chD Stephenson v Barclays Bank 625 Stephenson (Inspector of Taxes) v Barclays Bank Trust Co itd CHANCERY DIVISION WALTON J and, 3rd pecemper 1974 Capital gains tax ~ Settlement ~ Beneficiary becoming absolutely entitled to all assets forming part of settled property ~ Deemed disposal and reacquisition of assets by trustees ~ Two or more beneficiaries — Beneficiaries jointly absolutely entitled as against trustees - Meaning of ‘jointly” - Meaning of ‘absolutely entitled’ - Power to direct how assets shall be dealt with ~ Beneficiaries sui juris and collectively entitled to require transfer of trust funds subject to trustees’ rights of indemnity ~ Trusts continuing — Beneficiaries having no power so long as trust continues to direct how trustees should manage investments ~ Particular assets of fund to which each beneficiary entitled not identifiable ~ Beneficiaries entitled as tenants in common and not joint tenants ~ Whether beneficiaries jointly absolutely entitled as against trustees to all assets forming trust fund ~ Finance Act 1965, ss 22(5), 25(3)~Finance Act 1969, Sch 19, para 9. Capital gains tax ~ Settlement ~ Beneficiary becoming absolutely entitled to all assets forming part of settled property Beneficiary absolutely entitled as against trustee ~ Entitlement ‘subject to satisfying any outstanding charge, lien or other right of trustee to resort to assets ‘for payment of duty, taxes, costs or other outgoings ~ Outgoings ~ Rights of trustee limited to personal right of indemnity - Not including right to resort to income for payment in respect of another beneficial interest ~ Finance Act 1969, Sch 19, para 9. By his will deted a4th November 1939, the testator, after appointing the trustees to be executors and trustees thereof, bequeathed to his wife an annuity of £600 per annum for her life to commence from his death and to each of his three daughters an annuity of £300 per annum for their widowhoods to commence respectively from the dates of the deaths’of their respective husbands. ‘The will contained a direc- tion to the trustees to appropriate a fund to answer the annuities with power to resort to the capital of the appropriated fund in case the income thereof proved insufficient. Any surplus income from the fund, and the ultimate capital, was to fall into and form part of the income or capital of the residuary estate which the testator disposed of on an accuraulation trust, in the events which happened, for a period of 21 years from his death, and then on trust for all his grandchildren living at his death who should attain the age of 2r years, in equal shares. The will directed the trustees to invest the funds forming the residuary estate in any investment authorised by the will with power to change those investments for others of a like nature. By a codicil to the will made on 24th June 1940, the annuitants were confined to the income of the residuary estate, but any surplus income was to be treated as a reserve fund applicable for payment of the annuities of the daughters. The testator died on roth April 1944. Probate of his will and codicil was granted on 28th August 1944 to the trustees. In 1948 one of the daughters was widowed. The testator's widow died in 1951. On 28th October 1952 R, the elder of the two grandsons of the testator living at his death, attained the age of 21; on 13th April 1955 C, the younger of the two grandsons, did likewise. In 1959 and 1963 the other two daughters of the testator ; became widows. On x8th April 1965 the accumulation period ended. On 27th January 1969 all those concerned with the residuary estate, ie the trustees, R, C and the three daughters, entered into a deed of family arrangement whereunder a fund was appropriated to answer the daughters’ annuities, the trustees advanced a sum to R and C for the purpose of buying additional income for the daughters,626 All England Law Reports [1975] 1 All ER and the daughters confirmed that on the appropriation being effected, the trustees and the estate and effects of the testator other than the appropriated fund should be immediately released from all claim (if any) by and liability to the daughters or any of them to the intent that the trustees might then forthwith transfer the re- mainder of such estate and effects to R and C. The trustees had already acquired the investments which were to form the appropriated fund and accordingly the deed, insofar as it released the estate from the daughters’ claims, took effect immedi- ately on execution, The trustees did not, however, immediately transfer the residuary estate to R and C but continued to hold that fund. ‘The trustees were assessed to capital gains tax on the basis that, on 27th January 1969, when the deed of family arrangement became