England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		11/12/2009

Mr Justice Mann :

Introduction

1. This is an application by trustees for directions, authorisations and extra powers under the Trusts of an inter vivos settlement dated 4^th November 1940 ("the England Settlement" or "the Settlement"). The trustees seek the blessing of the court in relation to the manner in which they have historically attributed certain tax liabilities ("the Hotchpot issue"); they seek the introduction of powers of partition and appropriation, primarily so as to permit the constitution of a sub-trust to avoid the adverse consequences of double taxation, but also so as to facilitate the administration of the trust by easing conflicts of interest in relation to investments and the effects of capital payments of tax; and they seek the introduction of a set of modern trust administration provisions.

The Settlement and current beneficiaries

2. The Settlement was created by four brothers – Charles, William, Harry and Frank England. As drafted it provided for the following:

(i) On the death of the last surviving issue of the 4 brothers living at the date of the settlement, the fund was to be divided between the issue of the brothers in the proportions per stirpes 50%, 20%, 15% and 15% respectively.

(ii) Until that death, the income was to be paid equally to the brothers until their deaths, and thereafter (subject to powers of appointment that do not matter for present purposes) the equal shares were to be paid to their children in equal shares per stirpes, with successive generations taking if prior generations failed.

(iii) There were cross-accruer provisions within each stirps, and in favour of the other stirpes if any stirps failed.

3. On 1^st December 1949 a Deed of Rectification was entered into which recited that it had been intended that the entitlement to income should be in unequal shares, and had the effect that thereafter the income was distributed in the 50/20/15/15 shares applicable to the division of capital. That has been the basis of the distribution of income ever since.
4. Harry had no children. Charles had two children, one of them (Mrs Southgate) is still alive. William had two children, one of whom (Mrs Worster) is still alive; and Frank had one daughter (now Mrs Jones) who is also still alive. They have life interests in the income of the fund; two of them are 80 and one is 77. Together with certain grandchildren of the settlors, they are entitled under the settlement to the income of the fund for their lives, each of them benefiting from the fact that Harry had no children so that their current portions of income are greater than the portions taken by their respective parents. These three ladies are the three surviving descendants living at the date of the Settlement, so it is on the death of the last of them to die that the capital distribution will take place.
5. Some of the income beneficiaries have assigned their interests either to a reversionary company (Lancashire & Yorkshire Reversionary Interest Company Limited) or, in the case of Mrs Southgate, to Southgate Investments LLC. The details of that do not matter, but those two companies are thereby income beneficiaries under the Trust. The end result of this is that the current income entitlements are as follows:

i) 29.41% to Jane England and Michael John England (grandchildren of Charles, taken through their father John);

ii) 29.41% to Southgate Investments LLC;

iii) 8.825% to Mrs Jones;

iv) 11.765% to Mrs Worster;

v) 20.59% to the reversionary company referred to above.

6. In the application before me, Mrs Shân Warnock-Smith QC appeared for the trustees and sought a representation order to represent all unborn issue of any of the four brothers, Mr Christopher McCall QC represented Mrs Southgate, Southgate Investments LLC and those taking after her in respect of that share of Charles' stirps; and Miss Barbara Rich represented (in essence) the other beneficiaries and the Lancashire & Yorkshire Revisionary Interest Company Limited.

The perceived problems in the trust

7. The nature of the trusts is such that the beneficiaries in each stirps do not have a share in the income of a specified part of the fund. Instead, they have a specified share in the income of the whole of the fund. They are therefore "Freeston" trusts, named after re Freeston's Charity [1978] 1 WLR 741 where Goff LJ observed (at page 751):

"It is manifest that an interest in half the income of an undivided fund is quite different from the whole income of a divided half of that fund."

The parties to this litigation accept the view which the trustees have hitherto adopted, which is that the present trusts fall into the former of those categories (proportionate shares of the income of an undivided fund). There are one or two provisions of the Settlement which might be thought to be inconsistent with that, but the overall tenor of the Settlement is to that effect. There is no dispute about that, and having seen the Settlement I agree that that is the correct view of its effect. I shall therefore not set out the wording of the relevant parts of the Settlement in order to make that good.

