SPC00593

Alimentary liferent – Interest in possession – Construction of trust deed

THE SPECIAL COMMISSIONERS

THE TRUSTEES OF THE TRUST FOR
	MRS ISABELLA FAIRBAIRN OR DOUGLAS	Appellant

-	and –

	THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS 	 Respondents

		

				Special Commissioner:  JULIAN GHOSH QC

Sitting in public in Edinburgh on 4 October 2006

Mr Colin Tyre QC, instructed by Gillespie MacAndrew, for the Appellant 

Mr Colin Ryder, Assistant Director, HM Revenue & Customs, Capital Taxes, for the Respondents

© CROWN COPYRIGHT 2007

DECISION

1.	This is an appeal by the trustees of an inter vivos trust (‘the Douglas Trust’) 	created for the benefit of Isabella Fairbairn or Douglas (‘Mrs Douglas’) 	against notices of determination by the Commissioners of Her Majesty’s 	Revenue and Customs made under section 221 of the Inheritance Tax Act 	1984 (‘IHTA’) and dated 25 August 2005, whereby it was determined in 	relation to the deemed disposal for inheritance tax (‘IHT’) on the death on 27 	April 2002 of Mrs Douglas that, having regard to the provisions of Chapters I 	and II of Part III of the IHTA, she had an interest in possession in the settled 	property held by the trustees upon the terms of the Douglas Trust, and in 	consequence, that the estate of Mrs Douglas is deemed to include the property 	in which that interest subsisted.

2.	The issue raised by the appeal turns on the proper construction of purpose the 	second of the Deed of Declaration of Trust (‘the Trust Deed’) dated 25 May 	1962 and made by Robert Ballantine Anderson WS and Alan Thursfield Kerr 	WS with the concurrence of Mrs Douglas’ husband, Andrew Douglas (‘Mr 	Douglas’). The question that I am asked to determine is whether the provisions 	of the Trust Deed, as properly construed, conferred on Mrs Douglas a present 	right to present enjoyment of the annual income of the Trust Fund.

THE FACTS

3.	The parties have provided an agreed statement of facts, the contents of which I 	shall summarise as follows.

4.	On 25 May 1962, Mr Douglas transferred certain securities and investments to 	Messrs Anderson and Kerr, who, on the same day, executed the Trust Deed 	declaring that such securities and investments were to be held by them and 	their successors upon the trusts set out therein. The Trust Deed was registered 	in the Books of Council and Session on 10 August 1962.

5.	I shall deal with the relevant terms of the Trust Deed in due course. However, 	at this point it suffices to say that, until the death of Mr Douglas on 24 	December 1981, the Douglas Trust was treated as a settlor-interest trust by 	section 22 of the Finance Act 1958 (which was subsequently superseded by 	section 660 of the Income and Corporation Taxes Act 1988) so that the 	income arising from the Trust Fund was regarded for tax purposes as income 	of the settlor, Mr Douglas. The agreed documentation provided by the parties 	includes an Inland Revenue ruling dated 6 September 1963 to that effect.

6.	The agreed statement of facts goes on to record that, following Mr Douglas’ 	death, the Douglas Trust was treated for income tax and capital gains tax 	purposes as a discretionary trust, and that income tax and capital gains tax 	were paid on that basis until Mrs Douglas’ death.

7.	As I have noted, Mrs Douglas died on 27 April 2002.

THE TRUST DEED

8.	The Trust Deed provides that the Trust Fund shall be held upon trust for 	several purposes. It is purpose the second that is relevant to the issues under 	consideration in this appeal. It provides as follows:

For payment to or application for the maintenance, support, benefit and enjoyment of MRS. ISABELLA FAIRBAIRN or DOUGLAS, Wife of the said Andrew Douglas, Senior and residing with him at Saughtree, Newcastlton aforesaid during all the days and years of her life, for her alimentary liferent use only as the same shall not be capable of anticipation or subject to her debts or deeds or liable to the diligence of her creditors, of the free annual income of the Trust Fund, or such part thereof as we or our successors as Trustees acting under the powers hereinafter specified throughout these presents, and with the concurrence of the said Mrs. Isabella Fairbairn or Douglas may consider proper and expedient (all dividends and interest receivable after the date of their transfer to us or our foresaids, or any securities or investments transferred to us or our foresaids being treated wholly as income without apportionment): DECLARING that in the event of the whole of the income not being so paid or applied by us or our foresaids in any year the surplus of said income not so paid or applied may be accumulated and invested and may be expended as income in any future year and such accumulations not so expended shall be added to and form part of the capital of the Trust Fund: And in particular but without prejudice to the foregoing we and our foresaids shall have power to pay out of the said income the premium or premiums of insurance on any policy or policies effected or which may be effected on the life of and for the benefit of the said Mrs. Isabella Fairbairn or Douglas

	None of the other purposes specified in the Trust Deed is relevant to issues 	under consideration in the present appeal.

THE STATUTORY PROVISIONS

9.	By section 49 of the IHTA, a person beneficially entitled to an interest in 	possession in settled property is treated as beneficially entitled to the property 	in which that interest subsists. Section 46 provides, in relation to the 	application of IHT to Scotland, that:

…any reference to an interest in possession in settled property is a reference to an interest  of any kind under a settlement by virtue of which the person in right of that interest is entitled to the enjoyment of the property or would be so entitled if the property were capable of enjoyment…

	On the death of any person, section 4 of the IHTA provides that tax shall be 	charged as if, immediately before his death, he had made a transfer of value 	and the value transferred by it had been equal to the value of his estate 	immediately before his death. For these purposes, section 5 provides that a 	person’s estate is the aggregate of all the property to which he is beneficially 	entitled. Accordingly, the value transferred by the deemed transfer of value 	upon death will include the value of any property in which the deceased 	person enjoyed an interest in possession immediately before his death.

10.	Therefore, if Mrs Douglas had an interest in possession under the terms of the 	Douglas Trust, the value of the property in which that interest subsisted will be 	aggregated with her free estate for the purposes of calculating the charge to 	IHT arising upon her death. If no such interest in possession existed, the trust 	property will be relevant property (as defined by section 58 of the IHTA) and 	will be taxable in accordance with the regime set out in Chapter III of Part III 	of the IHTA. In the latter case, the value of the Trust Fund will not be 	aggregated with Mrs Douglas’ free estate.

11.	There is no statutory definition of ‘interest in possession’. However, it is 	common ground between the parties that, following Robertson’s Trs v IRC, 	the test enunciated by the House of Lords in Pearson v IRC is equally 	applicable in the context of Scots law. This test provides that an interest in 	possession must involve a present right to present enjoyment of the settled 	property.

THE APPELLANTS’ SUBMISSIONS

12.	The Appellants’ contended that, in practical terms, the question to be 	determined is whether, in the event of dispute between Mrs Douglas and the 	trustees, she could have demanded the whole of the annual income of the Trust 	Fund; or, to put it another way, whether her concurrence was required before 	income could be withheld from her. They accepted that if, on a proper 	construction of the Trust Deed, the concurrence of Mrs Douglas was necessary 	before such income could be withheld from her then she should be treated as 	having an interest in possession in the trust property for the purposes of IHT. 

13.	However, they contended that I should answer these questions in the negative, 	on the basis that (1) the terms of the Trust Deed indicate that the trustees had a 	function, in exercise of their fiduciary duties, that was more extensive than 	merely following the wishes of Mrs Douglas; and (2) that the power to pay 	insurance premiums is inconsistent with an entitlement on the part of Mrs 	Douglas to demand the whole of the income of the Trust Fund.