operative, R and C had ‘jointly’ become ‘absolutely entitled” to the balance of the residuary estate, within s 22(5)* of the Finance Act 1965, and Sch 19, para 9, to the Finance Act 1969, and that consequently the trustees were deemed, under s 25(3)° of the 1965 Act, to have disposed of the residuary estate and immediately reacquired it in their capacity as trustees for a consideration equal to its market value. The Special Commissioners allowed an appeal by the trustees, holding that R and C were not to be regarded as being ‘absolutely entitled’, within para 9 of Sch 19 to the 1969 Act, since, so long as the residuary estate was held on the trusts of the testator’s will, neither R nor C had power to direct the trustees how to manage the investments and therefore they had no power to ‘direct how [the assets of the residuary estate] shall be dealt with’. On appeal by the Crown the trustees contended, inter alia, that the phrase ‘jointly . .. entitled’ in s 22(5) did not apply to beneficial tenants in common of pure personalty, and that beneficiaries only became absolutely entitled to the assets forming the estate when the assets were actually distributed to them. Alternatively, they contended that R and C had become absolutely entitled on 13th April 1955 when C reached the age of 21 since the right of the annuitants to have their annuities paid out of the income of the residuary estate was merely ‘a charge, lien or other right of the trustees to resort to the [trust assets] for payment of . .. outgoings’, within Sch 19, para 9, to the 1969 Act. Held - The appeal would be allowed for the following reasons— ( The phrase ‘charge, lien or other right of the trustees’ in para 9 of Sch 19 to the 1969 Act referred to the trustees’ personal right of indemnity against the trust funds and was not apt to cover another beneficial interest arising under the same instru- ment, Accordingly R and C had not become absolutely entitled before the deed of family arrangement came into operation (see p 635 h to p 636 ¢, post). (i) There was no basis for the contention that two or more beneficiaries would not become ‘absolutely entitled’, within s 22(5) of the 1965 Act, to the trust assets until the date of distribution. The scheme of the legislation was that two or more bene- ficiaries were to be regarded as jointly and absolutely entitled to the trust assets where, subject to the trustees’ rights of indemnity, the beneficiaries collectively, in the same interest, i e concurrently or as tenants in common, were entitled to require the trustees to transfer all the trust assets to the beneficiaries themselves in their respective shares, or to their nominees, and to give the trustees an absolute discharge therefor. It was immaterial that it was impossible to say before distribution which particular assets each beneficiary had become absolutely entitled to and also im- material that, as long as the trust continued, the beneficiaries would not be entitled to direct the trustees how to manage the investment of the trust funds (see p 637 ¢ to g and p 638 a to h, post); Kidson (Inspector of Taxes) v Macdonald [1974] 1 All ER 849 applied. (ii) It followed that, when the deed of family arrangement was executed, R and C became, for the purposes of capital gains tax, jointly absolutely entitled as against 4 Section 22(5) is set out at p 634 d and e, post b Paragraph 9 is set out at p 634 j to p 635 4, post ¢ Section 25(a) is set out at p 634 h, postChD Stephenson v Barclays Bank 627 the trustees of the grandfather's will trusts to the remaining residue of the estate not thereby appropriated to answer the daughters’ annuities, within s 22(5) of the 1965 Act and Sch 19, para 9, to the 1969 Act, and that, by virtue of s 25(3) of the 1965 Act, there had been a deemed disposal of the residuary estate (see p 639 c and d, post). Notes For capital gains tax in relation to settled property, see 5 Halsbury’s Laws (4th Edn) 23, 59, paras 45, 115. For the Finance Act 1965, ss 22, 25, see 34 Halsbury’s Laws (3rd Edn) 877, 884. For the Finance Act 1969, Sch 19, para 9, see ibid 1227. Cases referred to in judgment Brockbank, Re, Ward v Bates [1948] 1 All ER 287, [1948] Ch 206, [1948] LJR 952, 47 Digest (Repl) 142, 1041. Kidson (Inspector of Taxes) v Macdonald [1974] 1 All ER 849, [1974] 2 WLR 566, [1974] STC 54. Marshall, Re, Marshall v Marshall [1914] 1 Ch 192, [1911-13] All ER Rep 671, 83 LJCh 307, 109 LT 835, CA, 47 Digest (Repl) 369, 3310. Weiner's Will Trusts, Re, Wyner v Braithwaite [1956] 2 All ER 482, [1956] t WLR 579, 47 Digest (Repl) 237, 2084. Cases also cited Coller’s Deed ‘Trusts, Re, Coller v Coller [1937] 3 All ER 292, [1939] Ch 277, CA. Hardin v Masterman [1896] 1 Ch 351, [1895-9] All ER Rep 695, CA. Leconfield Estaie Co v Inland Revenue Comrs [1970] 3 All ER 273, 46 Tax Cas 325, [1970] 1 WLR 1133. Tomlinson (Inspector of Taxes) v Glyn's Executor & Trustee Co [1970] 1 All ER 381, [1970] Ch 112, 45 Tax Cas 600, CA. Case stated 1. Ata meeting of the Commissioners for the Special Purposes of the Income ‘Tax Acts held on r1th June 1973, the respondents, Barclays Bank Trust Co Ltd, as trustees of Sir Richard Winfrey deceased (‘the testator’), appealed against an assess- ment to capital gains tax for the year 1968-69 in the sum of £10,000. 