8. This has led to problems in determining the incidence of tax when there have been deaths of those with life interests. Those deaths have generated liabilities to estate duty and capital transfer tax. The actual liability was relatively simple to calculate – it was on a part of the fund corresponding to the income proportion of that beneficiary. The trustees paid the tax accordingly (or are still paying it by instalments). However, its incidence is another matter. The trustees took the view that the beneficiaries should not simply continue to receive their previous proportions of the income without adjustment. Instead, they sought to apply a mechanism which attributed the payment to the relevant stirps of the deceased and adjusted income receipts accordingly. They did this by treating the tax paid as if it were an advance to the ultimate beneficiaries of that stirps and treating the beneficiaries under that stirps as if they had received income equivalent of interest on that tax and bringing it into hotchpot. Put simply (or as simply as such a complex matter can be put), the trustees calculated interest at a rate of 4%, carried out certain adjustments for notional tax, and added that to the income actually available for distribution. The appropriate shares of income were applied to that aggregated sum, and the relevant beneficiaries were treated as having already been paid the notional interest (as adjusted) before receiving the balance. Thus from the death of one life tenant, the others in that stirps had their actual income from the Settlement reduced to reflect the fact that the tax was treated as being paid out of a sum notionally attributed to that stirps. This was said to have been done on the advice of counsel given on more than one occasion in the past. It was done both before and after the decision in re Freeston (which was given part way through the life of the Settlement). I am asked to sanction this manner of calculating distributable income retrospectively lest in the future anyone should challenge it (though there has been no suggestion of a challenge that I am aware of). There are (as will appear below) other ways of going about adjusting entitlements in this sort of situation.
9. Some of the beneficiaries in Charles' stirps (the "Southgate beneficiaries") are now resident in America. They are Mrs Southgate, her two children (Richard and Christopher) and their three children (Jonathan, William and Jeremy). The evidence shows that this is storing up a serious tax problem which will arise on the ultimate capital distribution. All those people are subject to US tax provisions, and those provisions have the effect that undistributed capital gains will, in due course, be treated for US tax purposes as income, with the net effect that there will be a very significant charge to US tax (including interest and penalties) on or after the capital distribution date. The fund is also subject to UK tax, and no double taxation relief is available. The details of all this do not matter. For present purposes it is sufficient to say that it is plain enough that the combined effect of UK and US tax provisions is such that tax on the funds which will be taken by Mrs Southgate's successors is likely to be excessively burdensome and may even approach 100% of the value of the relevant share of the capital of the settlement. The trustees, with the consent of the beneficiaries, propose to avoid this effect by creating a distinct sub-trust in favour of Mrs Southgate and her issue, with US resident trustees. This will remove the UK's claims to tax in respect of the assets which are the subject of those trusts and ameliorate the US position. It would also make it easier and fairer to administer the funds for reasons appearing below.
10. It is against that general background that the trustees seek relief in the present proceedings, and I can now turn to the relief they seek.