The legal nature of the alimentary liferent

14.	The Appellants submitted that the proper construction of the Trust Deed 	depended upon a consideration of the true legal nature of an alimentary 	liferent. They contended (and I agree) that this is a peculiarly Scottish device 	that may be utilised by a truster as a means of protecting a beneficiary from 	his creditors (or, indeed, from himself) by means of restrictions on the 	arrestment, assignation and renunciation of interests declared to be alimentary 	in nature. I was directed to the second edition of Wilson and Duncan on 	Trusts, Trustees and Executors in relation to the nature of alimentary liferents. 	Further, the Appellants relied on the passage from the judgment of Lord 	McLaren in Cuthbert v Cuthbert’s Trs for the proposition that such restrictions 	apply only to the extent that the interest is of such reasonable amount as is ‘the 	necessary sum to maintain the person [i.e. the liferenter] in the rank of life to 	which he belongs, without deteriorating to a lower style of living.’ 

15.	The Appellants submitted that this qualification on the protection achieved by 	an alimentary liferent is reflected in the terms of purpose the second of the 	Trust Deed. They urged me to construe the purpose as a direction to the 	trustees to pay such amount of the annual income as is required by the 	liferentrix for her maintenance – that is to say, her alimentary use – having 	obtained her concurrence as to how much (if any) of the total annual income 	would be proper and expedient for that purpose. They submitted that it would 	not be a proper interpretation of the Trust Deed to regard the requirement for 	Mrs Douglas’ consent as, effectively, conferring a power of veto over 	retention of any part of the income of the Trust Fund.

16.	The Appellants further submitted that a failure by the trustees to address the 	question of how much income was ‘proper and expedient’ for the liferentrix’s 	alimentary use would constitute a breach of their duty as trustees towards the 	beneficiaries entitled to the fee. Accordingly, they submitted that the reference 	to Mrs Douglas’ concurrence cannot override the apparent express intention of 	the truster that an assessment be made from year to year at to how much of the 	income is required for her alimentary use and, consequently, how much is not 	so required and falls instead to be accumulated.

17.	They also submitted that the decision in Robertson’s Trs v IRC, to which I 	have already referred, is of no assistance in the present case. In Robertson’s 	Trs, an alimentary liferent was subject to powers conferred upon the trustees 	to enable them, prior to striking the free income or produce of any year, to 	appropriate such portion of revenue as they might think proper for meeting 	depreciation of the capital value of any assets with regard to which they might 	think it prudent to provide for depreciation and for any other reason or purpose 	which they might in their sole discretion deem to be advisable or necessary. 	The First Division of the Court of Session held that such powers were 	administrative, rather than dispositive, in nature and, accordingly, that they did 	not prevent the existence of an interest in possession in favour of the 	liferentrix. The Appellants submitted that the decision in Robertson’s Trs can 	be distinguished because there was no equivalent in the deed in that case of 	what the Appellants described as ‘the critical words’ in relation to the Douglas 	Trust, viz. ‘such part thereof as we…may consider proper and expedient.’

The power to pay insurance premiums

18.	The Appellants also relied on Cathcart’s Trs v Heneage’s Trs in support of 	the proposition that payment of insurance premiums, even on a policy that will 	not mature during the lifetime of a liferenter, is to be regarded as expenditure 	of trust income and not as accumulation. They submitted, therefore, that it is 	not possible as a matter of law to construe the power to pay insurance 	premiums as a particular instance of the direction contained in the Trust Deed 	to accumulate income not paid or applied in any year for the maintenance etc. 	of the alimentary liferentrix. On the contrary, they submitted that it can be 	interpreted only as one of the powers referred to in the first part (that is to say, 	in the part before the first colon) of purpose the second and that it did not, 	therefore, require the consent of Mrs Douglas prior to its exercise.

19.	The Appellants dealt with the reference to ‘the said income’ in the third part of 	purpose the second as follows. They submitted that the so-called last-	antecedent rule of construction, to which reference is made in Shepherd’s Trs 	v Shepherd, may be displaced if it is clear that the testatrix (or, in this case, 	the truster) followed another method of composition: see the opinions of the 	Lord President at 65 and of Lord Moncrieff at 67. Applying this approach to 	the Douglas Trust, they submitted that the truster used the expression ‘said 	income’ twice. The first occasion of its use was in the phrase ‘the surplus of 	the said income not so paid or applied’. In that context, the words ‘said 	income’ could refer only to ‘the free annual income of the trust fund’. 	Therefore, they submitted, it must follow that if the words ‘said income’ are to 	be applied consistently, the second occurrence of that phrase must also be 	construed as referring to the original reference to ‘the free annual income of 	the trust fund’.