2. Shortly stated the question for decision was whether on the execution of a deed of family arrangement and release dated 27th January 1969 the two grandsons of the testator became absolutely entitled to settled property as against the respondents within the meaning of s 25(3) of the Finance Act 1965. [Paragraph 3 listed the documents proved or admitted before the commissioners.] 4. The following facts were admitted between the parties: (j) By his will dated agth November 1939 the testator, then of Castor House, Castor, in the county of Northampton, appointed his son Richard Pattinson Winfrey and Barclays Bank Trust Co Ltd (‘the trustees’) to be the executors and trustees of his will. So far as relevant the will provided as follows: “5. I pequearu the following annuities (free of duty) (a) To my said Wife an annuity of Six hundred pounds per annum for her life to commence from my death and (b) To each of my three Daughters Ellen Willson Lucy Eades and Ruth Agutter annuities of Three hundred pounds per annum for their respective widowhoods to commence respectively from the dates of the deaths of their respective Husbands and I declare that each annuity shall be considered as accruing from day to day but to be paid by equal half yearly payments the first payment ro be made at the end of six calendar months from the same becoming due and I direct my Trustees to set apart as soon as conveniently may be and invest with power to vary investments a sum the income whereof when invested shall be sufficient at the time of investment to pay the said Annuities and to628 All England Law Reports [1975] 1 All ER pay such of the said annuities as are then payable accordingly with power to resort to the capital of the appropriated fund whenever the income shall be insufficient and until such sum shall be so appropriated I charge my residuary personal estate with the said annuities but after appropriation my residuary estate shall thereby be discharged from the said annuities Subject to the payment of the said annuities the appropriated fund or so much thereof as shall not be resorted to to make up a deficiency of income shall fall into and form part of my residuary estate and any surplus income of the appropriated fund shall be applied in the same manner as income of my residuary estate... °7(@)_ [pevise anp pequeata the residue of my real and personal estate (herein called my Residuary Estate) unto my Trustees upon Trust that my Trustees shall sell call in and convert into money the same or such part thereof as does not consist of money with power to postpone such sale calling in and conversion for such a period as my Trustecs without being liable to account may think proper and so that any reversionary interest be not sold until it falls into possession unless my Trustees see special reason for sale. (b) a TRusTEES shall out of the money to arise from the sale calling in and conversion of my Residuary Estate and out of my ready money pay my funeral and testamentary expenses death duties (including legacy and succession duty) and debts and shall also pay or provide for the legacies and annuities hereby or by any codicil hereto bequeathed but so that all legacies and annuities and the duty on all legacies and annuities bequeathed free of duty shall be paid primarily out of my personal estate. (© my tRustets shall invest the residue of the said money in their names or under their control in or upon any of the investments hereby authorised with power for my Trustees at discretion to change such investments for others of a like nature. (d) mv Trustees shall stand possessed of the said investments and any part of my Residuary Estate remaining unconverted and the investments for the time being representing the same (hereinafter called the Trust Fund) and of the annual income thereof Upon the trusts following that is to say Upon Trust to retain and accumulate the same at compound interest by investing the resulting income thereof in any investments hereby authorised with power from time to time to vary such investments at discretion until the decease of the surviving beneficiary under this my Will (other than grandchildren or remoter issue of mine) or the expiration of Twenty-one