The High Court held that ‘individuals’ meant natural persons and did not include corporations for purposes of the Trustee Act 1925; and that ‘trustees of the settlement’ in TCGA 1992, s. 69 was restricted to validly appointed trustees and did not include a trustee de son tort.

Facts

The claimants in this case were the current trustees of a settlement constituted in 1968 with C and his wife (W) as trustees. The trusts were discretionary trusts in favour of their children and remoter issue. The trustees were given a power of appointment over the trust assets. In 1982 by a deed of appointment, a bank (‘IBI’) and T were appointed to be the new trustees and C and W purported to resign. Their intention was to leave IBI and T as the sole trustees. It was at the heart of the claimants’ case that, while that document was effective to appoint IBI and T to be new trustees, it was not capable of discharging C and W because any such discharge would have left two trustees who were not both ‘individuals’ within s. 37(1)(c) of the Trustee Act 1925.

C and W were both resident in the UK. All the other persons subsequently appointed as trustees were nonresident in the UK for capital gains tax (CGT) purposes, other than the first and second claimants, as to whose residence no issue arose. C died in 1983. The Inland Revenue had raised assessments against the first and second claimants for CGT for each of the years 1989–90 to 1996–97 inclusive. The amounts for each of the years up to but not including the last of those years were assessed on the basis of gains made by the settlement as a result of dealings in relation to trust property. As regards the last year the assessment was raised partly in respect of such transactions, but also because it was said that, in the events which had happened, the trustees became non-resident in that year (by virtue of the death of W), generating a charge to tax. It was assumed that in all relevant years the trusts of the settlement were administered outside the UK.

The claimants brought proceedings for professional negligence against the two firms of solicitors who acted in the drawing of various documents during the relevant periods. They were alleged to have been negligent for not spotting that there was or might have been a problem. There was a claim for damages in the amount of capital gains tax and income tax, together with interest and penalties. It was felt that the proceedings could be more expeditiously resolved if certain preliminary questions were tried. The issues arose because of concerns over the effectiveness of the 1982 deed by which C and W purported to resign and IBI and T took over the trusteeship. The claimants argued that the closing words of s. 37(1)(c) of the Trustee Act 1925 meant that, while the appointment was effective, the resignations were not because if they had been effective then there would be one company and one individual, as opposed to two individuals, as trustees of the settlement. Accordingly, C and W remained trustees at that point (they were not discharged from their trust, in the wording of s. 37(1)(c)). That was an unintended effect, affecting the validity of the acts of the ostensible trustees thereafter, and it affected whether the trust was on shore or not for the purposes of the CGT legislation.

Following on from the 1982 document, there was a series of acts done by the ostensible trustees on the footing that IBI and T became the sole trustees. If they were not the sole trustees (i.e. if C and W were not in fact discharged in 1982) then in 1983, following the death of C, W remained a trustee. Since she did not participate in any of the acts until her death, then any acts which required the participation of all the trustees (i.e. the various appointments of new trustees and appointments in relation to beneficial interests) were invalid. The claimants said that that applied to all the various appointments. In those circumstances, the trial of a number of preliminary issues was ordered.

Issue

Whether, on a true construction of s. 37(1)(c) of the Trustee Act (prior to its amendment by the Trusts of Land and Appointment of Trustees Act 1996) the term individuals’ included corporations; and whether specified trustees appointed after 1982 were within the term ‘trustees of the settlement’ in TCGA 1992, s. 69.

Decision

Mann J (ruling accordingly) said that the word ‘individuals’ was used once in s. 37(1)(c) of the 1925 Act, and once in s. 39. The word ‘person’ or ‘persons’ was used a large number of times, and the word corporation was used as well. That suggested a deliberate use of the word ‘individuals’ to mean something different from persons. Thus in s. 36(2) there was an express reference to a corporation which suggested that the draftsman had well in mind the need to distinguish, for some purposes, corporations from natural persons. Section 36(3) contained another reference to a corporation. That led to the conclusion that if the draftsman had intended to include corporations within the people referred to at the end of s. 37(1)(c) (and s. 39) he would much more naturally have used the word ‘persons’ which was in use anyway (and which was the word used to resolve any future problems in the amendment made by the 1996 Act). Yet he did not – the word ‘individuals’ was apparently deliberately used.

The word individual had a natural meaning which did not include companies, and it was apparently deliberately chosen to distinguish it from ‘person’ in a context in which that latter word was used (s. 36) and which demonstrated that the draftsman was clearly conscious that ‘corporations’ might be trustees (both s. 36 and 37). Considering the legislative background of the Bodies Corporate (Joint Tenancy) Act 1899 and its use of the word ‘individual’ the force of those points became even stronger. The deliberate departure from ‘persons’ in earlier Acts completed the picture. Accordingly, ‘individuals’ in s. 37(1)(c) meant natural persons.

The effect of that conclusion was that C and W did not retire when they thought they had, so the subsequent appointments of trustees in which they did not participate were invalid even though those purported trustees acted as trustees and were to be taken as having acted entirely bona fide and innocently of the mistake that had been made in the chain of appointments. Those later trustees were trustees de son tort.

While a trustee de son tort might be described as a trustee of trust property vested in him, it was not necessarily or naturally correct to describe him as a trustee of the settlement within s. 69 of the 1992 Act. One would expect those words more naturally to describe the actual trustees. However, the real question that arose in relation to the use of the expression ‘trustees of the settlement’ depended on asking for what purpose and in what context did the question arise? In the present case the purpose and context was the 1992 Act. The scheme of the legislation was to charge the trust as if it were a separate entity and to view such things as residence by reference to the constituent parts of that entity. To allow trustees de son tort, who could come and go with no formality, to fall within that regime detracted from the certainty that was required. Nor was it necessary to allow or require trustees de son tort to be trustees of the settlement in order to make the tax regime work. Any tax chargeable on disposals by the de facto trustees would prima facie be chargeable as against them because they were the persons who made the gains for the purposes of s. 1 and 2. Unless there were some mechanism for attributing those gains elsewhere they would remain the only persons chargeable. While it would not be immediately natural to describe the trustee de son tort as a nominee or trustee for the actual trustee, in substance he was in the same position. He was obliged to transfer the property and only held it for as long as the actual trustee did not call for it. Section 60(2) effectively described the relationship between the trustee de son tort and the actual trustee. The latter had a better title.

Accordingly, such a person was within that section and the 1992 Act applied as if the assets were really vested in the actual trustees and as if the acts of the trustee de son tort were the actual trustee's acts. That produced a coherent scheme. Where there were actual trustees who were not in fact acting, but one or more trustees de son tort who were, then the disposals made by the latter would generate a charge to tax attributable to the former. If the actual trustees had to pay it they could get hold of the trust assets to enable them to do so. The actual trustees were the trustees of the settlement; although they were not acting and making disposals, any acts and disposals were attributed to them; the deemed disposals were treated as being made by them; provision was made for charging them appropriately in s. 65; it was the actual trustees who were considered as being the single continuing body of persons for the purposes of s. 69; and the residence of the trust was ascertained by reference to them under s. 69. Accordingly, so far as s. 69 of the 1992 Act was concerned, none of the specified persons were trustees of the settlement within the meaning of that section.

Chancery Division.
Judgment delivered 19 January 2007.