A special commissioner decided that the beneficiary of an alimentary liferent under a trust had an interest in possession under the terms of the trust so that the value of the property in which that interest subsisted should be aggregated with her free estate for the purposes of calculating the charge to inheritance tax (IHT) arising upon her death.

Facts

This was an appeal by the trustees of an inter vivos trust created for the benefit of Mrs D against notices of determination by the Revenue made under IHTA 1984, s. 221, whereby it was determined in relation to the deemed disposal for IHT on the death of Mrs D that, having regard to the provisions of IHTA 1984, Pt. III, Ch. I and II, she had an interest in possession in the settled property held by the trustees upon the terms of the trust, and in consequence, that the estate of Mrs D was deemed to include the property in which that interest subsisted.

In 1962, D had transferred certain securities and investments to trustees to be held on trusts set out in a trust deed. Until D's death in 1981, the trust was treated as a settlor-interest trust by the predecessor to ICTA 1988, s. 660 so that the income arising from the trust fund was regarded for tax purposes as income of D, as settlor. Following D's death, the trust was treated for income tax and capital gains tax purposes as a discretionary trust, and taxes were paid on that basis until Mrs D's death in 2002. The trust deed provided that the trust fund should be held upon trust for several purposes, including payment to or application for the maintenance, support, benefit and enjoyment of D's wife for her alimentary liferent use only. In the event of the whole of the income not being paid or applied by the trustees in any year, the surplus might be accumulated and invested and expended as income in any future year. In particular, the trustees had power to pay out of the income the premiums of insurance on any policy or policies effected on the life of and for the benefit of Mrs D.

The trustees contended that the concurrence of Mrs D was not necessary before income could be withheld from her so that she should not be treated as having an interest in possession in the trust property for the purposes of IHT. They argued that (1) the terms of the trust deed indicated that the trustees had a function, in exercise of their fiduciary duties, that was more extensive than merely following the wishes of Mrs D; and (2) the power to pay insurance premiums was inconsistent with an entitlement on the part of Mrs D to demand the whole of the income of the trust fund.

Issue

Whether the provisions of the trust deed, as properly construed, conferred on Mrs D a present right to present enjoyment of the annual income of the trust fund.

Decision

The special commissioner (Julian Ghosh) (dismissing the appeal) said that it appeared that the main purpose of the trust was to make an alimentary provision for the wife during her lifetime, the fee being intended for any children of the marriage. If so, the court would be slow to construe the provisions in her favour as being subject to a power in the trustees to defeat that purpose by diverting the net income for the benefit of others. There would have to be a clear indication in the deed if that were the intention of the settlor. It would be odd, if the intention was to give dispositive powers to the trustees, to express them in the order in which they were expressed in the trust deed, i.e. after the initial conveyancing of the free income to the wife. The present issue turned on the proper construction of the trust deed. The question was whether the power to apply income towards the payment of life insurance premiums applied to the whole income of the trust fund or only to any income that was not, with the consent of the liferentrix, paid to her or applied for her benefit.

The trust deed clearly created an alimentary liferent in favour of Mrs D in the free annual income of the trust fund. However, that was subject to the trustees’ powers to pay or apply to or for her benefit not ‘the free annual income of the trust fund’ but only such part of it as they might consider ‘proper and expedient’, provided always that the power effectively to withhold part of the free annual income might be exercised only with the concurrence of Mrs D. Unless or until the trustees considered it proper and expedient to pay or apply a lesser amount and Mrs D concurred with such a consideration, the trustees were obliged to pay the whole of the free annual income of the trust fund to Mrs D or to apply it for her benefit.

Mrs D, in effect, had a power of veto: the whole of the free annual income of the trust fund had to be paid or applied to her or for her benefit from year to year unless or until she should concur with a consideration by the trustees that it was proper and expedient for a lesser amount to be so paid or applied. Furthermore, the trust deed expressly provided that the free annual income might be paid or applied for her ‘maintenance, support, benefit and enjoyment’ which conferred on Mrs D a considerably broader interest that could not properly be construed as limited only to so much of the free annual income in any given year as was necessary for her maintenance.

On a proper construction of the trust deed, the power to pay the premiums of life insurance was exercisable only in relation to such income as was not paid or applied to or for the benefit of Mrs D and the trust deed did not contain a power to pay insurance premiums without the concurrence of the liferentrix.

(2007) Sp C 593.
Decision released 21 February 2007.