20.	In the circumstances, the Appellants submitted that the power to pay insurance 	premiums without (on their construction) the concurrence of the liferentrix is a 	further indication that no interest in possession subsisted in the trust property.

Past treatment as a discretionary trust

21.	Finally, the Appellants noted that the trust had for many years been treated by 	the Respondents’ predecessors, the Commissioners of Inland Revenue, as a 	discretionary trust for the purposes of income tax and capital gains tax. They 	submitted that this treatment was correct and that it should be treated as 	conclusive of the issue in the present appeal.

THE RESPONDENTS’ SUBMISSIONS

22.	The Respondents construed the first part of purpose the second (that is to say, 	the part before the first colon) as providing that the free annual income of the 	Trust Fund was to be paid to Mrs Douglas or applied for her benefit unless she 	consented to payment or application of part only of that free annual income. 	They accepted that the liferent in question was an alimentary one, the effect of 	which was to place the trust property beyond the reach of the liferentrix’s 	creditors. The second part of purpose the second (that is to say, the part 	between the first and second colons) provided, in their submission, for the 	situation where not all of the free annual income was paid to Mrs Douglas or 	applied for her benefit. In that event, the income not so paid or applied was to 	be accumulated and could be expended as income in a future year or added to 	the capital of the Trust Fund. They submitted that the first and second parts of 	the purpose are wholly consistent with a present right to present enjoyment.

23.	As to the third part of purpose the second (that is to say, the part following the 	second colon), the Respondents submitted that the reference to ‘said income’ 	refers back to the expression ‘the income not being so paid or applied by us’ 	used at the start of the second part of the clause. It was out of this income not 	so paid or applied – and not otherwise – that the trustees had a power to pay 	premiums of insurance on the life of or for the benefit of Mrs Douglas.

24.	The Respondents submitted that the main purpose of the relevant provisions of 	the Trust Deed was to make alimentary provision for Mrs Douglas during her 	lifetime. Although the trustees were ostensibly obliged to pay the whole of the 	free annual income of the Trust Fund to Mrs Douglas or to apply the same for 	her benefit, they were nevertheless given a qualified power to withhold part of 	the same. Although the Respondents accepted that such a power to withhold 	part of the income of an alimentary liferent is a valid power (see White’s Trs v 	White’s Trs), they submitted that the power in this case was exercisable only 	with the consent of Mrs Douglas. The existence of this qualification meant 	that the power did not prevent the existence of an interest in possession.

25.	The Respondents relied on the use of the words ‘without prejudice to the 	foregoing’. They submitted that, in the event that part of the income was not 	paid or applied to or for the benefit of Mrs Douglas, the Trust Deed made 	provision for that income not so paid or applied to be accumulated or 	expended as income in future years. Only then, they noted, did the Trust Deed 	provide that the trustees ‘without prejudice to the foregoing’ had power to 	apply ‘the said income’ towards payment of the premiums on life policies.

26.	They drew my attention to the similarities between these provisions and the 	terms of the trust under consideration in Robertson’s Trs, of which case I have 	already made mention. In both cases, the truster’s wife was granted an 	alimentary liferent as the second purposes of a deed and the power of the 	trustees to deal otherwise with the income was written after the grant of the 	liferent. In particular, my attention was drawn to the following passage from 	the opinion of Lord Kincraig in Robertson’s Trs:

It appears accordingly that the main purpose of the trust was to make an alimentary provision for the wife during her lifetime, the fee being intended for any children of the marriage If so, the court would be slow to construe the provisions in her favour as being subject to a power in the trustees to defeat that purpose by diverting the net income for the benefit of others. There would require, in my opinion, to be a clear indication in the deed if that were the intention of the wife as truster.

