Before
His Honour Judge Behrens QC
Between:
IN THE MATTER OF A SETTLEMENT KNOWN AS “RGST” MADE BY DEED OF APPOINTMENT DATED 11 SEPTEMBER 1998
AND IN THE MATTER OF SECTION 1 OF THE VARIATION OF TRUSTS ACT 1958.
(1) ANTHONY PATRICK RIDGWELL
(2) PATRICK GEORGE RIDGWELL
(3) JACQUELINE ANNE RIDGWELL
(Trustees of the RGST)
Claimants
AND
(1) EMILY MAY RIDGWELL
(2) TOM GEORGE RIDGWELL
(3) JACK ERIC RIDGWELL
(All acting by their litigation friend, IAIN MICHAEL HARRIS)
Defendants
JUDGMENT
The facts
This is an application under section 1 of the Variation of Trusts Act 1958 (“the Act”) to vary the terms of the trusts created under a Deed of Appointment dated 11th September 1998. Under that appointment the trust funds originally held under a Settlement dated 26th February 1979 (“the 1979 Settlement”) were to be held upon the trusts of a settlement known as the RGST.
The Claimants are the present Trustees of the RGST. The First Claimant, Anthony Ridgwell, is also the tenant for life under the RGST, and the sole surviving grandson of the Settlor of the original settlement from which the RGST is derived. The Second and Third Claimants are Anthony Ridgwell’s parents.
Anthony Ridgwell is 36 years old (date of birth 4/11/71). He is married to Ann Ridgwell (date of birth 26/7/1972). They have 3 children - the Defendants who were born on 18/10/2000, 15/6/2002 and 30/5/2005 respectively. They are accordingly 7, 5 and 2 respectively. It is clearly possible that Anthony Ridgwell will have further children.
Anthony Ridgwell has no live brothers or sisters. He did, however, have a younger brother, Mark Ridgwell who died of leukaemia in August 1988 at the young age of 14. As far as is known Anthony Ridgwell and his wife Ann Ridgwell are in good health.
Under paragraph 2.1 of the Second Schedule of RGST the trust funds are held for Anthony Ridgwell for life. Under paragraph 2.2 the Trustees have power during the lifetime of Anthony Ridgwell to pay or apply all or any part of the capital of the trust fund for the maintenance education or benefit of one or more of Anthony Ridgwell’s children or remoter issue. Under paragraph 2.3 after Anthony Ridgwell’s death and in default of an appointment by him either during his lifetime or in his will the trust fund is held for such of his children as are living at his death and achieve the age of 30 with a “per stirpes” provision if any of his children predecease him themselves leaving children.
The trust fund is very substantial. The current value of the RGST is of the order of £54,500,000. Much of this is attributable to the family holding Company – Napier Brown Holdings Limited (“NBH”). The RGST owns 64.15% of the shares in NBH (valued at nearly £27,000,000), and is owed over £23,000,000 by NBH in loans and accumulated interest. Anthony Ridgwell has a personal fortune of about £11 million.
The Trustees propose to vary the RGST in two ways. First, they propose that upon the death of Anthony Ridgwell, there be created a life interest in the income from the Trust Fund in favour of any surviving spouse; and, secondly that the power of appointment in paragraph 2.2 of the Second Schedule be exercisable during the lifetime of Anthony Ridgwell and of any surviving spouse.
Under the Act the Court can only approve variations that are for the benefit of the children and unborn children of Anthony Ridgwell. At first blush these variations do not appear to be for their benefit. The only effect of the variations is to defer (or possibly to defer) the date when the children or unborn children obtain a vested interest in the trust fund.
However it has been argued that this is too simplistic approach. When one takes into account the impact of inheritance tax, the greater flexibility afforded to the trustees by the variation, and the possibility of the trustees obtaining cheaper insurance, the overall benefit to the children and the unborn children outweighs the possible disadvantage of the deferred vesting of their interest. Thus the overall variation is for the benefit of the children and unborn children.
Representation
The Trustees were represented Teresa Rosen Peacocke. The children and unborn children were represented by Andrew Cosedge. Both Counsel were instructed by Howard Kennedy, 19 Cavendish Square, London W1A 2AW.
Ms Rosen Peacocke produced a full and helpful skeleton argument and referred me to relevant authorities under the Act. Mr Cosedge, who supported the application, took me through the relevant provisions of the Inheritance Tax Act 1984 as amended by Finance Act 2006. He also provided a helpful opinion on behalf of his clients in support of the proposed variation.
I am also grateful to Mrs Summers, the Partner at Howard Kennedy with care and control of the application, for the clear way she set out the problem and the arguments in her witness statement.
The Variation of Trusts Act
Ms Rosen Peacocke summarises the effect of the Act in paragraphs 18 – 20 of her skeleton argument.
