Analysis
The settlors, who were husband and wife, each executed a trust deed in mirror terms in 1992, creating discretionary trusts. At the time the trust deeds were executed the settlors had only one grandchild, Maxwell. The trust deeds contained inter alia the following definition of the beneficiaries:
‘The settlor’s children, Tracey Mathew and Kitty and his [her] grandchild Maxwell, and remoter issue and the spouses, widows and widowers of such children, grandchildren and remoter issue.’
On the same date as the trust deeds were executed the settlors’ solicitor prepared a signed memorandum addressed to the settlors which stated that the class of beneficiaries of the trusts included the settlors’ existing children and grandchild and any others born within the trust period.
In March 2001, the settlors were advised by their accountants that the trusts would incur tax charges on their tenth and twentieth anniversaries and that they should be broken and their assets dealt with in some other tax efficient manner. The accountant later informed the settlors that trusts with an interest in possession would not be subject to anniversary charges. The settlors were then referred to specialist solicitors who they informed that in order to avoid the anniversary charges they had been advised that interest in possession trusts should be created. The solicitors prepared deeds of appointment providing that the trust funds would be divided into three equal shares and held on life interest trusts for each of the settlors’ three children. The deeds of appointment further provided as follows:
‘… [that the trusts for each child] shall carry the intermediate income and statutory powers of maintenance, accumulation and advancement contained in the Trustee Act 1925 section 31 (as amended).’
The effect of s31(2)(ii) of the Trustee Act 1925 was to prevent the trusts for each of the settlors’ children from being qualifying interest in possession trusts. The trustees sought rectification of the deeds of appointment to exclude s31(2)(ii). They also sought construction of the trust deeds in terms that grandchildren of the settlors born after the date of execution were included in the class of beneficiaries of each trust or alternatively rectification of the deeds to include such grandchildren.
Held:
- (1) It was a linguistically possible construction that the words ‘and remoter issue’ coming after the word ‘Maxwell’ in the trust deeds referred simply to Maxwell’s remoter issue. However, the submission that it was inherently improbable that the settlors intended to exclude future grandchildren had considerable force. Moreover, the improbability became even greater when it was considered that, in a further sub-clause, the grandchildren and remoter issue of the settlor’s brother were included as beneficiaries. Any uncertainty as to the true construction was removed by the memorandum of the settlors’ solicitors. Accordingly, as a matter of construction of the trust deeds the trusts included the any grandchildren of the settlors born after the execution of the deeds and during the trust period. Rectification was unnecessary.
- (2) Although Re Delamere [1984] 1 WLR 813 makes clear that an exclusion of s31(2)(ii) does not need to be expressly stated provided it is sufficiently and clearly implicit in the wording of the instrument the wording of the statutory provision means that the mere fact that a vested interest in the accumulated income exists cannot implicitly exclude s31(2)(ii). Accordingly, it was not excluded by the deeds of appointment. However, it was abundantly clear from the evidence that the settlors’ intention was to create interest in possession trusts and that these would carry an entitlement to income. The mistake was as to the legal effect of the deeds of appointment which were intended to create interests in possession. Interest in possession is a legal concept not a tax concept. Accordingly, the mistake was not merely as to the fiscal effect of the deeds of appointment and rectification would be ordered.
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