	The Respondents submitted that no such clear indication may be found in the 	present Trust Deed. They contrasted the words ‘without prejudice to the 	foregoing’ with the form of words used in two other trust deeds that have 	received judicial consideration. In White’s Trs, the words used were: 	‘Moreover, and notwithstanding anything hereinbefore contained, I do hereby 	specially authorise and empower…’ In Chamber’s Trs v Smith, the words 	used were: ‘…notwithstanding the periods above appointed…’ The 	Respondents submitted that the form of wording used in those two cases 	evinced a clear intention to grant the trustees a power to withhold income, 	whereas the words ‘without prejudice to the foregoing trusts’ used in the 	present case indicated, in their submission, a power in relation only to that part 	of the income not paid or applied to or for the benefit of Mrs Douglas with her 	consent.

27.	The Respondents relied on four further issues in support of this conclusion.

28.	First, the Respondents noted that purpose the second contained two different 	meanings of ‘income’, viz. ‘the free annual income’ (which is used in the first 	part of the purpose) and ‘income not so paid or applied’ (which is used in the 	second part). They submitted that there is a change in the description of the 	income referred to by the Trust Deed. Relying on the last-antecedent rule of 	construction (for which I was directed to Shepherd’s Trs and to the relevant 	entry in the Scottish Contemporary Judicial Dictionary, edited by WL 	Stewart) they submitted that the expression ‘the said income’ in the third part 	must refer not to ‘the free annual income’ used in the first part but rather to the 	last antecedent, viz. the ‘income not so paid or applied’ referred to in the 	second part.

29.	Secondly, the Respondents relied on the order in which the trustees’ powers 	are set out in purpose the second. They cited the following passage from the 	opinion of Lord Kincraig in Robertson’s Trs:

It would be odd, in my opinion, if the intention was to give dispositive powers to the trustees, to express them in the order in which they have expressed them in the trust deed i.e. after the initial conveyancing of the free income to the wife.

	The Respondents noted that a similar order is used in the present Trust Deed: 	there is first a grant of an alimentary liferent, followed by a power on the part 	of the trustees to accumulate income and pay insurance premiums. Following 	the construction adopted in Robertson’s Trs, the Respondents submitted that it 	would be odd to treat the power to pay insurance premiums as a dispositive 	power.

30.	Thirdly, the Respondents drew my attention to the way in which the power to 	pay insurance premiums was given. They argued that the trustees were given 	power to pay insurance premiums in addition to the power to accumulate 	income because, without conferring on them such a specific power, they 	would not have been entitled to do so. The trustees were given the power to 	accumulate income not paid or applied to or for the benefit of Mrs Douglas 	and the power to spend it in the specified manner. This was not a power to 	take the income away from the alimentary liferentrix without her consent.

31.	Fourthly, the Respondents submitted that, since the power to pay insurance 	premiums did not take away or negate the right to the alimentary liferent but 	merely gave the trustees the power to spend in a particular way that part of the 	income not paid or applied to or for the benefit of the liferentrix, it mattered 	not whether the right was an administrative power (as in Robertson’s Trs) or a 	dispositive power because it could be exercised only after Mrs Douglas had 	agreed that the income need not be paid to her or applied for her benefit.

32.	Finally, the Respondents submitted that I should not be bound to follow for the 	purposes of IHT the Inland Revenue’s previous determinations of the status of 	the trust for the purposes of income tax. If, as the Respondents accepted might 	be the case, an error had been reached by the Inland Revenue in making these	determinations, such mistake is not a material consideration that can be taken 	into account in deciding the status of the trust for IHT purposes, which is the 	question that I have to decide.