Section 1(1)(a) of the Variation of Trusts Act 1958 provides
“Where property, whether real or personal, is held on trusts arising, whether before of after the passing of this Act, under any will, settlement or other disposition, the court may if it thinks fit by order approve on behalf of … (a) any person having, directly or indirectly, an interest, whether vested or contingent, under the trusts who by reason of infancy or other incapacity is incapable of assenting …
any arrangement (by whomsoever proposed, and whether or not there is any other person beneficially interested who is capable of assenting thereto) varying or revoking all or any of the trusts, or enlarging the powers of the trustees or managing or administering any of the property subject to the trusts.”
Provided … the court shall not approve an arrangement on behalf of any person unless the carrying out thereof would be for the benefit of that person.
The Court’s powers under the Act are discretionary. However, the discretion under the Act does not arise unless the Court is satisfied that:
the proposed variation is an arrangement within the meaning of the Act and
the arrangement is for the benefit of the children and unborn children of Anthony Ridgwell
Arrangement
In the course of his judgment in Re Steed’s Will Trust (Footnote: 1) Lord Evershed MR stated that the word “arrangement” was used in the widest possible sense as to cover any proposal that any person may put forward for varying or revoking the trusts. There is some suggestion that if the proposed change fundamentally alters the entire basis of the original trusts this cannot properly be described as a “variation” (Footnote: 2). However it seems to me clear that the addition of a life interest in this case does not, on any view, fundamentally alter the entire basis of the original trusts. I am accordingly satisfied that the proposed variation is an arrangement within the terms of the Act.
Benefit
Benefit usually means “financial benefit (Footnote: 3). This financial benefit can take the form of the mitigation of tax liabilities which would otherwise fall on the Trust Fund (Footnote: 4). In general, it is no objection to an application under the 1958 Act that its purpose, or primary purpose, is the avoidance or mitigation of tax. Thus in Re Weston’s Settlement (Footnote: 5) Stamp LJ stated (at p 232) that the court “is not the watchdog of the Commissioners of Inland Revenue” and Lord Denning MR remarked (at p 245) that
.“Two propositions are clear: (i) In exercising its discretion, the function of the court is to protect those who cannot protect themselves. It must do what is truly for their benefit. (ii) It can give its consent to a scheme to avoid death duties or other taxes. Nearly every variation that has come before the court has tax avoidance for its principal object: and no one has ever suggested that this is undesirable or contrary to public policy.”
Inheritance Tax.
Under section 49 of the Inheritance Tax Act 1984 (“IHTA”) a person beneficially entitled to an interest in possession in settled property is treated for the purpose of the Act as beneficially entitled to the property. Thus if no steps are taken to mitigate the tax liability the whole of the trust fund will on Anthony Ridgwell’s death be aggregated with his free estate so as to create a tax liability of 40% of £54,500,000, that is £21,800,000.
One method of avoiding this potential tax liability is to make potentially exempt transfers during Anthony Ridgwell’s lifetime. If Anthony Ridgwell survives more than 7 years from the date of the transfer the transfer becomes inheritance tax free. If he survives more than 3 years there is taper relief.
It is still possible to take advantage of this saving by the trustees making outright transfers to the children. However everyone agrees that it is not appropriate to make transfers of (say) £20 million to children as young as 7. According to Mrs Summers, the trustees do not feel it is appropriate to put substantial sums on bare trust for the children given their ages and the fact that they would then have complete control of the assets at the age of 18.
Prior to the Finance Act 2006 a possible solution to this problem lay in the creation of Accumulation and Maintenance Trusts for the children. Moneys paid into the Accumulation and Maintenance Trust would have been treated as a potentially exempt transfer.
The Finance Act 2006 altered the rules on the inheritance tax treatment of trusts. It is no longer possible to create an Accumulation and Maintenance Trust. The creation of any trust is treated as a chargeable transfer. Thus, any transfer over the available nil rate Band (£300,000) triggers an immediate 20% charge. Furthermore if a discretionary settlement is created there is an additional charge of 6% every 10 years and when capital is distributed.
The Finance Act 2006 did however include amendments to section 49 of the IHTA by adding a number of categories of persons who are included within the class of persons to whom it applies. One of these categories (called “a transitional serial interest”) is contained in section 49D, an interest to which a person becomes entitled on death of a spouse on or after 6th April 2008.
If the proposed variation takes effect and Anthony Ridgwell’s wife survives him, her interest will qualify as a transitional serial interest under section 49D with the result that her interest will qualify as an interest in possession under section 49.
Furthermore (subject to any future change in the law) she will qualify for the surviving spouse exemption from inheritance tax, so that there will be no inheritance tax payable on the RGST on Anthony Ridgwell’s death.
The effect of the proposed variation to paragraph 2.2 of the Second Schedule is that the Trustees will be able to make advances to Anthony Ridgwell’s children during the life of his surviving spouse and that those advances will qualify as potentially exempt transfers.
Thus the effect of the proposed variation is to give the Trustees greater flexibility in the timing of making advances under paragraph 2.2 in order to effect inheritance tax savings. Given the relative youth of Anthony Ridgwell’s children and the fact that Anthony Ridgwell’s brother died young the Trustees submit that this greater flexibility is a benefit to the children and the unborn children.
