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Judgment
LORD DENNING M.R. - In 1960 the grandfather, if I may so call him, Captain Knox of the Royal Navy, made a settlement in favour of his grandchildren. He appointed a trustee company and Mr. John Leonard Knox as his trustees. He conveyed several investments to those trustees on trust for the children of his son, Mr. Gerald Knox. Mr. Gerald Knox had then, in 1960, two small children. He has since had two other children. The four children are now aged 11, 10, 8 and 5. They are the expected beneficiaries under the trust, as well as any future children that Mr. Gerald Knox may have. In the settlement it was provided that the trustees were to hold the trust fund in trust for such of the beneficiaries as shall attain the age of 21 years or marry under that age, or, if more than one, in equal shares, absolutely. The "beneficiaries" were defined as "such of the children of Gerald whether already or hereafter to be born before the closing date. " The "closing date" was defined as meaning "the day upon which the first child of Gerald to attain the age of 21 years shall attain that age. " That meant that as soon as the eldest child became 21, the class was closed. No more children born after that date could take. If the eldest son lives till he is 21, the class will be closed on May 21, 1978. Otherwise, it will not be closed until the next child becomes 21. And so on.
In 1965 the Finance Act imposed for the first time capital gains tax. after the Act, the trustees of this settlement had occasion to sell and realise some of the investments. They made a gain for the year 1965-66 of Pounds 374. The question is : what is the rate of the capital gains tax which is chargeable on that capital gain ? The Finance Act, 1965, draws a distinction between corporations and trustees, on the one hand, and ordinary individuals on the other hand. Corporations and trustees have to pay the full rate of 30 per cent. on the gain (see section 20 (3)) : whereas ordinary individuals have an option given to them. An ordinary individual can select either to pay the full rate of 30 per cent. ; or alternatively, if he has not gained more than Pounds 5,000, he can say : "I would prefer to have half of the gain added to my income and be assessed on the total" (see section 21 (1)). That is a very considerable benefit to ordinary individuals. In most cases, if an ordinary individual adds the half gain to his total income, the result will be that he will pay a lower rate than 30 per cent. on the gain.
In the present case it is agreed that, if this was an ordinary trust of settled property, the trustees would have to pay 30 per cent. on the gain : but the trustees claim that this is an exceptional case where the children are to be regarded as if they were ordinary individuals and can claim the benefit of the alternative rate. If this is correct, the result would be (as they have no other income) that no capital gains tax would be payable. Instead of 30 per cent., it would be nothing.
Mr. John Knox, one of the trustees, himself conducted the case before us and did it admirably.
I will not go through the many sections of the Act today : I will only refer to the material one. Section 45 (1) of the Act defines "settled property" as "any property held in trust other than property to which section 22 (5) of this Act applies. " Section 22 (5) says :
"In relation to assets held by a person as nominee for another person, or as trustee for another person absolutely entitled as against the trustee, or for any person who would be so entitled but for being an infant or other person under disability (or for two or more persons who are or would be jointly so entitled), this Part of this Act shall apply as if the property were vested in, and the acts of the nominee or trustee in relation to the assets were the acts of, the person or persons for whom he is the nominee or trustee (acquisitions from or disposals to him by that person or persons being disregarded accordingly)."
That is all very complicated, but I will try and explain it simply. It means that if property is held by a person as a nominee for an ordinary individual, then the beneficiary can obtain the benefit of the alternative rate. Similarly, if property is held by a bare trustee for an ordinary individual who is of full age and entitled as of right to call for that property, then the beneficiary can obtain the benefit of the alternative rate. Then the section goes on to deal with trusts for children or persons of unsound mind. If property is held by trustees "for any person who would be absolutely entitled but for being an infant or other person under disability, " then the infant or other person can obtain the benefit of the alternative rate. In my opinion, those words are directed to a case where property is held by a trustee for a person who would be absolutely entitled to call for the property but for the fact that he is an infant or is of unsound mind. If his infancy or other disability is the only impediment which prevents his being absolutely entitled, then he can be regarded as an ordinary individual and he is entitled to the benefit of the alternative rate.
Mr. Knox argued in this way : take those words and apply them to this case. There are these four children. If they were not infants, they would all be over 21. So the closing date would have been reached. No unborn child could join the class. Each of the four would be absolutely entitled to call for a quarter share. So each of them would be absolutely entitled but for being an infant. So each of them is entitled to the alternative rate.
I am afraid I cannot accept this argument. It assumes not only that each is over 21. It also assumes that the closing date has been reached. That assumption is not permissible. I think that the right way of looking at the section is to take the time when the capital gain was made and to ask the question : "If he was not an infant at that time, would he be absolutely entitled to call for his money so as himself to be able to give directions to the trustees and to give a good receipt to them ?" In short : is the infancy the only bar ? In the present case none of these four children, if they were not infants, would be absolutely entitled at that time to call for the money or to give the trustees a proper receipt. Their interest were contingent on their living to the age of 21. They were defeasible pro tanto if other children were born. The section only applies where a child has, in the Chancery phrase to which Mr. Warner referred, a vested and indefeasible interest in possession. None of these four children came within that category : none of them was absolutely entitled to the money. Each of their interests was defeasible and contingent. It might never vest at all.
