Pierce & Ors v Wood & Ors [2009] EWHC 3225 (Ch)

Case No 9MA30628[2009] EWHC 3225 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Venue MANCHESTER DISTRICT REGISTRYDate 19th November 2009
Before
HIS HONOUR JUDGE HODGE QC(Sitting as a Judge of the High Court)
Between
(1) HEATHER PIERCEClaimants(2) GARETH ALUN PIERCEClaimant(3) RACHEL CERI DUNCANClaimant(4) JOHN JOSEPH OLIVERClaimant(5) DEIRDRE FRANCES OLIVERClaimant(6) ALEXANDER CRAIG MORRISClaimant(7) STEPHEN ROBERT MORRISClaimant(1) IRENE AMY WOODDefendants(2) THOMAS EDWARD OLIVERDefendant(3) JAMES MICHEL OLIVERDefendant(4) TREVOR RODERICK MORRISDefendant
Tape Transcription by Audrey Jones Transcription,49 Hill Rise, Romiley, Stockport, Cheshire SK6 3APTel: 0161 430 4705 Fax: 0161 217 9626 ajtranscription@ntlworld.com
Mr Giles Goodfellow QC appeared for ClaimantsMiss Elizabeth Wilson appeared for Defendants
JUDGMENT
[1]This is the trial of proceedings commenced by a Part 8 claim form in the Manchester District Registry of the Chancery Division on 15 July 2009. The claim is one that raises two principal issues of principle. The first is whether, following the decision of the Court of Appeal in the case of Howell v Trippier, [2004] EWCA Civ 885, reported at [2004] STC 1245, an enhanced scrip dividend received by the trustees of a discretionary lifetime settlement properly falls to be treated as a capital or as an income receipt as a matter of trusts law as well as for tax purposes. The Court of Appeal’s decision makes it clear that such an enhanced scrip dividend is properly to be treated as an income receipt in the hands of trustees for tax purposes; and it is the claimants’ case, supported by that of the defendants, that it falls to be so treated for trusts purposes as well.[2]The second issue of principle is the effect, if any, of the execution by trustees of a deed exercising a power which is ineffective according to its strict terms as a matter of law to achieve its expressed object. Should it be construed as having some lesser effect; and, if so, is that lesser effect capable of being avoided by the application of the principle (if indeed that is the correct expression to be used for it) in the well-known, and controversial, case of Re Hastings-Bass [1975] Ch 25.[3]The claim is brought by the present trustees of three separate discretionary lifetime settlements for the determination of similar questions arising in the execution of the trusts of all three settlements. The trustees of the three settlements are as follows: The first to third claimants are the trustees of the Stewart Alan Pierce settlement, created on 5 January 1997; the fourth and fifth claimants are the trustees of the John Joseph Oliver settlement, created on 2 April 1997; and the sixth and seventh claimants are the trustees of the Alan Craig Morris settlement dated 23 November 1997. The first defendant is a discretionary object of the Stewart Alan Pierce settlement; the second and third defendants are discretionary objects of the John Joseph Oliver settlement; and the fourth defendant is a discretionary object of the Alan Craig Morris settlement.[4]On 14 September 2009 I acceded to an application on paper for orders appointing the various defendants to represent the class of discretionary beneficiaries under the respective settlements of which they were themselves beneficiaries. It is not clear to me from the Court file or the trial bundle whether that order has ever been formally drawn up; but, if and insofar as there is any doubt on the point, those representation orders should be incorporated within the order made following this hearing.[5]The brief background to the matter is that each set of trustees elected to take up an issue of fully paid-up ordinary shares as part of an enhanced scrip dividend issued in respect of their existing shareholdings in a company formerly known as Leyland Trucks Manufacturing Limited and then known as Kepacourt Limited. For the purpose of these proceedings, the shares which were acquired in that way have been referred to as the scrip dividend shares. These were subsequently sold, along with the trustees’ remainder of their shareholdings in the company, as part of a takeover of the whole company. It is quite clear, by reference to the contrast between the values of the cash alternative and the enhanced scrip dividend, that for trusts law purposes the enhanced scrip dividend constituted a capital, rather than an income, receipt.[6]In the course of his opening, Mr Giles Goodfellow QC, who appears for the claimant trustees, expressly conceded that the enhanced scrip dividend received by each set of trustees was, as a matter of trust law, to be treated as a capital receipt in their hands. I have no doubt that that concession was correctly made, having regard to the considerable discrepancy between the effective value of the enhanced scrip dividend when contrasted with the relatively modest value of the cash alternative.[7]The evidence before the Court comprises, first, a witness statement from the first claimant, Mrs Heather Pierce (in relation to the Stewart Alan Pierce discretionary settlement) dated 23 July 2009, together with exhibits HP1 and HP2. Secondly, a witness statement from the fourth claimant, John Joseph Oliver, in relation to the John Joseph Oliver discretionary settlement. His witness statement is dated 18 July 2009 and comprises, in addition, exhibits JJ01 and 2. Thirdly, there is the witness statement of the sixth claimant, Alexander Craig Morris, in relation to his discretionary settlement. His witness statement is dated 22 July 2009; and has annexed to it exhibits ACM1 and 2. Fourthly, and finally, there is a witness statement from Mr Andrew Magilton dated 20 July 2009. He is a tax adviser with BTG Tax who have provided tax advice in relation to the settlements, although initially the advisers behind the settlements were Price Waterhouse Coopers. Mr Magilton has produced three exhibits, AM1, 2 and 3.