Life Insurance
The Trustees of the RGST have power to effect and maintain insurance out of the capital or income of the Trust Fund (under Clause 7(1)(xii) of the 1979 settlement incorporated into the RGST by paragraph 4 of the Second Schedule to the Deed of Appointment). The Trustees have been investigating the possibility of insuring against the inheritance tax that will be payable if the children become entitled on the death of the life tenant as opposed to under advancements made during the life tenant’s lifetime.
If the variation is not approved it will be necessary to take out a sole life policy on the life of Anthony Ridgwell. Mrs Summers has carried out investigations based on an estimated tax liability of £25 million. The current best estimate of the premium based on the life of Anthony Ridgwell is £186,000 per annum.
If the variation is approved the trustees will need to take out a joint lives policy on the lives of Anthony Ridgwell and his wife with the policy paying out on the death of the survivor. The current best estimate of the premium payable would be of the order of £78,000 per annum. This is less than half of the premium payable if the policy is taken out on Anthony Ridgwell’s life alone.
It is, of course, self evident that this premium will be payable for a longer time than if the policy were on the sole life of Anthony Ridgwell. However if and in so far as the Trustees make advances to the children this premium will, in any event, reduce.
Capital Gains Tax
In an e-mail sent after the conclusion of the oral argument Ms Rosen Peacocke points out that there may be in addition a saving in Capital Gains Tax as a result of the variations. Pursuant to section 62(1) Taxation of Chargeable Gains Act 1992 there is a tax free uplift for capital gains tax purposes to the value as at the date of death. If therefore outright appointments were made shortly after Anthony Ridgwell’s death little or no capital gains tax would be payable. Furthermore the appointments would be potentially exempt transfers with the result that there would be no inheritance tax payable if Anthony Ridgwell’s spouse survived for a further 7 years and taper relief in the event of her death between 3 years and 7 years after the appointment. It would be possible for the Trustees to insure against the liability for this tax.
Disadvantages.
The disadvantage of the proposed variation to Anthony Ridgwell’s children or future children is that their beneficial interest is postponed to that of Anthony Ridgwell’s surviving spouse. If no appointments are made by the Trustees they may have to wait a considerable time before their interests vest in possession.
In his opinion recommending the proposed variation on behalf of the children and unborn children Mr Cosedge makes the following points
Nevertheless it is apparent from paragraph 9 of the Witness Statement of Jo Summers that the trustees have in mind the distinct possibility of making outright advancements to the children when they are older. In the meantime, however, it is desirable to reduce so far as is possible the risk of inheritance tax becoming payable on the death of Anthony before those advancements have been made. That is the purpose of the proposed variation under which Anne would be granted a life interest in succession to that of Anthony. That life interest for Anne would qualify as a transitional serial interest under section 49D IHTA 1984 as introduced by FA 2006 and in consequence the spouse exemption would apply on Anne’s life interest coming into possession on Anthony’s death. In effect the trustees would have given themselves the lifetime of the longer lived out of Anthony and Anne (rather than just the lifetime of Anthony) in which to make outright advancements to the children at a suitable juncture. As mentioned above, those advancements would qualify as potentially exempt transfers incurring no inheritance tax in the event of the then life tenant (be it Anthony or Anne) surviving for 7 years. The possibility of him or her not so surviving could be covered by decreasing 7-year term life assurance.
This naturally means that in the absence of any advancement the vesting in possession of the children‘s remainder interests will be postponed for the lifetime of the longer lived of Anthony and Anne rather than just for the lifetime of Anthony. However, that is more a theoretical disadvantage than a real one given that the likelihood is that advancements will be made to the children in order (amongst other things) to achieve the very substantial inheritance tax savings described above. Moreover, that theoretical disadvantage can be seen as the inevitable, but worthwhile, price to be paid for obtaining the maximum time available in which to make advances so as to obtain the inheritance tax savings.
Two further points emerged in the course of argument. First it is almost inevitable that the Trustees will be making advancements under the settlement. Mr Cosedge suggested that the potential tax savings are such that it would be arguable that the Trustees would be in breach of trust if they failed to take advantage of them. Secondly the advances would be made by the Trustees and not the surviving spouse. Thus if, for some reason, there is a fall out in this family, the Trustees will still be able to make the advances even if the surviving spouse objects.
Conclusion
I reserved judgment in this case because I was concerned that the postponement of the children’s interests might not be for their benefit. However, Mr Cosedge and Ms Rosen Peacocke have persuaded me that the greater flexibility that the variation gives to the Trustees in the timing of making advances to effect Inheritance Tax savings, taken together with the potential savings in Capital Gains Tax, and the possibility of cheaper life insurance amount to a benefit to the children and unborn children which outweigh the theoretical disadvantage of the postponement of their interest in remainder.
It follows that I am satisfied that there is jurisdiction to approve the variation. As a matter of discretion I agree that the variation is a sensible solution to a difficult problem.
In all the circumstances I approve the settlement on behalf of the children and unborn children.
JOHN BEHRENS
14 November 2007