Anna Louise Wensley Stock & Ors v Andrew John Kenneth Neal & Anor [2026] EWHC 1823 (Ch)
Neutral Citation Number:[2026] EWHC 1823 (Ch)Case No PT-2025-000526IN THE HIGH COURT OF JUSTICEBUSINESS AND PROPERTY COURTS OF ENGLAND AND WALESPROPERTY TRUSTS AND PROBATE LIST (ChD)Venue Royal Courts of Justice, Rolls Building, Fetter Lane, London, EC4A 1NLDate 17 July 2026
Before
MR JUSTICE RICHARDS
Between
(1) ANNA LOUISE WENSLEY STOCKClaimants(2) VERONICA CHAMBERSClaimant(3) ALFRED JOHN FORTNAMClaimant(1) ANDREW JOHN KENNETH NEALClaimant(2) THE COMMISSIONERS FOR HIS MAJESTY'S REVENUE AND CUSTOMSClaimantSusannah Meadway (instructed by Wansbroughs LLP) for ClaimantsJames MacDougald (instructed by Godwins Solicitors LLP) for First DefendantJames Kirby (instructed by His Majesty's Revenue and Customs) for Second DefendantHearing Hearing date: 16 June 2026Approved JudgmentThis judgment was handed down remotely at 10.30am on 17 July 2026 by circulation to the parties or their representatives by e-mail and by release to the National Archives.
[1]The Claimants (the Trustees) are trustees of a settlement constituted by a deed executed by the Reverend Wilbert Vere Awdry (Reverend Awdry) on 10 March 1987 (the Settlement). Reverend Awdry was the author of the well-known, and well-loved, series of books involving Thomas the Tank Engine and his friends.[2]The Trustees have commenced proceedings by way of a Part 8 claim form requesting the court’s determination of whether certain royalty payments being paid to the Settlement are capital or income for “trust law purposes”. It is common ground that the royalties are income for income tax purposes.[3]The Trustees are party to this claim as claimants because they wish to know how the Settlement should be administered. The Second Defendant (HMRC) is party to the claim because they have an interest in the outcome as they are likely to be entitled to more tax if the royalties are categorised as income for trust law purposes. The First Defendant was appointed by the court at the instigation of the Trustees. He is an independent solicitor and has been asked to represent the interests of persons other than HMRC who might benefit if the royalties are income for trust law purposes.[4]It is appropriate to be clear as to the nature of the relevant “trust law purposes” since these are central to the ruling that is sought.[5]Trusts are frequently established for the benefit of people with successive interests. For example, a particular person (often referred to as a “life tenant”) may be entitled to receive income arising to the trust for his or her life. On the death of the life tenant, trust property may pass to another beneficiary, often referred to by the somewhat old-fashioned term “remainderman”. So, for example, a portfolio of securities might yield a periodic return in the form of dividends or interest which would be paid to a life tenant. On the death of the life tenant, the securities themselves might pass to the remainderman absolutely. In such an example, the interest of the life tenant can be understood as being in the income of the trust and the interest of the remainderman is in the capital of the trust.[6]Such trusts can last for a long time. They are frequently established as will trusts by testators on whose death the trust is established. Much might happen during the life of the trust. Trustees might permissibly dispose of, deal with, or reinvest trust assets. Issues can therefore arise as to who is to benefit from particular receipts.[7]Issues do not arise only when trust property is held for persons with successive interests. The Settlement in this case was originally an accumulation and maintenance trust which may not involve the same conflict between the interests of a life tenant and remainderman of the kind I have described because the beneficiaries interested in income have the prospect of an enlargement of their income interests into capital interests. However, the distinction between income and capital remains important in the case of the Settlement. As will be seen, the Settlement provides for “income” to be accumulated for a period. The Trustees’ powers or duties to advance funds to beneficiaries of the Settlement vary depending on whether a particular item is categorised as capital or income.[8]A prime consideration in resolving “income or capital” disputes is the meaning of the trust instrument. On close inspection, that instrument might resolve the dispute. Even if the wording is not clear, the court may be able to divine the settlor’s intention (which, as described later in this judgment must be ascertained objectively) either from the instrument or from certain judge-made principles concerned with inferring intention. For example, over time, the courts have developed a body of principles that apply as a guide to a settlor’s (objective) intention where trustees grant a “mining lease” over a parcel of land that entitles a lessee to extract minerals.