[8]The application is, so far as the parties are concerned, non-contentious. None of the defendants opposes the relief claimed, and, indeed, they positively support it. I have had the benefit, albeit fairly late in the day, of detailed, and helpful, written skeleton arguments, both dated 18 November 2009, from Mr Giles Goodfellow QC (on behalf of the claimants) and from Miss Elizabeth Wilson of counsel (on behalf of the defendants). That, however, does not mean that there is not any opposition to the grant of the relief sought in this case. The Court has also received assistance from Her Majesty’s Revenue and Customs, both in the form of a letter dated 12 November 2009, and in the form of accompanying representations extending to some five pages of closely-spaced type.[9]The questions on which the parties seek the Court’s determination are essentially three in number. First, whether, pursuant to section 249(6)(b) of the Income and Corporation Taxes Act 1988 (to which I shall refer as the Taxes Act) or otherwise, the scrip dividend shares, and their sale proceeds, fall to be treated as income for trust law purposes as well as for the purposes of the legislation relating to income tax. If that case is decided against the parties, in the sense that the scrip dividend shares and their sale proceeds fall to be treated, not as income, but as capital, for trust law purposes, then that is the end of the matter. If, however, the parties succeed in their contention that the shares, and their sale proceeds, fall to be treated as income for trust law purposes as well as for the purposes of income tax, a second question arises, namely whether the trustees of each relevant settlement have exercised their power of accumulation in relation to such trust income so as to convert it into capital, and, if so, when.[10]The third issue, which again only arises if the second issue is resolved against the contention of the parties, is that, if the trustees of any of the settlements have indeed exercised their powers of accumulation in relation to the whole or any part of the scrip dividend shares, or their sale proceeds, whether the exercise of such power is either void, or falls to be avoided, according to the principles in the Hastings-Bass case. Those issues may respectively be referred to as the trust income issue, the accumulation issue, and the Hastings-Bass issue.[11]The contentions of the claimants, which are supported by the defendants in relation to each of the relevant settlements, may be summarised as follows: First, it is said that, as a result of the Court of Appeal’s decision in Howell v Trippier, the effect of 249(6)(b) of the Taxes Act is to treat the scrip dividend shares as income for trust purposes as well as income for income tax purposes, and that irrespective as to how those shares might otherwise have been classified for the purposes of trusts law. Secondly, it is said that it was essential to the Court of Appeal’s decision in Howell v Trippier that the income represented by the scrip dividend shares in that case should be income for trust law purposes because the provision engaged in that case, which was section 686(2)(a) of the Taxes Act, applied to impose a charge to income tax at an additional rate (which was the rate applicable to trusts) only on taxable income which was also income for trust purposes and thus capable of being accumulated.[12]Thirdly, and accordingly, it is said that the scrip dividend shares, and their sale proceeds, remained income for trust purposes unless and until they were the subject of a valid exercise by the relevant trustees of each settlement of their power of accumulation.[13]Fourthly, it is said that at no time did the trustees decide to accumulate the sale proceeds. Firstly, no express decision to accumulate either the scrip dividend shares, or their sale proceeds, was ever taken by the trustees; still less was there any such decision ever recorded in writing. Secondly, there is no, or no sufficient, basis for finding that the trustees impliedly exercised their power to accumulate income in relation to the scrip dividend shares or their sale proceeds. The reasons for that are -(a) that until after the decision in Howell v Trippier had become final (which appears on the evidence to have been at some stage between about November and December of 2004) the trustees of each settlement had considered that the scrip dividend shares constituted a capital receipt from the beginning and so were not subject to the power of accumulation;(b) even in relation to receipts which were clearly trust income, the trustees did not exercise their power of accumulation but simply decided to retain such receipts as income rather than convert it into trust capital;(c) the treatment of trust income in the settlements’ accounts is no evidence of any decision to convert such income into trust capital. The word “accumulated”, in relation to income which had been carried forward from year to year, was not being used in any technical trust law sense; and it is said that that interpretation is confirmed by the fact that, even within the accounts, such “brought forward/accumulated income” is still treated as forming part of the income account of the relevant settlement’s assets; and(d) such actions in accumulating income would have been inconsistent with the advice that was being received at the time from BTG Tax and its predecessor incarnation, which was to preserve the trustees’ freedom of action, and their ability to make distributions to beneficiaries in a manner which both attracted no charge to inheritance tax and which also passed on the benefit of the income tax already borne by the trustees, particularly in the case of those beneficiaries who are not higher rate income tax payers.