements of section 89(1) would be fulfilled.  Edwin was disabled;  he had no interest in possession in the settled property;  and the terms of the trust set out in clause 7(iii)(a) of the wills would secure that no less than half of the settled property which is to be applied during Edwin’s lifetime is to be applied for his benefit.    
33.	Therefore, given the effect of clause 8(v)(b),  clause 8(viii)(a) of the wills is only effective to bring the residuary trusts in the two wills back within s.89(2) if it is construed so as to limit the exercise or operation of a power or provision of the wills, viz.  that contained in clause 8(v)(b), which would,  if not so limited, prevent Edwin being “treated as having an interest in possession (within the meaning of the Inheritance Tax Act 1984)”.    At first blush it might be said that if the draftsman of clause 8(viii)(a) had s.89 specifically in mind,  he would have used phraseology such as “...prevent any person who would in the absence of such power or provisions have had or be treated as having an interest in possession (within the meaning of the Inheritance Tax Act 1984)…” and that, in the absence of such specific wording,  clause 8(viii)(a) cannot prevent clause 8(v)(b) from having the effect that the requirement of s.89(1)(b)  is not fulfilled.
34.	Ultimately, however, I am persuaded that clause 8(viii)(a) must be construed so as to embrace “….be treated as having  an interest in possession (within the meaning of the Inheritance Tax Act 1984)”.    The only reason to refer to “an interest in possession (within the meaning of the Inheritance Tax Act 1984)” in clause 8(viii)(a) must have been to ensure that nothing in the powers or provisions of the wills would prevent the s.89(1) requirements from being fulfilled in Edwin’s case,  so as to enable the more favourable inheritance tax regime to operate to ensure that the settled property was not depleted by periodic charges during Edwin’s lifetime.   Moreover, if clause 8(viii)(a) is construed in this way it does not deprive clause 8(v)(b) of all content because that clause could still be used,  after Edwin’s death, in relation to Edwin’s children (if any) or any of the other beneficiaries who would not come within s.89.
35.	Therefore, for these reasons, which are similar to those expressed by the Chancellor (with all of which I concur), I agree that this appeal must be dismissed.