years from my death (whichever period shall be the shorter) but so that no part of such fund shall be invested in the purchase of land and then upon trust for all my Grandchildren living at my death who shall attain the age of Twenty-one years in equal shares and the issue of any such Grandchildren of mine who may have died in my lifetime leaving issue who shall survive me and attain the age of Twenty-one years such issue to take and if more than one equally between them the share of my estate their parent would have taken if such parent had survived me and attained a vested interest...” (2) By a codicil dared 2gth June r94o to his will the testator provided as follows: “When I signed my last Will I could not foresee all the dire consequences of War! Today the French Nation has collapsed and what may happen to us is in the lap of the gods! Already the State is taking more than half my Income and much heavier taxation must follow. The four Newspaper Companies from which most of my income is derived are hit very hard. My salaries from them cease at my death. This being so I must modify my bequests and give my Trustees increased powers, "1. ‘That whilst I wish my wife to receive £600 a year, I now provide that if the yearly income from my estate does not reach that sum, then the annuity must be limited to whatever the yearly income provides.b ChD Stephenson v Barclays Bank 629 ‘2. With regard to the Annuities to my daughters. If they should become payable during my Wife's life and the income from my estate does not exceed ‘£600 a year, my Trustees are to suspend payment until my Wife passes out, after that they are to limit the sums paid to my daughters to such sums as can be met out of the annual income of my estate, each daughter to share alike. ‘3. If during my Wife's life and afterwards there is a surplus of income, it shall be treated as a reserve and used when required to make up any deficiency in the sums required to pay the annuities to my daughters.” (3) The testator died on rgth April 1944 and his will and the codicil thereto were duly proved on 28th August 1944 by the executors and trustees named in the will. At the date of the hearing before the commissioners, the executors and trustees (‘the trustees’) were the trustees of the will and the codicil. (4) The testator's wife men- tioned in the will and codicil (‘the wife’) survived him and died on 7th August 1951. (5) The testator’s three daughters mentioned in cl 5 of the will (‘the annuitants’) all survived him and at the date of the hearing were still living, all being widows, their respective widowhoods having commenced on the following dates: Ellen Willson, 19th May 1959; Lucy Eades, 22nd December 1963; Ruth Agutter, 22nd January 1948. (6) The testator had two grandchildren and no more namely Richard John Winfrey (‘Richard’) and Francis Charles Winfrey (‘Charles’). Richard and Charles were both living at the testator’s death and had attained the age of 21 years, Richard on 28th October 1952 and Charles on 13th April 1955. (7) An annuity of £600 per annum was paid to the wife out of the annual income of the testator’s residuary estate from the testator’s death for the remainder of her life. Annuities of £300 per annum were paid to each of the annuitants out of the annual income of the residuary estate from the commencement of their respective widowhoods until the arrangements mentioned in the following sub-paragraphs were made. Until such time the balance of the annual income of the residuary estate was dealt with as follows: up until June 1967 sums were advanced to Richard and Charles amounting to £6,196 each and the balance of the surplus income was accumulated and invested in a fund (‘the accumulated income fund’); since June 1967 the whole of the income had been distributed equally between Richard and Charles. (8) In accordance with the terms of cl 7(d) of the will the trust therein declared to retain and accumulas. the income of the residuary estate came to an end on the expiry of 21 years from the testator’s death. (9) On 27th January 1969 a deed of family arrangement and release (the deed’) was made between the trustees of the first part, Richard and Charles of the second part, and the annuitants of the third part. By the deed it was recited that the deed was supplementary to the will and the codicil; that the wife had survived the testator and died on 7th August 1951; that the annuitants had survived the testa- tor and were all widows and had not remarried; that they had from the dates of the deaths of their respective husbands been in receipt of annuities of £300perannum. each in accordance with the terms of the will; that the period of ar years mentioned in cl 7(4) of the will quoted above had ended on 18th