DECISION

33.	I can deal shortly with the submissions relating to the previous determinations 	made by the Inland Revenue. I agree with the Respondents that any error that 	might have been made by the Inland Revenue in the past cannot be a material 	consideration when deciding how, on a proper construction of the Trust Deed, 	the statutory provisions of the IHTA should be applied to the trusts thereby 	created. Furthermore, I agree that any such mistake by the Inland Revenue – 	and I am not being asked to determine whether or not a mistake has been made 	in that regard – related only to income tax and capital gains tax. Such a 	mistake cannot fetter my freedom to determine for the purposes of IHT the 	proper treatment of the Douglas Trust. In my judgment, any mistake that 	might have been made is entirely irrelevant to the matter that I am required to 	decide and, accordingly, I have given no weight to the previous determinations 	made by the Inland Revenue.

34.	I am in agreement with both parties that, in essence, the issue before me turns 	on the proper construction of the terms of the Trust Deed and, in particular, the 	terms of purpose the second. In short, on a proper construction of the Trust 	Deed, does the power to apply income towards the payment of life insurance 	premiums apply to the whole income of the Trust Fund or only to such income 	(if any) as is not, with the consent of the liferentrix, paid to her or applied for 	her benefit? In my view, the proper construction of the Trust Deed is that 	propounded on behalf of the Respondents.

35.	The material parts of the first part of purpose the second are as follows:

For payment to or application for the maintenance, support, benefit and enjoyment of [Mrs Douglas]…for her alimentary liferent use only…of the free annual income of the Trust Fund, or such part thereof as we…with the concurrence of [Mrs Douglas] may consider proper and expedient…

	This clearly creates an alimentary liferent in favour of Mrs Douglas in the ‘the 	free annual income of the Trust Fund’. However, this liferent is subject to the 	trustees’ powers to pay or apply to or for her benefit not ‘the free annual 	income of the Trust Fund’ but only such part of it as they may consider 	‘proper and expedient’, provided always that this power effectively to 	withhold part of the free annual income may be exercised only with the 	concurrence of Mrs Douglas. In other words, unless or until the trustees should 	consider it proper and expedient to pay or apply a lesser amount and Mrs 	Douglas should concur with such a consideration, the trustees are obliged to 	pay the whole of the free annual income of the Trust Fund to Mrs Douglas or 	to apply it for her benefit.

36.	I am satisfied that the provisions of the first part of purpose the second are 	consistent with an interest in possession in favour of Mrs Douglas. I agree 	with the Appellants’ submission that the legal nature of an alimentary liferent 	protects the liferenter’s interest from her creditors only insofar as is necessary 	to maintain the liferenter in her appropriate station in life. In that regard, I 	agree that the provision allowing the trustees to consider what part of the free 	annual income of the Trust Fund is proper or expedient to pay or apply to or 	for the benefit of the liferenter could be described as a reflexion of the limited 	protection conferred by an alimentary liferent. However, I do not agree that 	the provision is such that it should be construed as a direction to the trustees to 	pay only such amount of the annual income in any year as is required by the 	liferentrix for her maintenance etc., having obtained her concurrence as to how 	much (if any) of the total annual income would be proper and expedient for 	use for that purpose. The trustees are directed to pay the whole of the annual 	income to the liferenter, subject only to a power to pay a lesser amount if they 	consider it to be proper and expedient to do so and the liferentrix consents to 	receive such lesser amount in lieu of the whole. I cannot agree with the 	submission advanced on behalf of the Appellants that it would not be a proper 	interpretation of the Trust Deed to regard the alimentary liferentrix as, 	effectively, having a power of veto over retention of any part of the income of 	the Trust Fund. On the contrary, Mrs Douglas did, in effect, have such a power 	of veto: the whole of the free annual income of the Trust Fund had to be paid 	or applied to her or for her benefit from year to year unless or until she should 	concur with a consideration by the trustees that it was proper and expedient for 	a lesser amount to be so paid or applied

37.	The Appellants also submitted that a failure by the trustees to consider from 	year to year how much of the free annual income was ‘proper and expedient’ 	for the liferentrix’s alimentary use would constitute a breach of their duty 	towards the beneficiaries entitled to the fee. Be that as it may, I cannot agree 	with the submission that the reference to Mrs Douglas’ concurrence cannot 	override the express intention of the truster that an assessment be made each 	year of how much of the income was required to be paid or applied for her 	alimentary use and, consequently, how much was not so required and fell 	instead to be accumulated. The trustees were expressly directed to pay or 	apply the whole of the free annual income to or for the benefit of Mrs Douglas 	unless they considered, and Mrs Douglas concurred, that it would be proper 	and expedient to pay a lesser amount. In my judgment, this provision does not 	detract from the central point that, unless or until Mrs Douglas concurred in 	receiving a lesser amount, the trustees were obliged to pay or apply the whole 	of the free annual income to or for her benefit, regardless of whether or not 	they considered it proper or expedient to pay a lesser amount. 

