Wyndham v Egremont & Ors

In this matter I have approved in exercise of the jurisdiction conferred by section 1(1) of the Variation of Trusts Act 1958 (“the 1958 Act”) an arrangement varying the trusts of a fund referred to as “George’s Fund” comprised in settlement known as Lord Egremont’s 1969 Settlement (“the 1969 Settlement”) which was created by a deed dated 28 February 1969 and deeds supplemental thereto. I did so at the conclusion of counsels’ submissions on 24 July 2009 and indicated that, in view of the matters raised in the course of argument, I would set out briefly in writing my reasons for giving that approval. This I now do.

The claimant, George Ronan Valentine Wyndham (“George”), after whom the fund in question is named and who has appeared before me by Mr Francis Barlow QC and Mr James Rivett, is the only son of John Max Henry Scawen Wyndham, Second Baron Egremont (“Lord Egremont”). George attained his 26^th birthday on 31 July 2009. He is unmarried.

George’s Fund, which I shall refer to simply as “the Fund”, consists of investments, cash, life policies, land in Cumbria and a great deal of agricultural and other land - indeed the major part of the Wyndham family estate - at Petworth in West Sussex. It is worth many millions. Petworth House was made over to the National Trust by Lord Egremont’s great-uncle in 1947. Petworth - the house and estate - has been the family seat since it came into the ownership of the Wyndham family in the 18^th century and, traced through the female line, has been in the ownership of Lord Egremont’s ancestors for many generations before that. It is where Lord Egremont and his family still live. It is this fact among others that has led to some of the terms of the arrangement which I was asked to approve. Before coming to those terms, there is a little more history that I should relate.

The barony of Egremont was created in 1963. The first holder of the barony was the present Lord Egremont’s father, George’s grandfather. In 1967, the First Baron Egremont inherited the barony of Leconfield. In so doing he became the Sixth Baron Leconfield so that the present Lord Egremont is also the Seventh Baron Leconfield. The barony of Leconfield was created in 1859. The first holder of the barony was himself descended from persons who had held the earldom of Egremont which, however, became extinct upon the death in 1845 of the first Lord Leconfield’s cousin. So the names of Egremont and Leconfield have long been associated with Petworth and the surrounding estate.

I do not need to trace the various instruments by which the trusts had been established upon which the Fund had come to be held by the time of the hearing before me to approve the arrangement varying them (“the pre-arrangement trusts”). It is sufficient to note that they start with the 1969 Settlement (itself the result of the exercise of a power of appointment contained in an earlier instrument) and end with a deed dated 18 July 2008 (“the 2008 Deed”). Those trusts were as follows:

(i) the Fund was held in trust for George during his lifetime;

(ii) if George should be living on the Vesting Day the Fund would thereupon vest in him absolutely;

(iii) the Trustees had power at any time or times before the Vesting Day to transfer the Fund to George absolutely or to apply the same for his benefit in such manner as they with his consent should think fit;

(iv) subject as aforesaid the Fund was held upon such trusts for the benefit of George’s children and remoter issue as he by deed or deeds revocable or irrevocable executed before the Vesting Day should appoint or if he should die before then as he by will or codicil should appoint;

(v) subject to and in default of appointment the Fund was held on trust for George’s eldest or only son living on the Vesting Day or if his eldest or only son should have died before the Vesting Day then on trust for such son’s eldest or only son living on the Vesting Day;

(vi) if the foregoing trusts should fail or determine the Fund was to devolve on George or his personal representatives.

Paragraph (vi) of the above summary - the ultimate trust - needs more explanation. As a result of various appointments, the Fund became absolutely vested in George on his 18^th birthday but on to that absolute interest various trusts had been engrafted which, in the events that have happened, were those summarised at paragraph (i) to (v) above by the time of my approval of the arrangement. The ultimate trust takes effect therefore under the rule in Hancock v Watson [1902] AC 14.

For the purpose of the pre-arrangement trusts the expression “Vesting Day” had been redefined by the 2008 Deed to be the day on which should expire the period of 20 years from the death of the last survivor of the issue, whether children or more remote, of His late Majesty King George V living on 20 May 1940. (The choice of Royal Lives by reference to that date derived from the terms of the 1969 Settlement which itself derived from the exercise of a power of appointment contained in an earlier instrument.)

Under the pre-arrangement trusts the only living beneficiary is George. He is entitled to: an immediate life interest, and an absolute interest in capital if he is living on the Vesting Day (as defined by the 2008 Deed); the right in the meantime to be considered for a capital advance; and the ultimate trust if he should die before the Vesting Day leaving no son or grandson living on the Vesting Day. Given the ages of the remaining Royal Lives in being under the definition of “the Vesting Day” contained in the 2008 Deed, the youngest of whom (HRH Princess Alexandra) is presently 72, those trusts will inevitably come to an end in the not too distant future and, since George is only 26, in all likelihood in George’s lifetime.