[9]However, the parties agree that determining whether a particular item is capital or income of a trust cannot be answered only by construing the trust instrument or applying judge-made rules to infer a settlor’s (objective) intention. The law can intervene to influence the outcome one way or the other. For example, s164 of the Law of Property Act 1925 (LPA 1925), until its repeal, imposed restrictions on the length of time for which income accruing to a trust could be accumulated. A settlor could not draft round this statutory restriction by providing that what the statute regards as income is instead to be treated as capital that is payable to the remainderman after expiry of the accumulation period.[10]Tax law also has its own rules that stand separate from questions of construction of a particular trust instrument or a particular settlor’s intention. What is now s480 of the Income Tax Act 2007 provides for “accumulated or discretionary income” to be subject to tax at the trust rate (45%). The parties are agreed (by reference to [21] of the judgment of Neuberger LJ as he then was in Howell v Trippier [2004] EWCA Civ 885, [2004] STC 1245) that this charge bites on items that are, as a matter of trust law, income receipts in the trustees’ hands. They are agreed that a trustee cannot draft round any such charge simply by labelling a particular item as capital in a trust deed.[11]It follows that the “trust law purposes” that I am asked to consider involve an ascertainment of both of the following questions: i) The true construction of the Settlement: that involves an objective determination of Reverend Awdry’s intention from a combination of the words used in the Settlement and surrounding circumstances; and ii) Whether that construction is displaced by any relevant trust law principles. PART A – THE MEANING OF THE SETTLEMENT The correct approach to construing the Settlement
PART A – THE MEANING OF THE SETTLEMENT
[12]No party devoted much of their written or oral submissions to the principles that should be applied when construing the Settlement. I took the parties to agree on the following principles that are stated in the current edition of Lewin on Trusts (the 20th edition and the first supplement to that edition): i) I must consider the objective meaning of the words used in the Settlement in the light of the surrounding circumstances ([7-004] of Lewin on Trusts). ii) The surrounding circumstances that can be considered do not include the purposes, motives or desires of Reverend Awdry himself. That is because the court is seeking to ascertain the intention as expressed in the Settlement, rather than the subjective state of mind of Reverend Awdry ([7-005] of Lewin on Trusts). iii) Surrounding circumstances (or “matrix of fact”) must be taken into account in interpreting the Settlement. As noted, those circumstances must, in this case at least, consist only of objective external facts. Such external facts and circumstances can help explain the objective meaning of provisions of the Settlement ([7-011] of Lewin on Trusts).[13]As will be seen, some of the case law that I will consider refers to the need to ascertain “intention”. I too will use that shorthand in this judgment, but in doing so will refer to objective indications of what the words of the trust instrument in question are intended to mean, rather than as a reference to subjective intention.
Background: Reverend Awdry’s prior assignment of copyrights
[14]On 16 October 1985, Reverend Awdry entered into a Deed of Assignment with his then publishers, William Heinemann Limited (described in the Deed as the “Publishers”). The Deed of Assignment recited arrangements under which Reverend Awdry had historically written books in the Thomas the Tank Engine series and been paid for doing so. Some of those arrangements could have resulted in Reverend Awdry divesting himself of copyright in literary works and drawings. However, the Deed of Assignment sought to regularise the position and make it clear that, even to the extent Reverend Awdry retained certain copyrights, those were to vest in the Publishers. The Deed of Assignment referred to relevant Thomas the Tank Engine books as the “Railway Series”.[15]Accordingly, by Clause 1(a) of the Deed of Assignment, Reverend Awdry assigned, to the extent that they had not already been assigned to the Publishers (or their predecessors in title), the entire copyright throughout the world in certain defined “Works” and “Illustrations” together with such rights as may subsist in what was described as the “Railway Format”.[16]In return, the Publishers were to pay Reverend Awdry a stream of royalties (Royalties) during the term of the copyrights so assigned.