38.	Furthermore, I cannot agree with the Appellants that the alimentary nature of 	the liferent meant that the truster’s intention was that Mrs Douglas should 	receive only so much as was required to maintain her in her appropriate 	station, that is to say, only so much as would be protected from her creditors 	by virtue of the peculiar nature of alimentary interests. On the contrary, the 	Trust Deed expressly provides that the free annual income may be paid or 	applied for her ‘maintenance, support, benefit and enjoyment’. In my 	judgment, this provision – particularly the words ‘and enjoyment’ – confers on 	Mrs Douglas a considerably broader interest that cannot properly be construed 	as limited only to so much of the free annual income in any given year as is 	necessary for her maintenance.

39.	The second part of purpose the second makes provision for how such income 	(if any) as is, with the concurrence of Mrs Douglas, not paid or applied to or 	for her benefit should, in fact, be applied:

DECLARING that in the event of the whole of the income not being so paid or applied by us or our foresaids in any year the surplus of said income not so paid or applied may be accumulated and invested and may be expended as income in any future year and such accumulations not so expended shall be added to and form part of the capital of the Trust Fund

I agree with the contention advanced by the Respondents that the transition from the first to the second parts of purpose the second marks a transition in the meaning of ‘income’. The second part clearly deals only with such income as is, with the concurrence of Mrs Douglas, not paid or applied to or for her benefit.

40.	In my judgment, the third part of purpose the second refines or expands upon 	the direction as to how the income referred to in the second part should be 	applied. It does not, in my judgment, revert back to a consideration of the 	whole of the free annual income of the Trust Fund, as dealt with in the first 	part of the purpose. I reach this conclusion on the basis of the wording 	employed by the Trust Deed. The third part is introduced by the words ‘And in 	particular’. In my judgment, this indicates an intention to describe in more 	particular detail the manner in which the income previously referred to – that 	is to say, such income as is, with the concurrence of Mrs Douglas, not paid or 	applied to or for her benefit – may be ‘accumulated and invested’. 	Furthermore, I agree with the Respondents that the use of the words ‘without 	prejudice to the foregoing’ indicates that the intention was not to confer an 	overriding dispositive power capable of ousting the previous dispositive 	directions, but rather to confer a power that was capable of being exercised 	only in a manner consistent with those previous dispositive directions. I also 	agree that the last-antecedent rule of construction supports such a conclusion. 	In determining the income to which the expression ‘the said income’ in the 	third part of purpose the second refers, one must look to the last antecedent. In 	this case, the last antecedent is the reference to income in the second part, 	which, as I have noted, is a reference not to the free annual income of the 	Trust Fund but rather to such part of that income as is not paid or applied to or 	for the benefit of Mrs Douglas. 

41.	I accept the general submission of the Appellants that, as a rule of 	construction, the last-antecedent rule can be ousted where a contrary intention 	is evinced by the terms of the particular instrument under consideration. 	However, I cannot accept that the terms of the Trust Deed under consideration 	in this particular case are sufficient to displace the general rule. I do not agree 	that the two references to ‘said income’, namely those in the second and third 	parts, must refer to the same thing. The natural and proper construction of 	purpose the second is, in my judgment, clear. There is a direction to pay to 	Mrs Douglas such of the free annual income as the trustees consider, with the 	consent of Mrs Douglas, to be proper and expedient. The subsequent parts of 	the purpose make provision for that part of the said income as is not so paid or 	applied. The second part allows for the accumulation and investment of such 	surplus income and the third part confers a particular power in relation to such 	surplus income. In my judgment, the reference to ‘the said income’ in the third 	part naturally refers back to the reference in the second part to ‘said income 	not so paid or applied’. The draftsman has simply not repeated the words ‘not 	so paid or applied’. In my judgment, it would be to place an unnatural 	construction on the words of purpose the second to find that the reference to 	‘said income’ in the third part thereof referred to the whole of the free annual 	income of the Trust Fund, particularly in light of the fact that the opening 	words of the third part indicate that it contains a ‘particular’ method of 	application of income that is to be ‘without prejudice to the foregoing’ 	directions.