The Hotchpot issue

11. This is the name given in this case to the question of the manner in which capital payments in respect of taxes have been and should be dealt with and reflected. I am asked to do two things - first, to direct that the trustees need take no steps in relation to the manner in which they have dealt with the point hitherto, and second to direct that in the future the trustees may deal with the point in the manner in which they, in their absolute discretion, think fit. Further elaboration of the problem, and how it has been addressed in the past, is necessary.
12. The trustees have, correctly (and without the benefit of Freeston) not treated these trusts as made up of separately appropriated funds. In those circumstances a problem arises when tax has to be paid on the death of a life tenant because there is no fund to which the payments can be appropriated for the time being. That means that there is no fund whose reduced income can be ascertained for the purposes of paying income from then on. In addition, there is no separate fund which is reduced, for the future, for the purpose of ascertaining the amount payable on the final distribution.
13. Two techniques have been proposed for dealing with that situation. The first has been labelled the arithmetic approach. Under this approach, the tax paid is treated as an advance in anticipation of the ultimate division of the fund. On the final division (which, of course, has not yet happened in the present case) the advances are added back, the division is done, and then the advances are debited from each share before it is paid. So far as income is concerned, notional interest is brought into account in the manner which has been applied to this trust and which is set out above.
14. The second is the proportionate approach. This would treat the tax as having reduced the capital potentially available to the relevant stirps as from the date when the tax was paid. This has an effect on the proportion that the value of that "share" bears to the fund as a whole (and therefore the other "shares"), which is effectively locked in. This differential is applied both for income and for capital distribution purposes.
15. There are probably variants and refinements of those approaches. Versions of them are referred to in Lewin on Trusts 18th Edition at paragraph 28-14. The trustees in the present case have not yet had to face up to what to do on a final distribution of capital (because that time has not yet come) but they have had to work out what to do on the various deaths which have occurred. Hitherto they have adopted the arithmetical approach in relation to income. They claim to have done so on the advice of counsel, starting with Opinions of Mr George Grove in 1962 and 1963. I have read those Opinions. They are difficult to understand without some of the other material referred to in them, but it does not seem to me that they clearly advise the adoption of either approach as a matter of principle. The first does not seem to address the point. The second deals with the method of calculating estate duty on the death of Harry. He (Mr Grove) first deals with one way of calculating relevant matters, which seems to be a proportionate method, but that is not wholly clear to me. Then he refers to an alternative manner of dealing with the final distribution, which seems to require the bringing of sums into hotchpot in the arithmetical manner. Having done that, he deals with what is "preferable", and by that he plainly means "preferable for the purposes of minimising tax". The figures demonstrated that the proportionate method (which the Estate Duty Office had proposed) was preferable for that purpose so he advised the trustees to accept that proposal. He did not advise on the principles which should be applied generally or for the future.
16. Despite that, I am told that the trustees adopted the arithmetical approach in distributing income. In October 1972 Mr Romilly Whitehead advised. He referred to both methods of dealing with the consequence of tax liabilities and observed that the cash method seemed to have been used. He made observations as to the effect of that in the event that the value of the fund has risen substantially by the date of final distribution. He did not advise that one approach was the correct one over the other; he said that the trustees should apply to the court for directions. They did not do so, and continued to apply the arithmetical method to the calculation of income.
17. The difference in approach has acquired added significance because of inflation (and therefore the increase in asset values) over the past 30 years or so, and because of an appropriation that the trustees would like to be able to make now (see below). Advice has been taken, and conflicting advice obtained. The trustees have expressed their view that so far as income is concerned they would like to move from the arithmetical basis to one which treats the beneficiaries under each stirps as entitled to income in a share which has been reduced by the amount of each "advance" in respect of historical tax attributable to it – a proportionate basis. They do not wish to disturb the previous basis of calculation.
18. Against that background I am invited to do two things. First, I am asked to direct that the trustees should take no steps to revisit the historical approach hitherto taken by them and their predecessors with regard to the impact on the interests of the beneficiaries of tax payable in relation to the fund and the results of that approach; and second I am asked to direct that from now on they may determine in their absolute discretion how inheritance tax should be borne and reflected as between those beneficially interested in the fund. In other words, the trustees want to be able to let sleeping dogs lie, but be at liberty to do something else for the future. I know what their present wish is for the future (see the preceding paragraph) but they do not want a direction that they do that.
19. I am prepared to make a direction of the first kind provided that it is understood that I am not blessing the historical arithmetical approach for all purposes and for all time. It has been adopted for years. There are sound reasons in principle and fairness why it might be adopted. It has a respectable basis in authority - see the cases referred to in Lewin. No adult beneficiaries (so far as I know) have challenged it; none of them challenge it now; and counsel in these proceedings, who appear for representative beneficiaries, do not oppose the direction the trustees seek. It seems to be unnecessary to embark on what would potentially be a complex, and perhaps undesirable, analysis of correct approaches (which may have more potential refinements than my narrative above suggests) when it is or may be unnecessary. In those circumstances I do not see why the trustees should poke the sleeping dog.
20. That is not to say that it is immune from scrutiny for all purposes and for all time. It may be that in the future a consideration of what should be done for the future might require a revisiting of the past. A beneficiary might be entitled to have that done. The affairs of this trust are sufficiently complex that I cannot rule that out. All I am determining at the moment is that what the trustees seem to have done is prima facie within the bounds of reasonableness, fairness and their powers. No-one is pressing them to revisit it; no-one is alleging a breach of trust (so section 61 of the Trustee Act 1925 does not come into the picture); the evidence indicates that no beneficiaries would welcome the cost to the trust estate that an application for further directions would cause to be incurred; and in those circumstances the trustees need not raise the matter themselves. I am therefore prepared to direct that the trustees take no steps to revisit those historical questions.
21. The relief for the future, however, is different. The trustees wish to have an "absolute discretion" to determine how future inheritance tax impacts on the various beneficial interests under the settlement. It does not seem to me to be appropriate to give them that discretion in an order of this Court. The question of how such matters should be approached in the future is probably a matter of mixed law and fact (and discretion), as counsel accepted. If that is right, it would be wrong in principle to give the trustees an absolute discretion to decide the point. If that is wrong, and if it is a matter of discretion for the trustees to do what is fair, then either the proposed order adds nothing to the situation, in which case it is unnecessary, or it gives them an even wider discretion than they have, which is inappropriate. Absent a division into separate funds, the problem will arise in the future, because there will be income to be distributed from year to year, and there will be deaths of life tenants. There will have to be a distribution on the death of the last of the older generation of life tenants to die. All of those events will raise the problem. The trustees will have to consider how it should be addressed in the light of the circumstances in which it arises. They may feel they can deal with it as a matter of discretion, if no question of principle arises; or they may feel that they need the directions of the court. What would be wrong would be to give them an uncontrolled discretion now if they do not already have one, even though that is sought in order to save the settlement from having to bear the costs of a future application. In the end I detected only lukewarm support, if there was any at all, for the original proposal.
22. During argument I suggested that one way round the problem would be to allow the trustees to act on the Opinion of senior chancery counsel, having given notice to the then adult beneficiaries, or parents of minors, so as to allow them to challenge a decision if they wished. The benefit of that would be that it would provide an opportunity to have the point dealt with without the cost of an application for directions on each occasion on which it arose, while protecting the right of the beneficiaries to have an application to the court if they wanted to. Both Mrs Warnock-Smith and Mr McCall indicated their contentment with such an order; Miss Rich did not oppose it. I consider that such a power can be added under section 57 of the Trustee Act 1925, and I would still be prepared to add it if the represented parties still wished to have it available. I have to say that the omens as to its being successful in avoiding an application are not particularly good. The Opinions that have been given in this matter do not give a lot of confidence that counsel would be able to advise with sufficient certainty as to allow the trustees to be able to act on his or her Opinion, but that will have to be judged as and when the eventuality arises.