The Settlement
[17]On 10 March 1987, Reverend Awdry made the Settlement which was described on its front page as a “Settlement on Accumulation and Maintenance Trusts”. The Settlement recorded that Reverend Awdry wished to make provision for his grandchildren (who were individually named and described as the “Beneficiaries” in the Settlement) and that he wished: … to transfer to the Trustees the property and assets set out in the Schedule hereto to be held by them upon and subject to the trusts [declared by the Settlement].[18]It is common ground that only those grandchildren named in the Settlement were Beneficiaries. In practice, Reverend Awdry had no grandchildren other than those named in the Settlement. The oldest Beneficiary was 17 years old at the time Reverend Awdry made the Settlement. The youngest was 6.[19]The Settlement contained the following definition of “the Trust Fund”:(i) the property and assets specified in the Schedule hereto(ii) [any additions to the Trust Fund of which, none are relevant to this dispute](iii) all accumulations of income of the Trust Fund duly made under any trust or power as accretions to the capital of the Trust Fund(iv) the investments property and sums of money from time to time representing the property and assets specified in the Schedule hereto and any such additions and accumulations as aforesaid and any part or parts thereof respectively[20]The Schedule described the property and assets referred to in the Recitals and limb (i) of the definition of the “Trust Fund” as: ONE HALF of all royalties paid to the Settlor after the date of this Deed under the provisions of the [Deed of Assignment][21]Clause 3 of the Settlement provided that: The Trustees shall hold the Trust Fund and the income thereof upon trust for such of the Beneficiaries as shall attain the Specified Age and if more than one in equal shares subject as hereinafter provided[22]The “Specified Age” was defined as being the age of 21. The Settlement also specified the following matters, consistent with the then applicable provisions of the Perpetuities and Accumulations Act 1964: i) the applicable perpetuity period was 80 years from the date of the Settlement; and ii) there was to be an “Accumulation Period” lasting 21 years from the date of the Settlement.[23]Clauses 4(1) to (3) provided as follows: The share (in this clause called “the Settled Share”) to which each of the Beneficiaries (in this clause called “the Beneficiary”) is presumptively entitled under clause 3 above shall not vest in him or her absolutely on attaining the Specified Age but shall be held by the Trustees upon the following trusts and with and subject to the following powers and provisions namely: (l) Until the Beneficiary attains the Specified Age or until the expiration of the Accumulation Period (whichever is the earlier) the Trustees may pay or apply the whole or any part of the income of the Settled Share to or for the maintenance education or benefit of the Beneficiary and Subject as aforesaid compound interest by investing the same and the resulting income thereof in any of the investments hereby authorised and shall hold all such accumulations as part of the capital of the Settled Share for all purposes (2) Following the expiration of the Accumulation Period and until any Beneficiary shall attain the Specified Age the Trustees shall apply the income of such Beneficiary's share by paying or applying it to or for the maintenance education or benefit of such Beneficiary (3) Subject as aforesaid the Trustees shall stand possessed of the Settled Share and the income thereof UPON TRUST to pay the income thereof to the Beneficiary during his or her life until such Beneficiary shall attain the age of forty five years whereupon such Beneficiary shall be entitled absolutely to the Settled Share[24]The parties are agreed on the following matters relating to Clauses 4(1) to (3): i) Some words are missing in Clause 4(1). However its overall meaning is clear. Before a Beneficiary turns 21 (which will necessarily happen before the expiry of the Accumulation Period), the Trustees had power to apply the income of that Beneficiary’s one-seventh share for his or her maintenance, education or benefit. Any income not so applied was to be accumulated as an accretion to that Beneficiary’s one-seventh share. ii) Clause 4(2) is redundant since the Accumulation Period expired 21 years after the date of the Settlement by which time all Beneficiaries would, if they reached 21 at all, would have turned 21. iii) Clause 4(3) provides for what should happen subject to Clause 4(1) and the redundant Clause 4(2). Since Clause 4(1) provides only for what happens before a Beneficiary turns 21 and Clause 4(2) is redundant, Clause 4(3) takes effect when a Beneficiary turns 21. Clause 4(3) provides for income of the Beneficiary’s one-seventh share to be paid to the Beneficiary during their life after attaining 21, but if they attain 45, they take the capital of their one-seventh share absolutely.[25]Clauses 4(4) and 4(5) dealt with what was to happen if a particular Beneficiary died before reaching the age of 45.[26]Clause 4(6) permitted the Trustees to pay or apply the capital of a Beneficiary’s Settled Share to, or for, that Beneficiary’s advancement or benefit.[27]Clause 7 contained powers of investment. In part, those powers were expressed to apply by reference to the “Trust Fund”. For example: i) By Clause 7(1) the Trustees had “… power to retain any moneys for the time being comprised in the Trust Fund uninvested for so long as they shall think fit whether producing income or not…” ii) The same clause contained provisions limiting the Trustees’ liability “… for any loss to the Trust Fund arising from any investment or purchase made in good faith”. iii) By Clause 7(3) the Trustees were not put under any obligation to diversify the investment of the Trust Fund “… but may exercise the powers conferred upon them by this Clause so that the whole or a major part of the Trust Fund is or remains in any investments hereby authorised…”[28]Clause 13 excluded Reverend Awdry and his spouse from having any interest in the Trust Fund and the income thereof.