[14]The fifth of the claimants’ contentions is that, if the Court were, notwithstanding the foregoing, to find that the trustees of any particular settlement had exercised their power to accumulate in relation to the proceeds of sale of the shares, the trustees would ask the Court to declare that such decision was either void or voidable since it is said that it would have been a product of a failure to take into account considerations relevant to the exercise of the trustees’ discretionary power, and, in particular, the prejudicial effect that converting trust income into trust capital would have had upon -(a) the trustees’ ability to pass on the benefit of the income tax they had already suffered to beneficiaries by making distributions of income to them falling within section 687 of the Taxes Act;(b) the trustees’ ability to make distributions to beneficiaries between the ten-yearly anniversaries of the creation of each settlement without incurring any exit charge to inheritance tax under section 65 of the Inheritance Tax Act 1984; and(c) the trustees’ exposure to the ten-yearly periodic charge to inheritance tax under section 64 of that Act, which charge would apply to accumulated income, but not to undistributed trust income that had not been accumulated as capital.[15]Finally, and if, contrary to the claimants’ earlier contentions, the Court should find that income has been validly accumulated, then the claimants wish to know when such accumulation took effect because that would affect the level of the inheritance tax charge on the tenth anniversary of each settlement under the decennial charging provisions in section 64 of the Inheritance Tax Act 1984.[16]In that regard, the trustees’ contention is that the earliest time that any of them could be treated as having accumulated trust income represented by the proceeds of sale of any shares would be when the relevant sets of trustees signed the accounts for the year ended 5 April 2005, being the year end following the Court of Appeal’s decision in the case of Howell v Trippier.[17]The trustees wrote to Her Majesty’s Revenue and Customs inquiring whether they would wish to be joined to the present proceedings. The Revenue’s final position is set out in a letter of 6 November, in which they indicated that they would not wish to be joined. Instead, they invited the claimants to put before the Court written representations, which were subsequently provided under cover of the letter of 12 November 2009, to which I have already referred.[18]It is clear from the third paragraph of that letter that the Revenue accept that the charge to tax under section 64 of the Inheritance Tax Act 1984, which is of course the charge that applies at each ten-year anniversary of the creation of the relevant settlement, only arises on capital comprised within a settlement which qualifies as “relevant property”, as defined in section 58(1) of the 1984 Act. The Revenue confirm, in the third paragraph of their letter, that, should the Court rule that the scrip dividend shares and their sale proceeds constitute income for trust law purposes, then no charge to tax will arise to the extent that the Court determines that such property is unaccumulated income, or income which has not otherwise been capitalised. However, the Revenue’s letter goes on to make the point that, should the Court determine that the shares and their sale proceeds do constitute capital in terms of trust law, then the charge to tax under section 64 either will or may arise; and the Revenue reserve their right to issue notices of determination to the trustees of each settlement under section 221 of the 1984 Act.[19]By way of closing, the Revenue expressed the view that every case raising questions regarding the classification of trust receipts and/or the applicability of the charge to tax under section 64 of the 1984 Act has to be considered on its own facts and its own merits. The writer expresses the view that the Court’s ruling in this claim will not set any binding precedent as regards future cases; and reserves the Revenue’s rights in any such future case, either to directly intervene in any proceedings which may be afoot should they consider it appropriate to do so, or to issue notices of determination if this would be in their interests, or to raise any other arguments which they may consider to be appropriate in the circumstances.[20]It does seem to me that, insofar as matters of general law are concerned, this case may well have the effect of setting a precedent unless and until it is considered on appeal, or by an appeal court in a later case.[21]In their written representations, the Revenue state that they wish to draw the Court’s attention to certain issues which it may wish to consider when determining the merits of the claimants’ application, and also to inform the Court of the Revenue’s views on those issues.