UK Social Security and Child Support Commissioners' Decisions

[2003] UKSSCSC CTC_4713_2002 (02 July 2003)

 


DECISION OF THE SOCIAL SECURITY COMMISSIONER

Case Reference No.: CTC 4713 2002

1. This is an appeal with the leave of a tribunal chairman from the decision of the Colchester Appeal Tribunal given on 8 July 2002 confirming the decision of a decision maker issued on 7 February 2002 that the claimant was entitled to Working Families' Tax credit at the weekly rate of £26.06 for 26 weeks from 12/02/02. In reaching that decision, the decision maker and the tribunal concluded that the tax credit to be paid in respect of the claimant's son was nil. For the reasons set out below this appeal is allowed. I set aside the decision of the tribunal and I remit the case to be heard by a new tribunal in accordance with the directions given below. Whether in the end this assists the claimant is likely to turn on the market value of the assets of the trust at 7 February 2002, of which there is no satisfactory evidence before me.
2. The tribunal found that the claimant's son, L, was the beneficiary under a trust fund, and was "deemed to have capital in the fund which had been valued at £9,500 at the relevant time" and that as the capital was over the limit of £3000 for the purpose of assessing entitlement to Working Families' Tax credits, there was no entitlement for tax credits payable in respect of L (see para.9 of the tribunal's statement of reasons).
3. The factual situation is simple and, for the most part, not in issue. L was born on 31 March 1995. L's father was a member of his employer's group pension scheme. Following the father's death there was a lump sum benefit of £10,619.63 held by the pension scheme trustees on discretionary trusts. By a declaration of trust dated 15 November 1996 between the pension scheme trustees and the claimant (file, pp.23-25), it was recited that the pension scheme trustees had resolved to pay that lump sum for the benefit of L. The declaration of trust provided that (a) the pension fund trustees and the claimant should be the trustees of the trust ("the Trustees"); (b) the Trustees should hold the lump sum on trust for L; (c) the Trustees could invest the lump sum as if they were beneficial owners; and (d) while L was under the age of 21 the Trustees "may pay the whole or part of capital or income of the Lump Sum for the maintenance, education or benefit of the Child as they think fit, and any provisions to the contrary in the Trustee Act 1925 shall not apply".
4. By letter dated 19 June 2001, the chairman of the pension fund trustees wrote (file, p.51) explaining that "This Trust was set up with professional advice and its aim was to provide for [L's] long term security on him attaining the age of 21. We were advised that the Trust should also include a clause allowing [the claimant] to apply for funds from the Trust in exceptional circumstances. The aim of this clause was to enable the Trustees to release money for [L's] benefit in absolutely exceptional circumstances only, e.g. the need for urgent medical treatment, the provision of specialist care in the event of an accident and other similar extreme situations. It was never the intention of the Trustees that [the claimant] would have the ability to apply for monies to be released from the Trust for their joint routine maintenance." There is no evidence that any money has ever been released from the trust.
5. The trust fund was invested in a UK Growth Unit Trust. Although there is a tax voucher for the units at p.52 of the file as at 28 February 2002, I am unclear as to the value of this holding at that date. Expert stockbroking advice in a letter dated 5 July 2002 was that at that time, with the FTSE 100 index standing at 4605, there was hardly any investor confidence in this market and there were few if any willing buyers (p.50).
6. Under regulation 46(4) of the Family Credit (General) Regulations 1987, where the capital of a child, if calculated in accordance with Part IV of the regulations in like manner as for the claimant (subject to certain immaterial exceptions) would exceed £3000, the credit in respect of that child should be nil. Under regulation 32, capital which a claimant possesses in the United Kingdom shall be calculated, so far as material to the present case, at its current market or surrender value less, where there would be expenses attributable to the sale, 10 per cent.
7. In Valerie Peters v. The Chief Adjudication Officer (reported as an appendix to R(SB)3/89) the Court of Appeal had to determine the capital resources of two girls who had similar rights under trusts. According to paragraph 2 of the decision of social security commissioner which was under appeal, the grandmother of the children had bequeathed the money standing to her credit in a particular bank account to such of her grandchildren as should be living at her death and if more than one then in equal shares for their own use and benefit absolutely. As the commissioner pointed out in paragraph 5 of his decision, the executors of the grandmother's will became trustees of the property bequeathed by operation of law as soon as it became clear that the money so bequeathed was not required for administration. The commissioner followed the decision of a tribunal of commissioners in R(SB)45/83 and the decision of another commissioner in R(SB)26/86 and held that a resource held in trust for an infant absolutely was as much the infant's resource as it would be if he were an adult.