The nature of the assignment effected by the Settlement
[29]I have not been shown any document other than the Settlement that is, or purports to be, an assignment of the Royalties. Nor have I been shown any document that gives, or purports to give, notice to the Publishers of the assignment of Royalties pursuant to s136 of the Law of Property Act 1925 (LPA 1925). All parties proceed on the basis that there are no such additional documents (although the Trustees do not concede that there were no such documents). Accordingly, all parties proceed on the basis that the only document that can effect any transfer of the Royalties, or the right to receive Royalties, is the Settlement itself.[30]It is common ground that the Settlement cannot effect a legal assignment of the Royalties themselves for a variety of reasons. One is that Reverend Awdry was seeking to assign only half of his interest in the Royalties. Section 136 of LPA 1925 requires a legal assignment of a thing in action to be “absolute” and a purported assignment of half of the Royalties, or even of the right to receive half the Royalties, does not satisfy this condition.[31]Accordingly, the parties agree that the Settlement effects an assignment in equity only. While a purported assignment of half of the Royalties themselves might take effect, in equity, as a contract for the assignment of half of those Royalties as and when received, that treatment is not available to the Settlement which was made for no consideration. Therefore, the parties agree that the Settlement does not effect an assignment of half of the future Royalties themselves or operate as a contract to do so. Rather, it is common ground that the Settlement effects an assignment of half of Reverend Awdry’s contractual right to receive the Royalties.[32]The parties also agree that the Settlement effects no assignment of the copyright in the Railway Series. That copyright has, throughout the term of the Settlement to date, been held by the Publishers (and their successors) and is not itself an asset of the Settlement.
The proper interpretation of the Settlement
[33]Read in any straightforward manner, the Settlement suggests a distinction between the Royalties themselves and income generated from the investment of those Royalties. For example: i) (Half of) the Royalties constitute the “Trust Fund”. ii) Clause 3 of the Settlement distinguishes between the “Trust Fund” and the “income thereof”. iii) The definition of “Trust Fund” envisages that, if the Trustees exercise a power to accumulate income, the income so accumulated becomes part of the Trust Fund. The clear implication is that income generated by the Trust Fund that is not so accumulated stands separate from the Trust Fund, is to be distributed and is not to become an accretion to the Trust Fund itself. iv) Clauses 4(1) to (3) contain prescriptive provisions as to what is to happen to the income of a Beneficiary’s Settled Share. Before a Beneficiary reaches 21, the Trustees may apply income towards a Beneficiary’s maintenance, education or benefit but subject to that must accumulate the income. Once a Beneficiary reaches 21, income of a Beneficiary’s Settled Share must be paid to that Beneficiary. v) On attaining the age of 45, the Beneficiary is able to benefit not just from income of the Settled Share, but becomes entitled absolutely to the Settled Share itself.[34]Those provisions are entirely consistent with the proposition that, viewed objectively, the Settlement treats Royalties received, together with the right to receive those Royalties, as capital of the Settlement with the income generated by the investment of those Royalties constituting the income of the Settlement.[35]The Defendants argue that the above approach overlooks the correct legal analysis summarised in paragraph 31 above. In essence, they argue that the Settlement can only take effect as an equitable assignment of the right to receive half of the Royalties. Therefore, to treat the capital of the Settlement as including Royalties themselves would be to interpret it in a manner inconsistent with its legal effect. Rather, in the Defendants’ submission, the Settlement has to be construed consistently with its effect in law. That can be achieved only by treating the capital of the Settlement as the right to receive half of the Royalties and the income of the Settlement as the Royalties received in fruition of that right.[36]The Settlement does not on its face distinguish between(i) the contractual right to receive Royalties, and(ii) Royalties received in fulfilment of that contractual right. The Defendants are correct to say that this distinction is meaningful. It underpins the correct legal analysis of the equitable assignment effected by the Settlement. However, I do not accept the Defendants’ submission that, unless the Trust Fund is construed as the contractual right only, the Settlement would be legally ineffective. Whether or not the Trust Fund distinguishes in terms between the “right” and the Royalties themselves, the Settlement is legally effective. Moreover, read as a whole, the Settlement manifests a clear intention that Reverend Awdry give up (to use a neutral expression) half of the Royalties as manifested by the settlor exclusion clause in Clause 13 of the Settlement. It is common ground that Reverend Awdry has indeed succeeded in giving up those Royalties. The question is how the Settlement intends Royalties, and the proceeds of investing them, to be treated.[37]The proposition that the Settlement intended to treat the proceeds of the Royalties themselves as income and the right to the Royalties as capital produces a number of apparently anomalous results. Perhaps the starkest of those anomalies can be seen by considering what happens when a Beneficiary turns 45. Clause 4(3) of the Settlement treats this as a watershed moment at which a Beneficiary becomes absolutely entitled to the Settled Share.