[22]So far as the first two of the issues are concerned (the trust income issue and the accumulation issue), the Revenue submit that the answer to that question turns on a careful consideration of the facts of the particular case. They emphasise that, although the main authorities on the subject of the classification of trust receipts establish useful guiding principles, each case ultimately rests on its own particular facts. The Revenue then refer to various authorities on the treatment, for trust law purposes, of the receipt of an enhanced scrip dividend by trustees. It is unnecessary for me to refer to those submissions because Mr Goodfellow has rightly conceded, as I have indicated, that the enhanced scrip dividend in each of the cases before me did constitute a capital, rather than an income, receipt for trust law purposes.[23]The Revenue go on to take the opportunity to seek to correct what they conceive to be a misapprehension on the part of the claimants’ tax adviser, Mr Magilton, as to the effect the Court of Appeal’s judgment in Howell v Trippier. They refer to a suggestion (in paragraph 39 of his witness statement) which they say is to the effect that, because the Court of Appeal in Howell v Trippier decided that the scrip dividend shares themselves were subject to income tax, then that Court must also be taken to have accepted the logically anterior proposition that section 249(6)(b) of the Taxes Act requires one to treat a scrip dividend as income for the purposes of trust law generally. The Revenue say that they do not consider that that statement is correct. In that regard, they refer the Court to paragraphs 51 to 58 of the Court of Appeal’s judgment in that case. The Revenue submit that the question of whether the scrip dividend shares were capital or income for the purposes of trust law is a logically separate question from the question whether, for income tax purposes, scrip dividend shares should be deemed to be income. They say that the classification question must be answered by considering the considerations relevant as a matter of trusts law.[24]I reject that submission on behalf of the Revenue. I prefer the arguments advanced by the claimants, and supported by the Defendants. The reasoning in Howell v Trippier is addressed at paragraph 6 of Mr Goodfellow’s written skeleton submissions. He submits that Howell v Trippier was a test case, designed to determine whether the trustees of discretionary trusts who received scrip dividend shares were liable to income tax at the rate applicable to trusts, or merely at the lower rate. In that case, it was common ground -(1) That if the trustees had chosen to receive the cash dividend instead of the scrip shares, the cash dividend would have been trust income and the trustees would have been liable to income tax on that cash dividend at the rate applicable to trusts;(2) That the effect of section 249(6)(b) of the Taxes Act was that, by virtue of the issue of the scrip shares to the trustees, income for income tax purposes arose to them, the amount of that income being the market value of the scrip shares, the trustees’ liability to income tax at the lower rate being discharged by an irrecoverable tax credit;(3) That the trustees would be liable to income tax at the rate applicable to trusts only if the income arising to them fell within section 686(2)(a) of the Taxes Act, on the basis that it was “income which is to be accumulated or which is payable at the discretion of the trustees or any other person...”(4) That only sums which were income receipts in the trustees’ hands could fall within section 686(2)(a). The scrip shares were, as a matter of trust law, capital receipts for trust purposes in the hands of the trustees; and in the absence of any deeming or similar provision to the contrary the scrip shares could not fall within section 686(2)(a).[25]But the effect of the Court of Appeal’s decision, in a single decision delivered by Neuberger LJ (with which the other two members of the Court, Dame Elizabeth Butler-Sloss P and Latham LJ, merely agreed) was that section 249(6)(b), on its true construction, and admittedly not on its more natural construction, operated so as to treat the scrip shares as being income in the hands of the trustees in the trusts law, as well as in the income tax, sense, and thereby rendered those shares, and their sale proceeds, subject to the rate applicable to trusts by virtue of section 686(2)(a).[26]Mr Goodfellow therefore submits that the clear ratio of the Court of Appeal’s decision is that the effect of section 249(6)(b) of the Taxes Act is to treat the scrip shares, and their sale proceeds, not just as income for income tax purposes, but also as income for the purposes of trusts law. That is why, he says, the income became susceptible to the trustees’ powers of accumulation, and that is why section 682(2)(a) operated so as to impose a charge to income tax calculated by reference to the rate applicable to trusts. If the scrip shares simply had been treated as income for income tax purposes, and not also for trust purposes, the necessary conditions of section 682(2)(a) would not have been satisfied.[27]He goes on to submit that there is nothing in section 249 of the Taxes Act which expressly or impliedly limits the effect of the deeming provision to income tax purposes.