April 1965; that the testator had two grandchildren, Richard and Charles, and no more living at his death; that the trustees had completed the administration of the testator’s estate and then held the residuary estate of the testator on trust to pay the annuities bequeathed to the annuitants and subject thereto on trust for Richard and Charles absolutely; that doubts had arisen about the effect of the codicil on the direction in cl 5 of the will to set apart and invest a sum to pay the annuities; that the trustees with the consent of Richard and Charles were desirous of resolving those doubts and of distributing the estate save insofar as it might be necessary to retain a fund to satisfy the annuities; that Richard and Charles were desirous of making further provision for the annuitants by the purchase of an annuity for each of them of £600 per annum in addition to the annuities provided by the will; and that the parties thereto had agreed to execute the deed to give effect to such arrangements and to release the trustees from liability. By the deed it was provided, inter alia, as follows:630 All England Law Reports [1975] 1 All ER ‘1, The Trustees will forthwith purchase with trust funds now subject to the terms of the Will the sum of tweNTy THOUSAND POUNDS (nominal) 54% Treasury Stock 2008/2012 and will set apart the same as a separate fund under the Will and use the income thereof to pay such of the annuities bequeathed by the Will of the testator as may from time to time be payable to each of the annuitants in satisfaction of the respective annuities given by the Will. ‘a, The Trustees shall forthwith raise from the remaining trust funds now subject to the terms of the Will and advance to Richard and Charles such sums as may be necessary to enable them to purchase from Norwich Union Life Assurance Society or such other Insurance Company of repute as they may select annuities of Six hundred pounds per annum for each annuitant (which Richard and Charles hereby respectively agree to do). "3, The annuitants will at the request of Richard or Charles complete such proposal form or proposal forms in respect of annuities so to be purchased as aforesaid as may reasonably be required for enabling Richard and Charles to effect the same. ‘4. The annuitants and each of them hereby jointly and severally confirm that on the making by the Trustees of the investment hereinbefore referred to and its appropriation to satisfy their annuities under the Will the Trustees and the estate and effects of the testator other than such investment shall be immedi- ately released from all claims (if any) by and liability to the annuitants or any of them to the intent that the Trustees may then forthwith transfer the remainder of such estate and effects to Richard and Charles.” (ro) Pursuant to the deed the sum of £20,000 (nominal) 54 per cent Treasury Stock referred to therein was set apart and at the date of the hearing before the commis- sioners was retained by the trustees for the purposes therein mentioned; and with sums of £14,889 17s od advanced to them by the trustees pursuant to cl 2 of the deed Richard and Charles purchased annuities of {[600 per annum for each of the annui- tants. At the dace of the hearing before the commissioners the trustees held the remainder of the residuary estate on trust for Richard and Charles in equal shares absolutely and were paying the income thereof to Richard and Charles accordingly. (11) On rath February 1972 the inspector of taxes, in pursuance of para 12 of Sch 10 to the Finance Act 1965, assessed the respondents to capital gains tax for the year 1968-69 in the sum of £10,000 on the basis that, on the occasion when the deed was made, there had, for the purposes of s 25(3) of the 1965 Act, been a deemed disposal of the balance of the residuary estate remaining after the appropriation of the said {[20,000 (nominal) 54 per cent Treasury Stock and payment of the said advances of {14,889 asa result of which capital gains estimated at {(10,000 had accrued. 5. It was contended on behalf of the respondents: (1) that so long as Richard and Charles were interested as beneficial tenants in common of the residuary estate all the assets comprised therein remained settled property for the purposes of Part III of the 1965 Act; (2) in thealternative: () that Richard and Charles had becomeabsolutely entitled as against the trustees to the residuary estate when they respectively attained the age of 21 and (ji) that in any event Richard and Charles had become absolutely entitled as against the trustees to the accumulated income fund a1 years after the testator’s death when the accumulation period under cl 7(d) of the will expired; () that accordingly Richard and Charles did not on the occasion when the deed was entered into become absolutely entitled as against the trustees to any settled property (or alternatively to the accumulated income fund); and (4) that the assessment under appeal should be discharged. 