8. The Court of Appeal does not refer to the terms of the will itself, but only to correspondence about it. It is plain, however, from the submissions of counsel for both parties in the Court of Appeal, as recited by May LJ in his judgment, that it was common ground that each of the two girls had been left a lump sum which was held by trustees on an absolute trust, and not a contingent one, to pay the sum to that girl on attaining the age of 18. It was also clear that each was a trust to which sections 31 and 32 of the Trustee Act 1925 applied, so that the trustees had power at the relevant time to advance up to 50 per cent of the moneys held by them for each girl whilst the trust subsisted, for her benefit, education and maintenance. In delivering the leading judgment, with which the other members of the court agreed, May LJ concluded that "each girl, for the purposes of the supplementary benefit legislation, must be considered as having possessed a resource comprising an equitable interest under the trust, which could be advanced up to one half until she attained the age of 18 and then she was entitled to the whole of the balance not advanced at the age of 18. That was the resource. That fell to be valued under regulation 5 [i.e. of the Supplementary Benefit (Resources) Regulations], because its value did not clearly appear from regulation 6 or the facts."
9. It is plain that the Court of Appeal rejected the contention that where the child was absolutely entitled to a sum of money held on trust for him or her, he or she had capital resources equal in value to the sum of money in question.
10. Regulation 5 of the Supplementary Benefit (Resources) Regulations provides that, with certain immaterial exceptions, the amount of a claimant's capital resources to be taken into account shall be the whole of his capital resources assessed where applicable at their current market value or surrender value less any sum which would be attributable to the expenses of sale. In the case before the Court of Appeal, the claimant had contended that the value of the equitable interest was 50 per cent of the capital sum. May LJ stated that he was not satisfied that the value of the resource could not be more than 50 per cent. However, he pointed out that it was an estimate on which both sides were agreed for the purposes of the appeal, and decided the appeal on that basis.
11. The Supplementary Benefit (Resources) Regulations referred to "capital resources" while the Family Credit (General) Regulations refer to "capital". It has not been suggested that there is any distinction between the two expressions so far as L's interest is concerned, and I can detect none. It follows that unless L's equitable interest is to be disregarded by reason of some special provision in the Family Credit (General) Regulations, it must be valued at its current market value less 10 per cent in respect of expenses attributable to the sale.
12. The claimant contends that L's interest is a future interest in property, and so to be disregarded by virtue of paragraph 5 of Schedule 3 to the Family Credit (General) Regulations. It is submitted that L's interest is contingent on his attaining 21 and that if he does not do so the fund will revert to the settlor. I reject this contention. It is plain that this was a payment for the benefit of L absolutely, so that in the event of his death the assets would form part of his estate. There is no suggestion in the Trust Deed that L's entitlement is in any way contingent on his attaining the age of 21. Clause 3 provides simply that the Trustees will hold the Lump Sum on trust for L. Until L reaches the age of 18 he can give no valid receipt for the fund, and so it must be retained by the trustees. Once he is 18, he will be absolutely entitled, and able to call for the fund to be transferred to him. There is a question why the age of 21 was chosen if the trustees cannot retain the fund if it is called for by L, but in my view this was either an oversight or was designed to ensure that the Trustees retained the fund until L became 21 unless he specifically asked them to hand it over. Whatever the explanation, it cannot detract from the absolute nature of the trust for L.
13. It follows that L's equitable interest is an immediate one and not a future one even though he cannot actually get his hands on the assets in the trust immediately. Indeed, if it were to be categorised as a future interest (a category of disregard which was only introduced in 1995) it would render the provisions as to the treatment of a child's capital virtually meaningless, as children are unable to give a good receipt for any capital assets held for them and those assets are typically held by nominees or trustees on trust for the child with statutory powers of advancement. I am satisfied therefore that whatever may be included in the category of future interests, an equitable interest in assets held on trust for a child absolutely is not a future interest.
14. The question then arises as to the value of that equitable interest. That is not a matter which was before the Court of Appeal in Peters, as the parties there were agreed as to the valuation in that case. It is plain that each case must turn on its own facts, and valuations of different interests must differ depending on such factors as the nature of the underlying investments. In the present case also, there is a power on the part of the trustees to advance the whole, as opposed to only half, of the capital and income of the fund.
15. However, there are fundamental valuation questions which were not addressed in Peters because the parties were agreed as to the valuation. If what was to be valued was the sale value of L's equitable interest, then it would be irrelevant that L could not call for the capital to be transferred to him because he could not give a valid receipt. An adult purchaser would be able to call for the legal title to the assets in the trust to be transferred to him or her, and would not have to wait until the notional seller of the equitable interest became 18 or 21. This is not what is contemplated by the Court of Appeal, which held that there should be a valuation of a right to the assets in the trust at the age of 18 with the possibility that some capital or income might be advanced before that time.