The appropriation and advancement points

23. This point arises as a result of the position that the Southgate beneficiaries will find themselves in as a result of being resident in the United States. I have already indicated the nature of the problem - as a result of the combined incidence of United States and UK taxes, there is a risk that the value of the funds that they would take on an ultimate distribution would be very substantially eaten up in tax. I do not need to go into the technicalities of why that is the case - it is sufficient to say that I have seen taxation advice which indicates that that is the case.
24. There is a good chance that those taxation consequences can be ameliorated by creating a sub-trust in favour of the Southgate beneficiaries. If that were done, and if US trustees were appointed of that sub-trust, then it could be made to fall outside the UK tax regime and steps could be taken to mitigate US tax as well.
25. In order to achieve that there would have to be an appropriation of assets to the Southgate sub-trust, and an authority to appoint US trustees of that sub-trust. There is no power of appropriation under the existing trusts, and I am invited to provide that the trustees should have a power of appropriation so as to point to the creation of a sub-fund for the Southgate beneficiaries, being a proportionate share of the overall fund as corresponds to their final share (no doubt with hotchpot applied appropriately). I am also asked to provide that US trustees may be appointed to that sub-fund. Particular proposed trustees are identified, but I am not asked to go so far as to refer to them in any order.
26. I am also asked to allow for a similar power of appropriation for the benefit of the other beneficial interests under the trust.
27. It is contended that I have power to vest such a power in the trustees by virtue of section 57 of the Trustee Act 1925. That section provides:

"57(1) Where in the management or administration of any property invested in trustees any sale, lease, mortgage, surrender, release, or other disposition, or any purchase, investment, acquisition, expenditure, or other transaction, is in the opinion of the Court expedient, but the same cannot be effected by reason of the absence of any power for that purpose vested in the trustees by the trust instrument, if any, or by law, the court may by order confer upon the trustees, either generally or in any particular instance, the necessary power for the purpose, on such terms, and subject to such provisions and conditions, if any, as the court may think fit and may direct in what manner any money authorised to be expended, and the costs of any transaction, are to be paid or borne as between capital and income.

(2) the court may, from time to time, rescind or vary any order made under this section, or may make any new or further order."

It is contended by the trustees, supported by the Southgate beneficiaries, through Mr McCall, that this section can be used to vest a power of appropriation in the trustees despite the fact that such a power is not, on its face, quite like any of the transactions listed in section 57. Miss Rich did not take a contrary position. It is said that an appropriation would be expedient, and would be an act of "management or administration" for the purposes of that section. It is further submitted that a number of authorities support that proposition.

28. I can deal with expediency shortly. I am quite satisfied that an appropriation would be expedient. It would (combined with other steps) give the opportunity to remove an unduly onerous tax burden. It would also enable the fund to be better administered against a background of beneficiaries in different jurisdictions. At the moment the fund is held in sterling. That means that the Southgate beneficiaries bear a currency risk. It would be better for them if a sub-fund could hold dollar investments. Further, appropriations across the funds would avoid the difficulties caused by the incidence of tax on future deaths. I am also told that it would reduce the scope for internal family conflicts in the running of the fund. In short, expediency is established.
29. In Re Thomas [1930] Ch 194 Farwell J ruled that a particular power of partition contained in will trusts had been rendered ineffective by statute. In the circumstances of that case it was expedient that there should be a partition, and the judge indicated that it could be permitted and effected under section 57. His conclusion on the point was very short:

"This therefore being a case where partition cannot be effected under any power vested in the trustees by the trust instrument or by law, I am entitled to consider whether it is expedient and ought to be carried into effect. If so I can authorise the trustees to effect it under the Trustee Act, 1925, s. 57, provided that I am satisfied that it cannot be effected in any other way.... Now here the evidence justifies me in saying that partition is expedient, and I will confer power on the trustees to make a partition. But I cannot at present approve the particular partition proposed. The trustees can either partition on their own responsibility or can come again with full evidence to obtain the Court's approval to this particular partition."

Farwell J was not apparently troubled by the idea that a power of appropriation would vary beneficial interests and go beyond the concepts of management and administration. However, those concepts troubled Goff LJ in Re Freeston. That was a case in which there was a perpetual gift to charity (and not a case in which there was to be an ultimate capital distribution). One of the two charities entitled to share the income questioned a partition of the fund that had been carried out by trustees and in that context drew the distinction that I have referred to in the citation appearing above, holding that its case fell into the first category (a share of the income of an undivided fund). At page 752 Goff LJ considered whether the partition could be effected under section 57 and said:

"Mr Baker next argued that such a transaction as we are considering could be effected under section 57 of the Trustee Act 1925, but the court cannot act under that section if what it is asked to do would vary the trusts, and therefore this cannot be varying the beneficial interests. But that does not seem to me to carry him anywhere either. The first inquiry would be whether it does or does not vary the beneficial interests and if one comes, as in my judgement one must come, to the conclusion that it does, then it would be a case where the court could not authorise it under that section."

It is apparent from the report that Re Thomas was cited by counsel, but Goff LJ does not refer to it, which is at first sight curious. The statement looks as though it is a blanket statement that section 57 cannot be used to confer a power of appropriation because such an act would potentially vary the beneficial interests, and that cannot be done under that section. He makes no attempt to reconcile Re Thomas. It is therefore useful to consider in a little more detail what Goff LJ actually held.

