Analysis
Shortly after he came of age, the 19th Duke of Somerset, claimant in this action, established a Settled Land Act settlement dated 30 September 1971 (the settlement). Under the terms of the settlement, the claimant was tenant for life and one of the trustees. The other trustees were independent professional trustees and were joined as first and second defendants. The rest of the defendants were all of the adult beneficiaries interested under the trusts of the settlement (all of whom supported the application), there being no existing minor beneficiaries nor any lacking capacity. The settlement provisions concerned property directly subject to the trust provisions (the trust property) and a reversionary interest (the reversionary property) under a separate settlement of which the claimant’s father was tenant for life in possession, with the claimant a tenant in tail in remainder (together ‘the two trust funds’). The settlement was expressly intended to enable a substantial part of the trust property and the reversionary property and their income to be available for the benefit of the claimant’s father’s descendants that were from time to time Dukes of Somerset or in line of succession to the Dukedom and in the order of their succession or prospective succession to it. To this end, clause 4 of the settlement directed that the two trust funds be held on a series of entailed interests, but these trusts were subject to wide overriding powers of appointment, exercisable by the tenant for life in favour of a class of beneficiaries known as ‘the discretionary beneficiaries’. The trust period was defined as the period of 80 years from 30 September 1971 and this was expressed to be the applicable perpetuity period.
Several sub-funds had been created by a series of revocable and non-exhaustive deeds made by the claimant with the consent of the trustees; one of the sub-funds was known as ‘the discretionary fund’ and was held on discretionary trusts of income and, subject to that, on the trusts and subject to the powers contained in the settlement. The discretionary fund was regarded as relevant property within Chapter III of the Inheritance Tax Act 1984 (the 1984 Act) but was conditionally exempt from the ten-year periodic charge by virtue of s79(1) of the 1984 Act. The remainder of the property subject to the settlement was known as ‘the retained fund’, which was itself split into two sub-funds known as ‘the retained fund A fund’ (which was the more valuable), an interest in possession fund whose income was held as to 95% for the claimant and 5% for his wife, and ‘the retained fund B fund’, also an interest in possession fund whose income was held as to 99% for one of the adult defendants and the other 1% for the claimant and his wife and, subject to that, the B fund was held on the trusts of the discretionary fund.
The application was made under the Variation of Trusts Act 1958 (the 1958 Act) for the court to approve an arrangement to vary the trusts of the Settlement on behalf of unborn and unascertained beneficiaries. The proposal was (i) to extend the period during which the overriding powers of appointment and revocation could be exercised; (ii) to add a power to permit the accumulation of income; (iii) to extend powers so as to allow the creation of an heritage maintenance fund; (iv) to vary the terms of the settlement to make clear that it was no longer to be governed by the Settled Land Act 1925; (v) to add further administrative powers to limit the self-dealing rule and to add power for the trustees to revoke and amend administrative powers subject to obtaining specialist advice from counsel before doing so; (vi) to widen the beneficial class to include same-sex spouses and civil partners; (vii) to require the trustees’ consent to the exercise of the life tenant’s power of appointment; and (viii) to confer on the trustees a flexible overriding power of appointment.
Held
The court approved the proposed arrangement, without the need for any supplemental application under s64 of the Settled Land Act 1925.
- 1) The court accepted that it had power under the 1958 Act to extend a trust and perpetuity period and considered that there was clearly a family benefit in such an extension: there would be inheritance tax and capital gains tax benefits and the theoretical disadvantage of future generations being brought into the class of potential beneficiaries was outweighed by the wider benefits provided by arrangement as a whole for the unborn and unascertained beneficiaries.
- 2) The court accepted that the 1958 Act could be used to confer a power of accumulation so as to remove the existing statutory restrictions on accumulations and that the addition of such a power would create practical benefits.
- 3) The proposal to extend powers so as to enable the creation of a heritage maintenance fund could be approved either under the 1958 Act or under s64 of the Settled Land Act 1925. The proposal would be of practical benefit by supporting the costs of the property held in the discretionary fund so that the trustees would not need to use capital of that fund to fund those costs.
- 4) The proposal that the settlement should no longer be governed by the Settled Land Act 1925 would take effect as a variation and not a resettlement. The core of the beneficial interests would not be altered by the change; the proposal would put the trust framework into a more modern form and the substratum of the settlement would remain in place. The court was satisfied that the proposal would be of benefit to the unborn and unascertained beneficiaries by removing the complexities that the trustees would otherwise encounter when entering into commercial arrangements with persons with limited understanding of the Settled Land Act 1925.
- 5) The proposal to add administrative powers to limit the self-dealing rule and to add power for the trustees to revoke and amend administrative powers raised two issues:
- (a) Although where the sole purpose of an application was to alter the management and administration powers of trustees without any variation of the beneficial interests, the better practice was for the trustees to apply under s57 of the Trustee Act 1925, where it was desired at the same time to vary the beneficial trusts, the application had to be made under the 1958 Act and there was no need to apply also under s57 of the Trustee Act 1925 or s64 of the Settled Land Act 1925. Having regard to the evidence as to the purpose of the enlargement or alteration of the powers, the court considered that the proposed alteration to modify the self-dealing rule would be in the interests of the unborn and unascertained beneficiaries.
- (b) The proposal to insert a provision giving the trustees power to revoke, vary any of the administrative provisions of the settlement or to add further administrative provisions, exercisable on the advice of an experienced lawyer, was considered by the court to be in the interests of the unborn and unascertained beneficiaries as well as the trust as a whole. It was needed to modernise the provisions of the settlement and the transition from Settled Land Act settlement to trust of land and, in any event, the trustees still needed to exercise the powers, with the continued benefit of highly experienced professional trustees and advisers and directions of the court where the decision was momentous.
- 6) The proposal to widen the beneficial class to include same-sex spouses and civil partners might be of benefit to the family as a whole, directly benefit unborn and unascertained beneficiaries who may themselves enter into same-sex marriages or civil partnerships and may wish their children or partners to benefit from the settlement.
- 7) The court considered that the proposal to restrict the exercise of the non-fiduciary powers of appointment of the tenant for life under the settlement so as to require the written consent of the trustees was of great potential benefit to the unborn and unascertained beneficiaries, removing the risk that a person unsuitable to exercise such wide powers would do so in a manner that was not for the long term benefit of the Settlement, recognising that the expertise of the trustees could be important and that on occasions two or three minds would be better than one.
- 8) The court also considered that it would benefit the unborn and unascertained beneficiaries if the trustees were given a flexible overriding power of appointment, exercisable by a majority of the trustees, to sit alongside the existing powers of appointment of the tenant for life, which would be exercisable subject to trustee consent; such a power might be used if a tenant for life was not willing to act.
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