[28]He also submits that once Parliament had decided to treat the issue of scrip shares to trustees of a discretionary trust as income for the purposes of the rate applicable to trusts, it was also logical for it to deem those scrip shares to be income for the purposes of trusts law, not only to satisfy the conditions of section 686(2)(a), but also to fit in with the scheme of sections 686 and 687. The scheme of those two provisions is to tax income when it initially arises to the discretionary trustees at the rate applicable to trusts (by virtue of section 686), but then to pass on the benefit of that tax credit to beneficiaries who subsequently receive payments of income from the trust (pursuant to section 687). In this way, income arising to the trustees, and then distributed to the beneficiaries, is subjected to the relevant beneficiaries’ effective rate of income tax.[29]An appointment or advance of trust capital, in exercise of a power over capital, even if it were to meet an income need of the beneficiary, is normally a capital receipt in the beneficiary’s hands, and thus outside the scope of section 687. In support of that submission, I was taken to the decision of the Court of Appeal in the case of Stevenson v Wishart [1987] STC 266, in particular pages 271-272 in the only reasoned judgment (of Fox LJ). Thus, Mr Goodfellow submits, if the scrip shares were taxed as income for the purposes of income tax, but were to be treated as capital for trusts law purposes, the benefit of those shares, or their sale proceeds, could not normally be appointed out as income, and so would be taxed at a much higher effective rate of tax, even if they were appointed out in favour of non- or basic rate taxpayers. That would operate to create an anomalous distinction between scrip shares and other forms of income.[30]Mr Goodfellow concludes this aspect of his submission by pointing out that there is a well established policy of the Revenue that income, unless converted into trust capital, is not subjected to the charge to inheritance tax, thereby avoiding a second charge to tax. He says that if scrip shares, even though they were chargeable to income tax at the rate applicable to trusts, were to be treated as trust capital, they would not be converted into trust income and so would automatically be exposed to the inheritance tax charge. Again, he says, that would cause there to be an anomalous difference in treatment between income in the form of scrip shares and other forms of income.[31]In summary, what Mr Goodfellow says is that it is both integral to the reasoning of the Court of Appeal in Howell v Trippier, and also perfectly sensible, having regard to the structure of the taxes legislation as a whole, to treat a scrip dividend as income for all purposes, and not only for the purposes of income tax.[32]I accept that submission. In my judgment, the effect of the Court of Appeal’s decision in Howell v Trippier is that section 249(6)(b) of the Taxes Act is to be construed as treating a scrip dividend received by trustees as income in their hands for the purposes of trusts law, as well as for income tax purposes. I am satisfied that that is the true effect of Neuberger LJ’s judgment on a fair reading, in particular, of paragraphs 23, 24, 33, and 54 through to 58. The actual issue raised by the appeal in that case was whether scrip dividends paid to trustees of a discretionary trust were taxable at the rate applicable to trusts. It was common ground that the stock dividend received by the trustees had been capital as a matter of trust law. That was made clear at page 1260 letter J of the report (paragraph 6 of Neuberger LJ’s judgment). At paragraph 23, Neuberger LJ stated that the crucial feature of the trustees’ case had been that section 686(2)(a) limits the ambit of section 686 to receipts in the hands of trustees of discretionary or accumulation settlements which are to be treated as income under the relevant settlement.[33]The Revenue’s argument in reply to that was said (at paragraph 24) to be that the issue of the bonus shares to the trustees was deemed by virtue of section 249(6)(b) to be the receipt of income by the trustees; and that one must follow through that fiction into section 686.[34]At paragraph 33, Neuberger LJ acknowledged that if there were sufficiently strong contextual or policy reasons for justifying such a conclusion, whilst “income” in section 249(6)(b) would most naturally mean income in the Taxes Act sense, it could also mean income for trust law purposes. In the section of his judgment at paragraphs 54 to 58 headed “Conclusion,” and in particular at paragraph 54, Neuberger LJ expressed the view that it was indeed permissible to read “income” in section 249(6)(b) as meaning income under trust law because there was a sufficiently strong body of permissible material to justify such a reading.[35]In my judgment, the Court of Appeal was holding that the effect of section 249(6)(b) is to treat income in the form of bonus shares as an income, rather than a capital, receipt for all purposes, and not just for the purposes of the legislation relating to income tax.[36]I therefore accept Mr Goodfellow’s submission that the scrip dividend shares, and their sale proceeds, fell to be treated as income for trust law purposes, as well as for the purposes of income tax.[37]That means that I have to go on to consider the second issue, which is the accumulation issue. As to that, the Revenue’s position is that the question turns on the particular facts of the case. That I think is correct. All that the Revenue wishes to say in that regard is that strong inferences can be drawn from the fact that the claimants made no distribution to the beneficiaries of the settlements since receiving the scrip dividend shares over ten years ago. The Revenue make the point that all income received by the trustees has in large part been continually reinvested; and the Revenue suggest that the natural conclusion to be drawn from that state of affairs is that such income has been accumulated and converted into capital.