30. The trusts in Freeston were charitable trusts and (distilling the matter slightly) were trusts to pay the income of the fund to each of two educational institutions. It was in that context that they were held to be trusts which were trusts to share the income of undivided shares, rather than rights to the income of a severed or partitioned part. At first instance Fox J held that the appropriation in that case of one half of the fund to the college and one half to the school was an alteration of the beneficial interests:

"The effect of the appropriation in 1950, if it was valid, was to displace that trust [of a moiety of the income] and substituted a trust under which the foundation was entitled to the income of the severed moiety of the corpus of the fund. It is said on behalf of the college that the appropriation was mere administration. I do not think it was. In my opinion it was an alteration of the beneficial interests. The right to one moiety of the income of a fund is quite a different thing from the right to the income of a severed moiety of the fund. And the difference is not just a technicality. The advantages from the point of view of investment and administration in keeping a large fund intact may be substantial." ([1978] 1 WLR 120 at page 127-8.)

Since it altered the beneficial interests it could not be done under the statutory powers relied on in that case, which did not allow the alteration of such interests. He does not deal with section 57, but his analysis of the effect of the appropriation is an important starting point for considering what Goff LJ was saying.

31. In the Court of Appeal Goff LJ confirmed the analysis of the nature of the trust interests. He shared the view that the two types of interest were conceptually different - see again the passage cited above. It was in that context that he made the remarks about section 57 that he did. Having determined the nature of the beneficial interest in his case, he was clearly, in my view, expressing the opinion that section 57 could not be used to vary that sort of beneficial interest in that sort of way. Mr McCall submitted that what he was in fact doing was dealing with a sort of bootstraps argument from counsel (Mr Baker), rather than making a general pronouncement on the extent of section 57. Mr McCall sought to say that counsel started from the premise that appropriation could be done under section 57, and that since that was the case, and since you cannot vary beneficial interests under section 57, it could not be a variation of the beneficial interests so as to bar it under the statutory provisions in question. Goff LJ was accepting counsel's premise about not varying the beneficial interests without necessarily accepting that partition under section 57 was barred for that reason. He also pointed out that there was no section 57 application before the court in Freeston.
32. I do not think that Mr McCall's analysis works. It is not wholly clear to me what Mr Baker was saying, but he may have been saying something like Mr McCall's version. It may be that in that context he pointed to Re Thomas. If that is right then one must look back to Re Thomas to see the nature of the trusts in that case. Having done that, it seems to me that they were trusts which gave interests in portions of the funds to various classes of beneficiary. It was not a Freeston-type trust. Appropriating in that case would not be varying the beneficial interests in the way which Fox J and Goff LJ apparently had in mind. It seems to me to be clear that Goff LJ was expressing the view that to apportion the corpus of the fund in a Freeston-type trust was varying the beneficial interest (and agreeing with Fox J in that respect) and that a power to introduce such a power was beyond the scope of section 57 which did not extend to permitting such variations. He probably did not mention re Thomas because the trusts in that case were different. Since there was no section 57 application before the court in Freeston, Goff LJ's views were probably technically obiter, but in their context they are entitled to great weight.
33. So I turn to the next basis on which counsel sought to distinguish the remarks in Freeston. First, it was said that Freeston was a different type of trust in that it was perpetual gift of income to charity. While that description is accurate, I do not see why that makes a difference to the apparent principles on which Goff LJ was proceeding.
34. Next it was said that Goff LJ did not have the benefit of Re Downshire [1953] Ch 218 at p 248 being cited to him. That case is said to demonstrate that the court can allow that which is expedient in the management or administration of a trust even if there are incidental changes in the beneficial interests which accompany the exercise of the power. This was an answer to Goff LJ's views about not varying beneficial interests – it could be done if it were incidental. Mr McCall and Mrs Warnock-Smith then went on seek to make that good by reference to more modern authority, which also demonstrated that a power of apportionment was regarded as an administrative provision for these purposes.
35. The passage from Re Downshire relied on is part of Evershed MR's survey of the law relating the court's powers in relation to trusts. In that context he considered section 57. Mr McCall relied on the following passage on page 248:

"Not only did the legislature do neither of those things, but it did not even mention beneficial interests from the beginning of the section to the end, or give the slightest indication that it was intending to give power to vary or interfere with such interests or intermeddle with them in any way - except to the extent that they might incidentally be affected by the exercise of the powers which the section does in terms confer." (counsel's emphasis)

What counsel sought to extract from this passage is that if a power of apportionment can be classified as administrative or managerial (which they say it can) then it can be conferred if its exercise brings about only an incidental effect on beneficial interests. Mr McCall drew attention to the fact that this passage was expressly approved in the House of Lords (in the decision in Re Chapman [1954] AC 429).

36. This approach is said to have been adopted in modern authority. In the Cayman Islands Smellie CJ was asked to add a power of partition to a settlement in MEP v Rothschild Trust Cayman Ltd, (unreported, 20th October 2009). The Cayman court was asked to consider giving the trustees a power to apportion a trust estate into three funds, based on a statutory power which is in the same terms as section 57. The trusts are not set out in detail in the judgment, but they seem to have been a form of discretionary trust in favour of a mother in her lifetime, and an income interest to two of her daughters equally (presumably in relation to any unappointed funds), with their children and grandchildren taking at the end of the trust period. The proposed power was to allow a division and partition of the fund into three equal subfunds. The beneficial interests in those funds were to be exactly the same as in the unpartitioned fund; the differences in the sub-funds were to be as to "administrative matters relating to the composition and powers of Management Committees and to the appointment or removal of Trustees".
37. Smellie CJ was satisfied that it was expedient to exercise the power if it was legally permissible, and went on to consider the latter point. He observed that the trustees had no power to appropriate or partition under the terms of the trusts, and went on:

"23. That being so, it would follow that the jurisdiction exists of what is proposed here by way of transaction for the partition of the Trust into sub-funds is in essence to be regarded as administrative but not dispositive in nature, as being expedient in the interests of the administration or management of the trusts.