I agree with the judgment of Cross J., which is reported now in (1969) 2 W L.R. 283, but pausing to note that the Crown before us withdrew the concession which appears at the top of p. 289.
For those reasons I would dismiss the appeal.
SACHS L. J. - This appeal raises as its first point a short question as to the meaning in relation to a holder of relevant assets on which a capital gain is realised of the words a "person absolutely entitled as against the trustee" as they appear in section 22 (5) of the Finance Act, 1965. The relevant phrase is one which - so we were informed by Mr. Knox - is not familiar to the Chancery Bar. Indeed in his judgment Cross. J. said, at p. 288, that it was quite new to him. The way is accordingly open to interpret those words in a straightforward fashion, apt to the context of the Act and untrammelled by precedent. To my mind they are only apt to describe, in relation to holders of securities, those who are nominees or bare trustees.
No one who holds securities can be a bare trustee for someone who has only what Mr. Knox termed a defeasible interest. (Perhaps the fuller phrase of Mr. Warner is the one to be used, that is to say, a vested and indefeasible interest in possession.) Mr. Knox naturally conceded that no person whose interest in the assets of a trust can be diminished by the entry into the class of beneficiaries of some person coming in by birth or other contingencies has an absolute interest : he has only one defeasible at any rate pro tanto. It is crystal clear that the four children of Mr. Gerald Knox had during the material financial year and still have only defeasible interests, so long, at least, as Mr. Gerald Knox survives. No one can have other than a defeasible interest in this trust for "his existing and future children" until one of them attains the age of 21 and thereby crystallises the closing date. So much then for the first question.
The next question is an equally short one, relating to the meaning of the words "or for any person who would be so entitled but for being an infant. " Nothing in section 22 (5) could or did during the financial year in question turn the childrens interest from one that was defeasible into one that was indefeasible. It follows that it cannot be said that any of the children would have been absolutely entitled to the assets of the trust "but for being an infant. " How indeed can it be said that a person would be absolutely entitled to assets "but for being an infant," if he would not be entitled if he were an adult ?
The point that the infancy of these four children is in this particular case irrelevant as regards the defeasibility is perhaps well illustrated by the simple illustration of considering a trust deed couched in identical words to that before this court, but with the closing date made to be on one of the children attaining the age of 30 years. If at some date before any child had attained that age there were four children of Mr. Gerald Knox aged between 22 and 29 and Mr. Gerald Knox were surviving, of course the interest of each of those four children would at that date still be defeasible and would remain so until one of them reached the age of 30.
At the risk of repetition, it seems to me that the relevant questions which I should pose to myself are these - Upon the terms of this trust, could any of the four children attain an absolute title against the trustees until May 21, 1978 ? The answer is No. Had any of the children attained such an absolute title at the time the capital gain was realised ? Again the answer is No. What stopped them having such an absolute title ? The answer is - The terms of the trust deed - not their infant disability.
In these circumstances it is not necessary to consider the effect of clause 10 of the trust deed save to drew attention to the provision which made each of the childrens interests defeasible in the relevant year and will continue to do so up to at any rate May 21, 1978. It may, indeed, be as regards any one of these four infants that even if all survive to that date, yet he or she may get none of the assets in the end.
I would only add that any other construction of the relevant phrases in section 22 (5) would run completely counter to the manifest intent of that section in relation to the Act as a whole. That intention is clearly to treat the case of a beneficially entitled adult in a position to call for the assets of a trust in exactly the same way as if those assets were in his hands without these being an intervening trustee. Equally the plain object of the words "any person who would be so entitled but for being an infant" is simply to prevent persons under a disability failing to have the advantage of the alternative method of assessment of capital gains tax that adults not under a disability have been given by that subsection. Infancy is one of the disabilities.
For those reasons I fully agree with the judgment of Cross. J. and I too would dismiss the appeal.
PHILLIMORE L. J. - I would merely add my tribute to the advocacy and ingenuity of Mr. Knox''s argument which I confess attracted me at first. I think, however, that once it is appreciated that the clause as a whole is intended to refer to those who are in substance entitled to enjoy the money held in trust for them, his argument becomes untenable. It seems to me that on the submission made for the Crown one has only got to take a simple example to see the kind of case that is envisaged. In the course of argument I put to counsel the case where one child has attained 21 so that the closing date has occurred. A second, albeit he or she has not attained 21, has married, and therefore his or her interest is absolute and but for the circumstance of infancy, he or she would be entitled to call on the trustees for the appropriate share of the fund; in other words, he or she is in the position of a person absolutely entitled as against the trustees but for the circumstance of infancy. That, as it seems to me, is clearly the kind of case that this clause was intended to cover, and it would be quite inappropriate to expand it by imagining that the children who may never attain 21 and so attain their share have in fact reached that age and to give them benefit on that basis.
For those reasons I would agree that this appeal must be dismissed.
Appeal dismissed with costs.