6. It was contended on behalf of the Crown: (1) that Richard and Charles on the occasion when the deed was made (but not at any earlier time) had become absolutely entitled as against the trustees within the meaning of s 25(3) of the 1965 Act, to settled. property, namely, the balance of the residuary estate (including the accumulatedChD Stephenson v Barclays Bank 631 income fund) of the testator remaining after the appropriation of the said (20,000 (nominal) 54 per cent Treasury Stock and payment of the said advances of £714,889; @) that by virtue of s 25(3) there was on that occasion a deemed disposal by the trustees to themselves of the balance of the residuary estate; (3) that capital gains had accrued to the trustees in respect of that deemed disposal; (4) that the assessment to capital gains tax which was under appeal stiould be upheld in principle, leaving figures to be agreed. [Paragraph 7 listed the cases! cited to the commissioners.] 8. The commissioners took time to consider their decision and gave it in writing on x6th July 1973 as follows: “z, On this appeal against an assessment to Capital Gains Tax made for the year 1968-69 the question for our determination is whether on the occasion when, the Deed of Family Arrangement and Release dated 27th January, 1969 (herein- after called the “Deed supplemental to the Will”) was entered into Richard John Winfrey (hereinafter called Richard”) and Francis Charles Winfrey (herein- after called Charles”) became absolutely entitled as against the trustees within the meaning of Section 25(3) of the Finance Act, 1965, to settled property, namely the residuary estate of the late Sir Richard Winfrey and income therefrom remaining after the trustees had sét aside certain Treasury Stock pursuant to the said Deed to satisfy annuities given by the deceased's Will (or alternatively so much thereof as was not held as an Accumulated Income Fund), with the result that there was then for the purposes of that tax a deemed disposal within the said subsection, ‘a. By declaratory provisions enacted in paragraph 9 of Schedule 19 to the Finance Act, 1969, (below the cross-heading “Distinction between trustees of settled property and bare trustees”) references in Part Ill of the Finance Act, 1965, to any asset held by a person as a trustee for another person absolutely entitled as against the trustees are required to be construed as references to a case where that other person has the exclusive right, subject only to satisfying any outstanding charge, lien or other right of the trustees to resort to the asset for payment of duty, taxes, costs or other outgoings, to direct how that asset shall be dealt with. It was common ground between the parties that these provisions, being declaratory in form, took effect retrospectively. "3, We think it convenient to consider in the first place the question whether (as was contended on behalf of the [respondents] alternatively) the annuities payable were, prior to the Deed supplemental to the Will being entered into, bequests within the scope of the words in the said paragraph 9 commencing with the words “subject only” and ending with the word “outgoings” (herein- after called “the ‘subject only’ phrase”). As to this, it is, we think, material to note that that paragraph relates to references to any asset held by a person as trustee for another person absolutely entitled “‘as against the trustee”. Given this context, we are of opinion that in construing the “subject only” phrase the words following the words “other right” should be read as qualifying the words “outstanding charge, lien or other right”, and not merely in the words “other right”. Further, it seems to us that if this is so the annuities, while prior to the Deed supplemental to the Will charges against annual income of the estate, did not come within the scope of the “subject only” phrase. In the first place we think that in construing that phrase the ejusdem generis rule applies, and that 1 Berkeley, Re, Inglis v Berkeley (Countess) [1968] 3 All BR 364, [1968] Ch 744, CA; Brockbank, Re, Ward v Bates [1948] r All ER 287, [1948] 1 Ch 206; Coller’s Deed Trusts, Re, Coller v Coller [1937] 3 All ER 292, [1939] Ch 277; Hardin v Masterman [1896] 1 Ch 351, [1895-9] All ER Rep 695; Leaconfield Estate Co v Inland Revenue Comrs [1970] 3 All ER 273, 46 Tax Cas 325, [1970] 1 WLR 1133; R v Special Comrs of Income Tax, ex parte Shaftesbury Homes and Arethusa ‘Training Ship [1923] 1 KB 393, 8 Tax Cas 367, [1922] All ER Rep 637, CA.