24. Even though the transaction would expressly and directly involve the partition of the Trust Fund into three sub-funds and so fundamentally alter the structure of the Trust, I am satisfied that the predominant purpose and practicalities are essentially administrative in nature. This is primarily for the reason already mentioned - that the sub-funds will remain governed by the trusts of the Z Trust [ie the trust in question] and so there are not intended to be any alterations of the respective beneficial interests.

25. There perhaps will, nonetheless, be some unintended, unforeseen and incidental change to the practical beneficial entitlements. This may be in the sense envisaged in [Freeston] where it is said 'it is manifest that an interest in half the income [(of an undivided fund)] is quite different from the whole income of a divided part of that fund.'

26. Put another way, the idea is that as a single larger fund when invested could potentially yield more than the combined income of three equal sub-funds derived from it; a one-third interest in the single fund could be worth more than the full interest in any of its sub-divisions.

27. While such a potential diminution in benefit must be recognised; I accept, on the authority of the case law, that while the jurisdiction given to the Court by section 63 [ie the equivalent of section 57] does not involve a power to vary or interfere with or intermeddle with the existing beneficial trusts; there is to be recognised an acceptable exception to the extent that beneficial interests might be affected, but only incidentally affected, by the proper exercise of the powers which the section of the Law does in terms expressly confer. This - I add merely in parenthesis here - notwithstanding the contrary views expressed, but only obiter, by Goff LJ in [Freeston]."

He went on to consider Downshire and said:

"In my view, [the citations from Downshire] embody an exception which the Court recognised as necessarily arising from the performance by trustees of administrative powers which are fiduciary and discretionary in nature and which - as some earlier and later cases show - could often entail in their proper exercise, an overlap between the pure management of trust assets with administrative actions taken genuinely in the interests of the trust as a whole but which could incidentally affect beneficial interests."

He gives some examples, and specifically refers to Re Thomas. At paragraph 40 he expresses the view that in the case before him any potential alteration or interference with beneficial interests was a necessary incident of the proper management and administration of the trust, and at paragraph 41 he expressly emphasises:

"that here no alteration of the beneficial interests or entitlements are [sic] contemplated."

