A special commissioner decided that a taxpayer, as administrator and sole remaining member of a self-administered pension scheme who withdrew all the funds held on trust under the scheme was not entitled to rely on the rules in Saunders v Vautier (1841) Cr & Ph 240; 41 ER 482 and Re Hastings-Bass (dec'd) [1975] Ch 25 to avoid liability to income tax under ICTA 1988, s. 591C and 596A.

Facts

The taxpayer was the administrator and (since 1991) the sole remaining member of a small self-administered pension scheme. Issues arose as to the tax consequences of the taxpayer's conduct in relation to the scheme which was established in March 1979 by a declaration of trust executed by J Ltd (‘the company’). M Ltd was the original administrator of the scheme. The taxpayer and his late wife were the only employees of the company and the only members of the scheme. The taxpayer was also the sole director of the company until his retirement in 1999. When his wife died in 1991, the moneys due to her under the scheme were paid to her personal representatives. By a supplemental trust deed dated 1 January 1994, the scheme became a small self-administered scheme and adopted new rules. The taxpayer's daughter and a pensioneer trustee were appointed as additional trustees with the taxpayer as the continuing trustee. In August 1998, the company was discharged from all obligations in connection with the trust and the power of appointing and removing trustees was assigned to the taxpayer.

The Revenue accepted that the scheme was an exempt approved scheme for the purposes of ICTA 1988, s. 592, dating back to 10 April 1979. On 22 July 1994, the company assigned to the trustees all its title in the M Ltd policy set up under the original scheme. On 4 April 1995, the trustees opened an account with the building society, into which they deposited all the funds of the scheme following the encashment of the policy. In November 1998 the taxpayer informed the pensioner trustee that he intended to exercise his sole beneficial interest in the fund pursuant to the rule in Saunders v Vautier (above). The pensioneer trustee was unable to agree to the trust moneys being paid to the taxpayer as that would constitute a termination of the scheme other than in accordance with the approved winding-up provisions. The taxpayer then gave notice terminating the company's position as trustee and subsequently withdrew some £200,000 from the scheme funds.

In June 2000, the pension schemes office informed the taxpayer that it was not satisfied that the pensioneer trustee had been correctly removed and stated that the taxpayer was unable to wind up the scheme under the rule in Saunders v Vautier. The company was dissolved on or about 19 September 2000. The taxpayer made tax returns excluding the sums withdrawn from the pension funds. The taxpayer contended that the scheme had been wound up under the rule in Saunders v Vautier and that, accordingly, the withdrawn moneys belonged to him so that the withdrawal gave rise to no adverse tax consequences. The Revenue contended that the moneys remained assets of the scheme and that the conduct of the taxpayer in respect of the moneys caused the Revenue towithdraw its approval from the scheme. On that basis, the Revenue contended that the taxpayer, as administrator of the scheme, became liable upon cessation of approval to tax under Sch. D, Case VI pursuant to ICTA 1988, s. 591C. Further, the taxpayer received payments from an unapproved scheme and, accordingly, was also liable to tax under Sch. E pursuant to ICTA 1988, s. 596A on the amounts received.

Issue

Whether the appellant was entitled to rely on the rule in Saunders v Vautier and treat the assets formerly held under a supplemental trust deed as his own absolute property; whether the taxpayer was entitled to rely on the rule in Re Hastings-Bass (dec'd) (above) and reinstate the trust fund; whether the taxpayer was liable to tax under ICTA 1988, s. 591C, as administrator of the scheme; and whether he was liable to tax under ICTA 1988, s. 596A.

Decision

The special commissioner (Julian Ghosh) (dismissing the appeal) said that it was fundamental to the application of the rule in Saunders v Vautier that the beneficiaries had to be together entitled to the whole of the beneficial interest. It was clear that the rule could have no application where there were potential beneficiaries not yet in existence, however remote their interests might be or however unlikely it might be that those beneficiaries should come into existence. There remained the possibility that persons other than the taxpayer might be entitled to an interest under the trusts of the scheme. In the circumstances, the taxpayer was not entitled to the whole beneficial interest and, accordingly, was not entitled to call for a transfer of the trust property under the rule in Saunders v Vautier.

In any event, although the rule in Saunders v Vautier entitled the beneficiaries to give directions to the trustees as to how they should deal with the trust property, the trust was still extant. Furthermore, the notice of termination given by the taxpayer to the pensioneer trustee was a notice to terminate its trusteeship. Under the terms of the supplemental trust deed, the actual termination was not effective for four weeks. Therefore, as at the date of the first withdrawal, the pensioneer trustee was still in office. The terms of the supplemental trust deed required that the power of removal be exercised by deed. The taxpayer had not complied with that formality. In the circumstances, therefore, the scheme had not ceased to exist and the moneys held in the building society did not belong absolutely to the taxpayer and, therefore, the payment of those moneys to him was not an unauthorised payment.

In the alternative, the taxpayer, having acted in his capacity as a trustee, in good faith and in accordance with his understanding of the law, claimed to be entitled to rely on the rule, or principle, established in Re Hastings-Bass and should be given the opportunity to put right his mistake by re-instating the trust fund. If so allowed, there would, in fact, have been no payment made to the taxpayer and the charges to tax fell away.

However, the principle which emerged from Re Hastings-Bass was dependent upon the duty of trustees to have regard only to relevant considerations when exercising the powers vested in them. The classic formulation was that where a trustee acted under a discretion given to him by the terms of the trust but the effect of the exercise was different from that which he intended, the court would interfere if he would not have acted as he did but for failing to take into account considerations which he ought to have taken into account or taking into account considerations which he ought not to have taken into account.

However, the principle in Re Hastings-Bass was not apposite to the present facts. It was predicated upon the assumption that where the trustees had failed to take into account only the relevant considerations when exercising a power vested in them, they had failed in their fiduciary duties towards those interested under the trust and, accordingly, the purported exercise of the power was vitiated. In view of that theoretical basis for the principle, it was clear that it did not provide relief from the consequences of the act of a beneficiary.

In the present case, the payment in question was not brought about through the exercise by the trustees of their powers but through the request by a beneficiary who sought to apply the rule in Saunders v Vautier against the trustees. In such circumstances, the beneficiary was not entitled to rely upon Re Hastings Bass. Furthermore, the application of Re Hastings-Bass in such circumstances would be wrong as a matter of principle. The availability of such relief in these circumstances would render s. 596A a mere waste of ink. Parliament intended that the section should give rise to a charge to tax upon the recipient of unauthorised payments. It could not have been the intention of Parliament that upon such an assessment being raised, the taxpayer could rely on the unauthorised nature of the payment to render it a nullity and, hence, avoid the charge to tax. Therefore, the taxpayer was not entitled to rely upon the principle in Re Hastings-Bass to relieve him of the consequences of his mistake as to the application of the rule in Saunders v Vautier. Accordingly, the scheme was still in existence at the time of the withdrawal of funds from the building society by the taxpayer.

(2008) Sp C 683.
Decision released 19 May 2008.