42.	Therefore, I find that on a proper construction of the Trust Deed, the power to 	pay the premiums of life insurance is exercisable only in relation to such 	income as is not paid or applied to or for the benefit of Mrs Douglas. To find 	otherwise would not only breach the last-antecedent rule of construction but 	would also, in my judgment, force upon the Trust Deed an unnatural 	construction that is inconsistent with the actual words and method of 	composition used. 

43.	In the circumstances, therefore, I cannot agree with the Appellants’ conclusion 	that the Trust Deed contains a power to pay insurance premiums without the 	concurrence of the liferentrix. For this reason, it is not necessary for me to 	determine whether the power to pay insurance premiums is a dispositive 	power or whether it is, like the powers in Robertson’s Trs v IRC, a mere 	administrative power the inclusion of which does not detract from the 	existence of an interest in possession. Furthermore, even if, as the Appellants 	submit, the payment of insurance premiums must be considered an 	expenditure of income, the fact that such payment cannot, on a proper 	construction of the Trust Deed, be made without the concurrence of the 	liferentrix means that such payment of income does not prevent the existence 	of an interest in possession. Even if, as the Appellants submit, the power can 	be interpreted only as one of the ‘powers’ referred to in the first part of 	purpose the second, that does not mean, in my judgment, that it is a dispositive 	power capable of preventing the existence of an interest in possession. The 	powers to which the Appellants refer are simply a global reference to the 	trustees’ powers generally. There is nothing in the terms of the Trust Deed to 	indicate that the direction contained in the first part of purpose the second is to 	be made subject to the power in the third part or to any other power. 	Therefore, I cannot find any force in the Appellants argument that the power 	to pay insurance premiums does not require the consent of Mrs Douglas and, 	accordingly, that its inclusion negates the existence of an interest in 	possession. Although the terms of the Trust Deed do not require the consent of 	Mrs Douglas to the exercise of the actual power, the power can be exercised 	only in respect of such income as, with the concurrence of Mrs Douglas, has 	not been paid to her or applied for her benefit. In the circumstances, therefore, 	Mrs Douglas did enjoy what might be described as an indirect power of veto 	over the exercise of the power to pay insurance premiums.

44.	I have reached my decision without expressly referring to the contrast drawn 	by the Respondents between the wording used in the Douglas Trust and the 	wording used in White’s Trs and in Chamber’s Trs. Similarly, I have not 	referred expressly to the guidance offered by Lord Kincraig in Robertson’s Trs 	in relation to the court’s slowness to construe the provisions of a trust, the 	main purpose of which is to make alimentary provision for a person for her 	lifetime, as being subject to a power in the trustees to defeat that purpose by 	diverting the net income for the benefit of others. However, I draw comfort 	from the fact that these observations and Lord Kincraig’s guidance seek to 	reinforce the conclusion to which I have otherwise been drawn.

CONCLUSION

45.	For the reasons given above, I find that the provisions of purpose the second 	of the Trust Deed, as properly construed, were apt to confer upon Mrs Douglas 	as liferentrix an interest in possession in the property held upon the terms of 	the Douglas Trust. In the circumstances, therefore, I dismiss the appeal and 	uphold the determination of the Commissioner for Her Majesty’s Revenue and 	Customs.

JULIAN GHOSH QC
SPECIAL COMMISSIONER

RELEASED: 21 February 2007

SC 3086/2006