38. Thus he arrives at his decision that it would be correct to allow the partition in question.
39. Mr McCall and Mrs Warnock-Smith both placed some emphasis on this case as encapsulating what they said was an important principle, namely that the variation of beneficial interests was not a complete bar to an appropriation under section 57 if it was incidental to its administrative and managerial purpose. They also relied on authorities which held that a power of appropriation is properly characterised as only administrative or ancillary even though its exercise might have an impact on beneficial entitlements - see Russell v IRC [1988] STC 195 at 203a-c; Hornsby v Playoust [2005] VSC 107. They therefore invited me to view the proposed appropriation and partition power as being expedient, managerial and administrative, and that any effect on the beneficial interests was sufficiently incidental as to not stand in the way of conferring the power. They drew my attention to the examples given at paragraph 45-16 of Lewin. Goff LJ's remarks in Freeston were said to be obiter, and (I think) not to be inconsistent with the principles extracted from the other cases because the matter was not debated there. The proposed partition in the present case was, according to Mrs Warnock-Smith, administrative because its purpose was to prevent assets being wiped out in taxation.
40. In my view, when the cases are properly understood, there is no inconsistency between what Goff LJ said in Freeston and what the other cases say. The other cases stress that a power of appropriation can be conferred, or exercised, where the prime purpose is administrative and managerial, and any effect on the beneficial interests is incidental. Thus a scheme to change the assets of the trust, and distribute in specie to beneficiaries who are entitled to the trust assets (as in Hornsby v Playoust) falls into that category. There is an effect on the beneficiaries, and they take an interest in different assets, so their interests are affected, but that was incidental to the managerial purpose of the scheme. The same can be said of all the other examples in the cases or the category of transactions listed (non-exhaustively) in section 57 itself. In one sense it is merely conceding the obvious to allow that administrative purposes can incidentally affect beneficial interests, because most of them will inevitably do so. Trustees who are allowed to change one asset for another affect the interests in the first asset, and create interests in the second. To that extent it is inevitable that there will be some incidental effect. To allow a partition of a fund already held in moieties (as in Re Thomas) is a stronger example, but the effect is still incidental and there is no real effect on the beneficial interests (particularly where, as in Re Thomas, the original trusts had a power of appropriation anyway). However, in none of these are the trusts actually changed - the beneficial interests remain the same. That is true of the Cayman case. There were appropriations to sub-trusts, for administrative reasons, but the trusts affecting the funds in those sub-trusts were precisely the same as they were before the appropriation.
41. The position in relation to the present trusts, as in Freeston, is different. The point to which the judges in Freeston drew attention was the difference between the nature of a beneficial interest in the income of the whole fund and a beneficial interest in an undivided share. They were held to be conceptually different, which is why an apportionment could not be made without varying the beneficial interests. An apportionment was not merely dividing out an otherwise undivided share; it would have been altering the very nature of the beneficial interest. It was that which was held to be prohibited. Fox J held in terms that that was not mere administration. I think, with respect, that that was correct. Goff LJ must have agreed with him, but he does not say so in terms. What he did say was that that sort of thing cannot be done under section 57.
42. As a general proposition it was not disputed before me in the present case that an appropriation as is to be provided for would vary the beneficial interests in this fund; nor can it be seriously disputable. It was also not disputed, and in my view rightly, that section 57 cannot be used to as to bring about a variation of the beneficial interests. That is not its purpose. That is plainly right. What is said is that there is a proviso to the effect that a variation does not prevent the exercise of the power if it is merely incidental to a primary managerial or administrative purpose. I agree that there is a proviso, but it is not one which allows an actual variation of the actual beneficial interests. None of the cases go that far. They refer to an effect on the beneficial interests which, on close study, means an effect on how they are in fact enjoyed (so that, for example, they are enjoyed over asset B as opposed to asset A); but the beneficial interests remain intact. That is particularly clear in the Cayman case, where the Chief Justice clearly states that the trusts would remain the same after the partition as they were before. It is also demonstrated by what happened in Re Thomas, though there is no express rationalisation of the point in that manner. There an interest in an undivided share was to be substituted by an interest in part of a divided fund. The nature of the beneficial interests did not change, and so far as there was a difference in enjoyment it could truly be said to be incidental to the higher purpose of better administration and management of the fund. The same could not be said of the case before me. The whole point of the partition is to create trusts of divided shares in place of trusts of income over a whole (undivided) fund. That is not just an incidental effect; that is to a large extent its purpose. It would create a different set of beneficial interests, qualitatively speaking, to those which currently exist.
43. Accordingly, in my view the proposed power of appropriation in this case and its proposed exercise are outside the scope of section 57, and I therefore refuse to confer the necessary power. I say that with a little regret, because in terms of expediency the case would have been made out, but that regret is tempered by the fact that it seems to me that the same result could be achieved by a variation of the trusts, with an application under the Variation of Trusts Act 1958. It was hinted to me that that has not been possible, at least in part because of inter-family relations. I confess to finding that a little puzzling, because those relations have not prevented at least acquiescence in the present application, but that is what I was told.
44. That conclusion makes it unnecessary for me to go on to consider another aspect of the application which is designed to rescue the fund from excessive taxation and which is coupled with the proposed appropriation, but I heard argument on the point and I will deal with it. It concerns a proposed advancement by the trustees.
45. So far as UK tax is concerned, and assuming funds could be appropriated to a sub-trust, the most advantageous outcome can be achieved if the sub-trust could be made to fall within Schedule 4ZA of the Taxation of Capital Gains Act 1992. That schedule allows the trustees to make an election to treat the sub-trust as if it were a separate settlement for tax purposes, which has various advantages. It is thought by the trustees that if it is treated as a separate settlement for capital gains tax purposes there will be no termination of Mrs Southgate's current life interest in the Southgate fund, thus avoiding some tax. In order for there to be a valid election, a number of conditions have to be fulfilled, the fourth of which is:

"… that, if the sub-fund election had taken effect, no person would be a beneficiary under both the sub-fund settlement and the principal settlement." (paragraph 8)

If there were an appropriation without more, then this condition would not be fulfilled because of the cross-accruers within the stirps. It will be remembered that the beneficiaries under each stirps are potentially beneficiaries under others if the others die out. If the beneficiaries under any one stirps die out before the distribution date, then the other beneficiaries under the other stirpes pick up the interests under the expired stirps. It is those interests which have to be extinguished, so far as the Southgate stirps and its beneficiaries are concerned, if an election were to be validly made.

46. The trustees would propose to deal with this problem by exercising the statutory power of advancement under section 32 of the Trustee Act 1925. They propose to exercise it in the following way. Richard and Christopher are two adult grandchildren of Charles, and are thus in the Southgate (American) stirps. Their mother, Mrs Southgate, is still alive. Richard and Christopher have cross-accruer rights within the Southgate stirps in the event of the death of each other and their brother's family; they have cross-accruer rights in the event of the deaths of other grandchildren with the Charles stirps; and they have cross-accruer rights in the other major stirps of the trust. The trustees have prepared a draft resolution which is intended to have the following effect:

i) So far as Christopher's cross-accruer rights in respect of Richard's share in the fund are concerned, there is to be an advance so that they are held for Christopher absolutely free of contingency. The same is to be done mutatis mutandis for Richard's cross-accruer rights in Christopher's part. Thus each holds an accelerated absolute interest in that part of the fund, and (I think) that is intended to exclude the other beneficiaries from this part of the fund.

ii) Christopher's cross-accrual rights in relation to the rest of the fund are to be advanced so that they are held by him free from any contingency but on trust to be held on the same trusts as would have applied to them had he and Richard died without issue as at the date of the resolution. The effect of that is said to be that those rights are held thenceforth for the benefit of the remaining family members free from any rights that Christopher might have in them. The same is proposed for Richard's cross-accrual rights in the rest of the fund.

