The statute called for the apportionment of capital gains made by non-resident trustees where resident beneficiaries had ‘interests’ in the settled property, with the apportionment to be made ‘in such manner as is just and reasonable between’ them. The persons in question only had discretionary interests in the settled property.
Held: Such discretionary beneficiaries did have ‘interests in settled property’ for the purposes of s 42(2) of the 1965 Act.
The House considered the argument that interpretation of a taxing statute might cause hardship.
Lord Scarman characterised the term ‘beneficiary’ as: ‘a term which everyone is agreed includes persons who are the objects of the discretionary trusts’.
Lord Wilberforce said: ‘I would only refer to one other argument, that based on the alleged ‘hardship’ of accepting the Revenue’s contention. I do not think that this is a relevant consideration at all. If there were two equally possible constructions of this subsection, it might be correct to choose that which is the more favourable to the taxpayer, on the basis that subjects can only be taxed by clear words. This principle cannot apply where there are decisive legal reasons for preferring one construction rather than another. Once this step has been taken considerations of ‘hardship’ do not enter into the discussion.’ and ‘Settlors, after 1965, make their settlements with knowledge of the legislation and of its consequences.’
. . And ‘The key question is as to the meaning of the word ‘interests’ in section 42(2) of the Finance Act 1965, the alternatives being whether this word refers only to such interests as can be assigned a value, or whether it is a word of more general significance capable of covering any interest, quantifiable or non-quantifiable, of a beneficiary under a trust. That either of these is a possible meaning in fiscal legislation is made clear (a) by the general observations of Lord Reid in Gartside v. Inland Revenue Commissioners [1968] A.C. 533 [sic], 603 (see also those of Stephen J. and Wills J. in Attorney-General v. Heywood (1887) 19 Q.B.D. 326) and (b) by a comparison of the cases just cited. In Heywood, which arose under section 38 of the Customs and Inland Revenue Act 1881, and where the question was whether the settlor had reserved ‘an interest’ by including himself among a discretionary class of beneficiaries, the word ‘interest’ was given the more general meaning. To require that it meant something to which an ascertainable value could be assigned would, it was held, be contrary to the scheme of the statute. In Gartside, on the other hand, which arose under section 43 of the Finance Act 1940, and where the question was whether estate duty would be charged in respect of the determination of a discretionary interest, this House held that the word must bear the narrower meaning because the statute necessarily required ascertainment of the quantum of the interest. In Gartside I expressed the opinion, from which the other members of the House did not dissent, that these two cases could stand together. The word ‘interest’ is one of uncertain meaning and it remains to be decided on the terms of the applicable statute which, or possibly what other, meaning the word may bear. The appellant contends for the narrower meaning, and can find some support in section 42 of the Act of 1965. There is the reference to ‘values’ in subsection (2). There is subsection (3) which, he contends, sets out a code for assigning values to discretionary interests in income or capital – an exclusive code within one of whose provisions a case must fall if a charge to tax in respect of a discretionary trust is to arise. There is, thirdly, the reference, in subsection (2), to a life interest or an interest in reversion, but, in my opinion this does not survive a first critical look: the reference is clearly illustrative and nothing more. The two main arguments are by no means negligible, but they are, in my opinion, greatly outweighed by those on the other side. I simply state them, as they impressed me; they are developed in discussion in the Court of Appeal’s judgment. 1. The initial words of subsection (2) are ‘any beneficiary’. Unless clearly directed otherwise, I would assume that ‘persons having interests’ was correlative to these words. Discretionary objects are clearly ‘beneficiaries’, so I would suppose them also to be included in ‘persons having interests.’ 2. The apportionment to be made under the subsection is mandatory. The amount of the gains – i.e., the whole amount – must be apportioned in the relevant year of assessment. This can only be done if discretionary objects, who may be the only ‘beneficiaries’ in that year, can be the objects of apportionment. 3. The words, in subsection (2), ‘in such manner as is just and reasonable’ and ‘as near as may be, according to the respective values of those interests’ suggest a broad rather than an actuarial approach in which all relevant considerations may be taken into account. They permit, inter alia, consideration of the settlor’s letter of intent which shows, at least, that the settlement was to be regarded as for the benefit of the grandchildren, not of the settlor’s two children. 4. That subsection (3) represents an exclusive code is in my opinion not supported by the form of the section. On the contrary, the structure of it suggests that subsection (2) is the main and general charging provision, subsection (3) being auxiliary and confined to particular cases. These considerations together convince me that an apportionment in respect of ‘interests’ under a discretionary trust can, indeed must, be made. ‘
HL Capital gains tax – Gains accruing to trustee resident outside the UK – UK – resident beneficiaries being both potential objects of discretionary power and having interests contingent on surviving to a specified day – Whether apportionment of gains amongst beneficiaries mandatory – Whether relevant to consider hardship – Manner of apportionment – Finance Act 1965, s 42.
Judges:
Lord Wilberforce, Lord Scarman, Lord Roskill and Lord Brandon
Citations:
[1982] 1 WLR 1319, [1982] 3 All ER 808, [1982] UKHL TC – 56 – 501
Links:
Statutes:
Jurisdiction:
England and Wales
Cited by:
Cited – Trennery v West (Inspector of Taxes) HL 27-Jan-2005
The House considered the application of the section to ‘flip-flop trusts’. The section allocated liability to charge on gains within a settlement under certain circumstances onto the settlor, and at his rate of tax. Assets were allocated to two . .
Lists of cited by and citing cases may be incomplete.
Capital Gains Tax, Trusts
Updated: 29 June 2022; Ref: scu.222085