The arrangement varying the trusts of the Fund is designed to achieve two aims: (1) to ensure, in accordance with George’s wishes, that the ancestral estates at Petworth continue to be attached to the two baronies and thus to devolve for as long as possible down the senior male line and (2) to defer, by an extension of the applicable trust period, the very considerable tax charges which under current legislation - absent the arrangement - will arise on the termination of the pre-arrangement trusts and which could only be met by the sale of a significant part of the ancestral lands as the major constituent of the Fund.

With those objectives in mind the arrangement has involved the following modifications to the pre-arrangement trusts:

(ii) the deletion of the contingent capital trust in favour of George (being the trust summarised at (ii) of paragraph 5 above);

(iii) the substitution for the default trust in favour of George’s son or grandson of a default trust of the Fund (and also of the income thereof in the meantime) in favour of that one of George’s male issue in the male line who shall be living on the Vesting Day and then hold the baronies of Egremont and Leconfield;

(iv) the addition of a default power of appointment of the Fund and the income thereof among the male issue in the male line of the Fifth Baron Leconfield (other than the present Lord Egremont) exercisable by the trustees with George’s consent during his lifetime and otherwise at their discretion; and

(v) the addition of a default trust of the Fund (and also of the income thereof in the meantime) in favour of that one of the Fifth Baron Leconfield's male issue in the male line (other than the present Lord Egremont) who shall be living on Vesting Day and shall then hold the baronies of Egremont and Leconfield or the barony of Leconfield.

The proposed variation, if it is to be approved by the court under section 1(1), must be for the benefit of the only other class of beneficiaries potentially entitled under the pre-arrangement trusts, namely George’s future eldest or only son living on the Vesting Day and, if he should have died by then, the eldest or only son living on the Vesting Day of George’s eldest or only son. This very restricted class, which is currently unborn, is represented by the defendants who are the trustees of the Fund in their capacity as trustees of the 1969 Settlement. They have appeared before me by Mr Hedley Marten.

Mr Marten has submitted, and I agree, that the variation to the pre-arrangement trusts brings two very clear benefits to the unborns. The first is the elimination of the likelihood, given George’s young age and the relative imminence of the current Vesting Day, that George will be alive on the Vesting Day and thus take all, leaving nothing for the unborns. Since George is one of the measuring lives for the purpose of the new trust period under the trusts as varied, he can no longer take under the proposed contingent trust of capital. The deferment of the absolute vesting of capital by a significant period of time means, it is true, that the prospect of George’s son or grandson taking an absolute interest in capital if George were to die before the present Vesting Date is correspondingly deferred and may possibly be eliminated altogether if that son or grandson should not survive to the new Vesting Day. But, in the meantime, following George’s death, such son or grandson will be entitled to the intermediate income earned by the Fund.

The second benefit is that the Vesting Day will under existing legislation give rise to a deemed disposal of the Fund and thus trigger a substantial charge to capital gains tax. Present estimates are that the liability will exceed £3 million. The postponement of the Vesting Day under the proposed arrangement to the expiry of the period of 21 years from the death of the last survivor of the legitimate issue, whether children or more remote, living on 24 July 2009 (when I approved the arrangement) of His late Majesty King George V and the Fifth Baron Leconfield is intended to effect a postponement of the charge to tax by a very significant period. Mr Marten submitted, and I agree, that the deferment of that charge is a clear and substantial benefit to the unborns. Mr Marten accepted, as I have mentioned, that the postponement of the Vesting Day reduces or eliminates the chances of a future son or grandson of George taking absolutely, but submitted that it was nevertheless realistic to assume that such persons would wish to take steps to avoid the severe tax consequences of such absolute vesting. I agree. In the meantime, such son or grandson has the income of the Fund following George’s death.

The addition of a new clause extending the default trusts (under the pre-arrangement trusts they are limited to the two named unborns) to male issue of all degrees in the male line of George does not either advantage or disadvantage those unborns since it merely adds trusts behind the existing trusts in their favour. The same, Mr Marten submitted, applies to the new trusts to be added in favour of the male issue in the male line of the Fifth Baron Leconfield. Although these additions are not specifically for the benefit of the unborns, the trustees consider it appropriate to support them in view of the historic connection between the Wyndham family and Petworth.

I do not see that the addition of these trusts causes any difficulty. The fact that these additional provisions are not specifically for the benefit of the unborns does not matter provided that I am satisfied, as I was, that overall the unborns are benefited by the arrangement.

Subject only to the following three points, which were elaborated at some length in the skeleton arguments and other papers before me and to which Mr Barlow referred in some detail, I was satisfied therefore that the arrangement was one which I could properly approve under section 1(1) of the 1958 Act.