[38]Again, on this issue, which, as I say, turns entirely on the facts, on the evidence before the Court of Mr Magilton and the trustees, there is no doubt in my mind that the trustees have never decided to convert the sale proceeds from income into capital. No express or implied decision to that effect has ever been taken; and, given that the value of the sale proceeds constitutes by far the major part of the trust fund of each settlement, it would be very surprising for such an important decision never to have been consciously addressed, let alone minuted.[39]Perhaps even more pertinently, for many years, until after the conclusion of the proceedings in Howell v Trippier, the scrip dividend shares were regarded, in the event wrongly, as having been received as trust capital, and so the question of converting trust income into capital never arose in relation to the shares or their sale proceeds. Once it was appreciated that the scrip dividend shares were indeed income, both for income tax and also trust law purposes, the focus moved to recouping the tax charge associated with the scrip dividends having been income for tax purposes by making distributions to lower or basic rate taxpayer beneficiaries. That required the distributions being made to such beneficiaries by way of income rather than capital. That strategy would have been seriously undermined if the trust income were being converted into capital.[40]Finally, the accounting treatment is quite consistent with the proceeds of sale remaining trust income, and is not evidence of any decision to convert trust income into trust capital. In that regard, I was taken to the accounts of one of the settlements (all of which followed the same form) for the year ended 5 April 2005, at page 94 of divider 4 of trial bundle B, which show that, as between the years 2004 to 2005, monies standing to the credit of the capital account before the Howell v Trippier decision were translated into monies standing to the credit of the income account for the 2005 year following that decision. In short, there is absolutely nothing to indicate any decision on the part of the trustees of any of the three settlements to accumulate income, in the sense of converting such income into capital.[41]During the course of my pre-reading, limited though it was, my attention fell upon an entry in the chronology of events, helpfully prepared for the Court by Miss Wilson of counsel, where (at paragraphs 7 and 8 of that chronology) she refers to the trustees of each of the three settlements having added a provision to their respective settlements in April 1998. The provision that was thereby added (by way of a deed of appointment said to be made in exercise of the power conferred by clause 6 - which confers a power to appoint over capital and income - rather than clause 7, relating to the payment or application of income, but also “of all other relevant powers”) provided that the provision specified in the schedule was to be expressly incorporated into each of the settlements. The schedule provided, very shortly, that the trustees were to treat any section 249 distribution received or receivable by them as capital of the trust fund.[42]During the course of the hearing, I raised with Mr Goodfellow the question whether, by that deed of appointment, the trustees were irrevocably electing to treat the bonus shares (which were a section 249 distribution) as capital of the trust fund. Mr Goodfellow’s answer to that was that the deed was not directed to converting bonus shares received as income into capital, but rather was an attempt to treat bonus shares as capital right from the start. What the trustees were seeking, in effect, to do was to fortify the argument, which they were then seeking to advance, that the enhanced scrip dividend was to be treated as a capital, rather than an income, receipt. He made the point that the trustees were in no position to contract out of the effect of section 249(6)(b), as it was later to be construed by the Court of Appeal in Howell v Trippier; and that, in any event, they could not in any way subject themselves to an obligation to act otherwise than bona fide in the best interests of their beneficiaries.[43]He effectively submitted that the trustees had been mistaken as to the proper characterisation of the scrip dividends at the time they exercised their power by executing the relevant deeds in April 1998; and, as a result, they resolved to treat the scrip dividends as capital when they were unable to do so. He therefore submitted that the effect of the deed in that respect was entirely nugatory. He said that the deed was effectively executed under a mistake of law; and that it would be perverse to require the trustees, by way of implementation of that deed, having received the scrip dividends as income, then to exercise their power to convert them to capital when that would be inconsistent with the true best interests of the beneficiaries. He said it would be completely irrational for the trustees to be required to act in that way.