16. Plainly if that advance was still to be made to L for his benefit, L would not have disposed of his entire equitable interest. If there is to be a hypothetical market valuation, it must be on the basis that the entire equitable interest is disposed of. But in that case, at least on the facts of the present case, the entire purpose of accumulating, as explained by the trustees would be defeated, and there would be no reason why the trustees should not simply wind up the trust and pay the assets to the purchaser rather than insist on a power to accumulate which had no surviving purpose, and on retaining the trust fund for no conceivable benefit to anybody.
17. I am driven to the conclusion that if one is to determine the current market value of the claimant's equitable interest in specific assets, no regard can be had to the restrictions on the claimant's ability to enjoy his interest except to the extent that an equivalent restriction would materially affect the hypothetical purchaser if it was imposed on that purchaser. In most cases where the interest being hypothetically sold is an absolute one, and the trustees have power to advance the whole of the trust fund as here (in Peters only half of the fund could be advanced), the trustees will have no reason once the sale has occurred not to advance the whole of the assets if asked to do so, subject only to discharging trust liabilities out of them, and rid themselves of what would have become an unnecessary burden. Normally, in such circumstances, one would expect the valuation to approximate to the net underlying value of the trust fund being sold, less 10 per cent to cover the costs of the sale, with, in some cases, a relatively small discount to justify the transaction.
18. The fact that the claimant cannot in fact sell the equitable interest is immaterial in my judgment, just as it is immaterial in the case of the valuation of shares in a company which cannot be sold because of restrictions on their transfer in the company's articles. The question to be determined is the value of the equitable interest if it were hypothetically to be sold by a willing vendor to a willing purchaser on the relevant date – for example by order of the court.
19. If, however, the valuer ought to approach the valuation on the basis that the market value to be ascertained was of the claimant's restricted equitable interest, the only way which I can find to give effect to that is to assume a hypothetical market value to L or somebody of a similar age. Otherwise the restrictions on the power of advancement do not make sense. Such a valuation would seem to presuppose that the child in question or somebody on his behalf would pay for the equitable interest, and I can find no basis for supposing that he would not pay the whole of the net value of the underlying assets less the costs of the purchase. There is no reason why he should seek or expect to receive a discount on the market because his ability to deal with the asset is limited because of his age.
20. It follows that however I approach the matter it appears to me that the Court of Appeal, in the absence of argument on the point, has failed to appreciate that its approach ought to lead to a valuation of the equitable interest as being more or less equal to the whole net value of the trust fund less 10 per cent for sale expenses where appropriate.
21. The final question is as to the value of the trust fund on 7 February 2002. It is apparent from the evidence before the tribunal that trust assets were invested in a UK Growth Unit Trust (pp.50,52). There is no evidence as to the terms on which the units in the unit trust were held – for example whether for a fixed term, and if so for how long, or whether the asset in question could be surrendered or sold, and if so, subject to what restrictions – nor is there any evidence as to the value of the investment at the particular time. There is evidence from the claimant's expert that at July 2002 there was hardly any investor confidence in that market and that there were few, if any, willing buyers. This is 5 months after the relevant date of 7 February, but even if I were to assume that similar conditions applied then, I would still need evidence as to the market value of the fund at that date. Even accepting that there was almost no investor confidence in the market and that buyers were hard to find, there must have been a price (if the investment was saleable or assumed to be saleable) at which a buyer would have come forward and bought.
22. The evidence of the expert for the secretary of state is expressed to be on the assumption that the sole asset of the trust is the original Lump Sum. In the light of subsequent evidence that is plainly incorrect as the money has been invested in the unit trusts, which could subsequently have gone down in value, and there was therefore no basis on which the tribunal ought to have accepted his evidence. On that ground alone, I find that the tribunal was in error of law and that its decision must be set aside. As I have no evidence as to the actual value of the investment or the equitable interest in it, it is necessary to remit the case to a new tribunal for rehearing. It may be, however, that in the light of this decision, once the value of the trust assets at 7 February 2002 is known, that it will be apparent whether the market value of L's equitable interest is more or less than £3000.

(Signed) Michael Mark

Deputy Commissioner

2 July 2003