The first concerns the propriety of inserting a new perpetuity date into the trusts of the Fund. As to this, it is well established that an arrangement under section 1(1) enables the court to approve a variation which includes a new perpetuity period applicable to the settlement in question. In Re Holt’s Settlement [1969] 1Ch 100 Megarry J approved an arrangement which substituted in place of a common law period a new statutory period of eighty years and also added a new twenty-one year accumulation period, both of which were made possible by the Perpetuities and Accumulations Act 1964 (“the 1964 Act”) and neither of which was available under the settlement that was being varied, since it took effect prior to the commencement of the 1964 Act on 15 July 1964. At page 120, Megarry J observed that:

A few days after the judgment in Re Holt’s Settlement was delivered, the House of Lords gave judgment in IRC v Holmden [1968] AC 685. In that case, a settlement provided that during the life of the settlor’s widow the income should be held upon discretionary trusts for a class of beneficiaries consisting of the widow, her children and their issue. On 12 January 1960 the court approved (under section 1(1) of the 1958 Act) an arrangement whereby the discretionary trusts should last during the widow’s life or twenty-one years, whichever was the longer. The widow who was already aged 84 at the time of the court’s order approving the arrangement died less than three years later and the question was whether estate duty was payable on the widow’s death. If there had been no arrangement, the funds would have passed on her death so that duty would have been payable under section 1 of the Finance Act 1894. It was contended for the Revenue that under the arrangement the interest in income “has been disposed of or has determined” so that duty was chargeable under section 43 of the Finance Act 1940. In evaluating this contention, the House of Lords considered the effect of an arrangement approved by the court under the 1958 Act. Lord Reid pointed out (at page 701) that the court did not itself amend or vary the trusts; the beneficiaries were bound because they had consented, the court supplying the consent for the infant and unascertained beneficiaries. It followed, in his view, that the arrangement brought to an end the original provisions and substituted for them new provisions arranged by the beneficiaries. To like effect was Lord Guest at pages 710-711. Lord Wilberforce reached a similar conclusion at page 713:

In Goulding v James [1997] 2AER 239 at 247, Mummery LJ, with whom the other members of the Court of Appeal agreed, said this by way of summary of the authorities:

Here, there is no wish to insert a new perpetuity period by reference to section 1(1) of the 1964 Act but to introduce what is, in effect, a new common law period by reference to stated lives in being measured as at the date of approval of the arrangement, plus twenty-one years. In my judgment, there is ample power to do so just as there is, in appropriate cases, to insert a new perpetuity period by reference to the statutory period made available by the 1964 Act.

Necessarily implicit in the fact that the court’s power under section 1(1) of the 1958 Act to approve an arrangement operates as a statutory extension of the consent principle embodied in the rule in Saunders v Vautier (see Goulding v James) is that merely because that is the basis for the jurisdiction does not mean that every exercise of the jurisdiction gives rise to a resettlement. Section 1(1) of the 1958 Act authorises the court to approve an arrangement varying (or revoking) all or any of the trusts of a will, settlement or other disposition. It does not authorise the court to approve a resettlement. See Re T’s Settlement Trusts [1964] Ch 158 at 162. This leads to the second of the matters raised in argument before me which was whether by seeking to introduce a term extending the trust period, and doing so for potentially so lengthy a period, when coupled with the other amendments and insertions, it might be said that the arrangement was not by way of a variation of the trusts of the Fund at all but, in truth, was to be regarded as a resettlement of the Fund.

There is no bright-line test for determining whether it is the one or the other. In Re Balls Settlement Trusts[1968] 1 WLR 899 Megarry J stated at (905) that:

Useful guidance for determining whether what is proposed is a variation rather than a resettlement, indeed the analogy is very close, is to be found in Roome v Edwards [1982] AC 279. The case was concerned with a claim for capital gains tax. It was material to that claim to decide whether the exercise of a power of appointment contained in a settlement gave rise to a settlement separate from the main settlement. At pages 292-293 Lord Wilberforce (with whose speech three of the other four Law Lords agreed: Lord Roskill delivered a separate speech) said this, speaking generally on the topic:

With that guidance in mind I have no doubt that the alterations to the pre-arrangement trusts contained in the arrangement which I have approved constitute a variation of those trusts and not a resettlement. The trustees remain the same, the subsisting trusts remain largely unaltered and the administrative provisions affecting them are wholly unchanged. The only significant changes are (1) to the trusts in the remainder, although the ultimate trust in favour of George and his personal representatives remains the same, and (2) the introduction of the new and extended perpetuity period.

That leads to the last and related question which is whether the arrangement will have adverse tax consequences. Just as the court may be willing to approve an arrangement varying the trusts of a settlement with a view to mitigating potential tax burdens, it is likely to be unwilling to approve an arrangement which has adverse tax consequences for those on whose behalf it is concerned to give its approval unless those consequences are more than outweighed by other benefits. The concern here is whether, on the ground that they give rise to a resettlement, the variations to the trust, principally the extension of the trust period, might be said to give rise to a “deemed disposal” under section 71(1) of the Taxation of Capital Gains Act 1992 or might lead to adverse consequences for inheritance tax or Stamp Duty Land Tax purposes. I propose to take this very shortly because, in my view, the approach of Lord Wilberforce in Roome v Edwards (cited earlier) is in point. I do not consider, for the reasons already summarised, that the arrangement does give rise to a resettlement. This view cannot of course bind HM Revenue and Customs who, I should note, were approached with a view to commenting on a joint opinion of counsel to the effect that the variations of the pre-arrangement trusts effected by the arrangement would not give rise to adverse tax consequences but who declined - as I understand it in accordance with a change of practice in such matters - to be joined to the proceedings or to comment one way or the other on counsels’ opinion or otherwise to make any representations.