[44]I accept the submission that the deed of appointment was ineffective immediately to convert the scrip dividends from income into capital. That could not be achieved as a result of section 249(6)(b), as construed in Howell v Trippier. At one stage I considered whether the deed should perhaps be construed, in order to validate it, as effectively achieving the next best thing, namely of evidencing an intention to accumulate what was an income receipt and convert it into a capital receipt. What I had in mind was the maxim that equity looks upon as done that which should be done. But I am satisfied that that would not be consistent with true equitable principles, because it would require the trustees to act otherwise than in good faith in the best interests of their beneficiaries; and that is not something that a court of equity would require them to do.[45]In my view, therefore, Mr Goodfellow is right to submit that the effect of that deed, at least so far as the treatment in law of the scrip dividends is concerned, was nugatory. If, however, I am wrong in that, then it seems to me that a principled application of the principle underlying the rule in the Hastings-Bass case would lead to the conclusion that the deed should be treated as either void or voidable. I should say that in the present case it matters not which consequence flows from the application of the Hastings-Bass principle because, even if the true result is that an exercise of a discretion invalidated by Hastings-Bass is thereby rendered voidable rather than void, there is no reason, in the present case, why the Court should not avoid the relevant exercise of the trustees’ discretion. There has been no distribution of capital in the present case, nor any purported distribution of capital; and there is absolutely no reason why, if the trustees have acted wrongly in converting income into capital, that exercise cannot be undone.[46]It is unnecessary for me, in the present case, to embark upon any detailed consideration of the principle in Hastings-Bass. Both counsel accepted as a correct statement of the law the exposition of the principle to be found at paragraph 119 of the decision of Lloyd LJ, sitting as a judge of first instance, in the case of Sieff v Fox [2005] EWHC 1312 (Ch) [2005] 1WLR 3811.[47]It is necessary for me to refer only to the subparagraphs numbered (i) and (v):
“(i) The best formulation of the principle seems to me to be this. Where trustees act under a discretion given to them by the terms of the trust, in circumstances in which they are free to decide whether or not to exercise that discretion, but the effect of the exercise is different from that which they intended, the court will interfere with their action if it is clear that they would not have acted as they did had they not failed to take into account considerations which they ought to have taken into account, or taken into account considerations which they ought not to have taken into account.”
Moving on to paragraph (v):
“(v) I am in no doubt that, as a general proposition, fiscal consequences are among the matters which may be relevant for the purposes of the principle.”
[48]I entertain concerns as to the potential wide-ranging effects of the Hastings-Bass principle (which has been described, extra-judicially, by Lord Neuberger of Abbotsbury as amounting, in effect, to a “get out of jail free card” in the hands of trustees); but, notwithstanding concerns as to the true bounds of the principle, I have no doubt whatsoever that, if it were necessary to do so (because, contrary to my primary view, the deeds of appointment are effective), then it seems to me that, on any view of the true scope of the Hastings-Bass principle, it must apply here.[49]In executing those deeds, the trustees did so with a view to making it clear that the relevant scrip dividends were to be treated as capital, rather than income, receipts. As a result of a subsequent Court of Appeal decision it has become clear that that was not something that they could achieve. In those circumstances, it would be wrong for a Court to try to give some lesser, and unintended, effect to the deeds; but if the Court were to construe those deeds as having some lesser effect, I have no doubt that that lesser effect would not have been one which the trustees would have wished to countenance. In those circumstances, it seems to me that the Hastings-Bass principle would apply to invalidate that lesser effect.[50]I therefore conclude, on the accumulation issue, that the parties are correct, and that the trustees of none of the settlements have exercised any power of accumulation in relation to such trust income. It is therefore unnecessary for me to consider either when they might have done so or whether, if they did so, the application of the rule in Hastings-Bass would have the effect of rendering the exercise of such power either void or voidable, and I do not propose in this judgment to contribute any further contribution to the law in that contentious area.[51]I should say that, in the course of their written representations, although directed to a slightly different aspect of the matter, the Revenue did draw the Court’s attention, very helpfully, to the passage in Lloyd LJ’s judgment in Sieff v Fox at paragraph 86. The particular passage which the Revenue wished to emphasise is at page 3839 at letter E:
“If the discrepancy between the intended and actual fiscal consequences were the result of a later court decision by which the position was held to be otherwise than had previously been supposed, it would be very surprising if that change could have the effect of invalidating acts by trustees done on the basis of the previous understanding of the position.”