47. Thus a divorce is intended to be achieved between the new Southgate fund and the rest of the Settlement for the purposes of Schedule 4ZA, and the capital gains tax advantages flowing from that, and which would otherwise not flow, are to be achieved.
48. The order which I am asked to make is one which gives the trustees "liberty" to exercise the power of advancement in the manner described above. It is not suggested that the trustees lack the power in the absence of my order – what is to be exercised is their section 32 powers which they have got anyway. It seems that they want some sort of confirmation from the court that that exercise is appropriate, though that was not made clear in the application, and no reason was given as to why it should be needed.
49. I am afraid I cannot give that blessing, because the proposed acts do not seem to me to fall within the statutory power. Section 32(1) of the 1925 Act provides that:

"Trustees may at any time or times pay or apply any capital money subject to a trust, for the advancement … [etc]"

50. The proposed "advancements" do not fall within that description even if (as appears to be the case) capital money for these purposes can include property in specie and is not confined to cash. The proposed exercise of the power is not to be done in relation to property subject to the trust (save very indirectly). It relates to an interest under the trust. Such an interest is not property subject to a trust for the purposes of the section. The interest defines the entitlement of a beneficiary in the underlying property; it is not the same thing as the property. This is emphasised in the provisos to the subsection:

"Provided that –

(a) the money so paid or applied for the advancement or benefit of any person shall not exceed altogether in amount one-half of the presumptive or vested share or interest of that person in the trust property

(b) if that person is or becomes absolutely or indefeasibly entitled to a share in the trust property the money so paid or applied shall be brought into account as part of such share …" (my emphasis)

Thus a distinction is drawn between an interest in the trust property on the one hand, and the trust property itself on the other. An advancement under the section deals with the latter. The proposal of the trustees deals with the former. What they are proposing is a variation of the trusts to exclude contingent interests, not the application of "capital money [property] subject to a trust". Mr McCall (who was the principal proponent of this point) was unable to show me any authority which justified, or even illustrated, a transaction of this kind under section 32. All he could manage was some examples which, so far as they bore on the point, assumed that which they set out to prove. In the absence of authority my view is that the transaction cannot be done by the trustees under section 32. That view is supported by the definition of advancement in Lewin at paragraph 32-01:

"The general purpose of a power of advancement is to enable trustees in a proper case to anticipate the vesting in possession of an intended beneficiary's contingent or reversionary interest by raising money on account of his interest and paying or applying it immediately for his benefit. By doing so they release it from the trusts of the settlement and accelerate the enjoyment of his interest …"

What is proposed in this case is nothing like that. I therefore decline to make an order giving the trustees liberty to carry out that part of the scheme.

Administrative powers

51. Last, the trustees invite me to confer some additional powers on them, under section 57, to bring the administrative powers of the trustees into line with modern trusts. The present Settlement has few useful administrative powers (though the investment power is adequate) and they wish to have what modern trustees are generally equipped with. The terms are, I understand, based on the standard precedent used by Messrs Charles Russell LLP, the solicitors for the trustees in this litigation.
52. I have considered the proposed extensive powers and will not set them out here. With one exception, they seem to me to be properly conferred under section 57. The exception is one which reads:

"Payment of tax

The Trustees may pay tax liabilities (and interest on such tax) in relation to the trusts under this Settlement even though such liabilities are not enforceable against the Trustees"

53. At first sight I could not see a justification for the trustees paying tax for which they are not liable. If the taxable person was the beneficiary, but the trust was not liable for it (if this was the situation contemplated by the power), then the trustees could either advance that sum (if the power of advancement could be exercised) or even lend it under the extended powers. That would not require a further special power. Otherwise it is not apparent why the other beneficiaries should be prejudiced by the payment of the tax. It turned out that a power such as this is thought to be useful to deal with a situation such as one in which a foreign jurisdiction regarded the trustees as liable but could not enforce the liability here. Paying the tax might be necessary if the trustee needed to travel to that jurisdiction. I was told (by way of illustration) that that has been a concern of Guernsey trustees wishing to travel to the UK, and the absence of such a power might deter professional trustees from undertaking this trusteeship in the future.
54. I am not persuaded by that sort of justification, and no other was advanced. If a trust cannot in practice be made liable and the trustees decide not to pay it in the interests of the trust, but a trustee's travel arrangements meant that the tax would have to be paid to keep him or her out of the hands of the local authorities in some jurisdiction to which he or she intended to travel, then it is not immediately apparent why the trustee's personal needs should lead to a liability being imposed on the trust which it would not otherwise (in practice) be forced to bear and which the trustees do not choose to bear. If there is a real problem in the future, then it can be solved by an application for directions if the answer is not sufficiently plain to the trustees anyway. If it is right in a particular instance to allow the tax to be paid, then no doubt it will be ordered. If it would not be right in that particular case, then it would not be right to allow a general power to make the payment. If there is an underlying problem, it should be addressed on the real facts of a real case (a real problem), not in anticipation and in the abstract.
55. I therefore allow the introduction of the requested powers but without that particular one.