[52]In their written representations, the Revenue submit that the discrepancy between the intended and the actual fiscal consequences of those of the claimants’ actions which on this hypothesis, and contrary to my findings, have resulted in income being accumulated and converted into capital, arose from the Court of Appeal’s decision in Howell v Trippier, in which the position was held to be otherwise than had previously been supposed. The Revenue say that, in line with Lloyd LJ’s observations, they consider that this brings the claimants’ application outside the scope of the Hastings-Bass principle.[53]Insofar as it might be thought that that submission should be considered in relation to the 1998 deeds, it seems to me that the submission is misconceived. The 1998 appointments were intended merely to deal with the character or quality of the receipt of the scrip dividends. It is clear that they cannot override the effect of section 249(6)(b) of the Taxes Act. That being so, the purpose of the deeds was incapable of attainment by the trustees. The documents were incapable of taking effect in accordance with their terms; but if that is wrong, then they should be treated as either void, or as voidable, by the application of the Hasting-Bass principle. If they are indeed incapable of taking effect in accordance with their terms, the trustees would certainly not have sought to achieve the lesser objective, undesirable from the point of view of the beneficiaries, of receiving the enhanced scrip dividends as income, and then converting what had been received as income into capital. It would have been contrary to the interests of the beneficiaries to do so. That is not an action which has proved to be unwise because of a discrepancy between an intended and an actual fiscal consequence as a result of a later court decision. The later court decision has not had the effect of rendering the deed unwise; it has had the effect of rendering it completely nugatory; and, in my judgment, the mere fact that this has become apparent as the result of a later court decision could not prevent the trustees from saying that the deed should not be given some lesser effect where that effect would be contrary to the interests of their beneficiaries.[54]In summary, acceptance of the Revenue’s position would amount, in effect, to allowing the Revenue to have its cake, in the form of a charge to tax on the enhanced scrip dividends at the time of issue at the rate applicable to trusts; and then seeking to have it a second time, by way of the application of the ten-yearly charge to tax under section 64 of the 1984 Act. My decision avoids that undesirable consequence; but it seems to me that my decision is properly founded in principle, even though it has beneficial consequences in practice.[55]So, for those reasons, I decide the first and second questions in the Part 8 claim form in the manner contended for by the claimants, with the support of the defendants; and the third question therefore does not arise. MR GOODFELLOW: My Lord, if I may, there was one typo that probably crept in. JUDGE HODGE: I think it did. I wondered, as I was reading it, whether you meant “recoverable.” MR GOODFELLOW: Yes. Also, paragraph 11 of my skeleton, to which you referred where “if the shares or their proceeds through a sale could not normally be appointed out as income,” it does read “would not be taxed at a much higher effective rate,” it should say “and so would be taxed at a much higher effective rate even if they were appointed out.” So the not should be deleted. JUDGE HODGE: And I also wondered earlier on whether there was an “irrecoverable” which should have been “recoverable.” MR GOODFELLOW: Where is that, my Lord? JUDGE HODGE: That is the problem. I cannot remember where it is. MR GOODFELLOW: I should know my skeleton. I think it is probably at the same point, the higher tax paid by the trustees would not be recoverable if the asset were treated as a capital for trust purposes. I am not sure if it appears in the skeleton. JUDGE HODGE: It was in 6.2. I wondered whether the end of 6.2: “The trustees’ liability to income tax at the lower rate was discharged by a--- MR GOODFELLOW: No. That is correct. Even if you are a nil rate tax payer you cannot go to the Revenue and say--- JUDGE HODGE: Right. MR GOODFELLOW: Right at the beginning of your judgment you said that the Court of Appeal in Howell v Trippier makes it quite clear that the scrip dividend shares are to be treated as a capital receipt, but obviously they decided it was to be treated as an income. JUDGE HODGE: Yes. MR GOODFELLOW: And Miss Wilson points out that you might have referred to 249(2)(b) rather than (6)(b), and again my Lord, you were often referring to section 682(2)(a) and it is actually section 686(2)(a). JUDGE HODGE: Right.

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