[38]On the Trustees’ interpretation, turning 45 is indeed a watershed moment. Up until that point a particular Beneficiary would have had an interest only in income generated from investing the Royalties. When the Beneficiary turns 45, he or she would become entitled to call for payment of a share of the Royalties themselves and potentially to deal with the right to receive the Royalties by assigning that right.[39]However, on the Defendants’ interpretation, not much would change on a Beneficiary turning 45. On turning 21, a Beneficiary would, on the Defendants’ interpretation, already be entitled to receive a one-seventh share of the Royalties paid to the Settlement. On turning 45, the Beneficiary would learn that they have now also become absolutely entitled to a “right” to share in the Royalties. It is true that becoming entitled to the “right” as well as to payment of a share of the Royalties themselves is not entirely meaningless. The Beneficiary could seek to turn that right to account by, for example, seeking to deal with it so as to obtain a lump sum representing the net present value of that Beneficiary’s future share of Royalties. However, I see little support for the proposition that this was the change that the Settlement envisaged would take place on a Beneficiary turning 45. Much more plausible and obvious, in my judgment, is the proposition that a Beneficiary turning 45 would mark the kind of watershed moment described in paragraph 38 above.[40]That approach is supported by an analysis of surrounding circumstances. The Settlement was set up for the benefit of Reverend Awdry’s grandchildren who were young when the Settlement was established. The Settlement manifests a clear intention that the Beneficiaries should not have too much, too young. That is entirely consistent with, and supportive of, an interpretation that, once they have attained the age of 21, their entitlement should be to income generated by investment of the Royalties. Only on attaining the age of 45 should the Beneficiaries be entitled to call for payment of the greater sums consisting of a share of the Royalties themselves.[41]Royalties paid to the Settlement in 1987/88 were £141,532. Therefore, if all Beneficiaries had simultaneously turned 21 at that time, they could, on the Defendants’ interpretation, have expected to receive around £20,000 each per year. There was some debate between the parties as to whether Reverend Awdry would have regarded this as “too much” money for a 21-year-old to receive. I was told that £20,000 per year in 1987/88 would be worth around £60,000 per year now. However, in my judgment, little is to be gained from an impressionistic analysis of whether £20,000 per year in 1987/88 was a large sum of money or not. Much more significant is the clear intention, manifested on the face of the Settlement, that Beneficiaries should obtain more on turning 45 than they had when they were aged between 21 and 45.[42]There are drafting difficulties with the Defendants’ interpretation as well. None of the powers of investment summarised in paragraph 27 work straightforwardly if the Trust Fund is interpreted to consist only of a contractual right. By contrast, they work perfectly well if the Trust Fund is viewed as including the cash proceeds of (half of) the Royalties themselves as well as the contractual right to receive them.[43]Overall, I conclude that a straightforward reading of the Settlement is that the Royalties that the Trustees receive are to be treated as capital. PART B – THE EFFECT OF OVERARCHING “TRUST LAW PURPOSES” The mining lease cases and Davidson’s Trustees The authorities
PART B – THE EFFECT OF OVERARCHING “TRUST LAW PURPOSES”
[44]I was shown a strand of authorities dealing with mining leases granted by trustees holding land for persons in succession. Paragraph 23-023 of Lewin on Trusts neatly explains why mining leases are a special case as follows: (1) Statute apart, the rent or royalties under a mining lease are in general treated as capital, as the minerals won and removed are part of the land itself. Hence they are retained by the trustees and the income beneficiary benefits from them only by way of the income that accrues to them once added to capital. There are, however, well-established exceptions.[45]An example of an exception of the kind to which the editors of Lewin on Trusts refer is explained in Campbell v Wardlaw (1883) 8 App Cas 641. In that case, a testator left his estate in trust, with his widow having a life interest. The estate included some coal and iron mines of which the testator had granted mining leases during his lifetime. After his death his trustees granted new mining leases relating to other mineral deposits that had not previously been exploited by way of mining lease. The question was whether the rent payable on the new mining leases was income (that should go to the testator’s widow) or capital (that should go to the remainderman).[46]The House of Lords held that the rents were capital. The reasons for that conclusion can be seen in the speech of Lord Blackburn who treated the matter as depending on the intention of the testator. If the testator had granted a mining lease over particular deposits and then transferred the land, subject to the lease, to his trustees, the “irresistible indication of intention” would be that the testator intended the widow to work those mines during her lifetime, and so benefit from the rents generated, just as the testator had done. However, in this case, the testator had not been working the specific mineral deposits in issue during his lifetime. Accordingly, once his trustees began to work those deposits for the first time after his death, the rents were capital in nature.[47]Another example of this approach can be seen in the Scottish case of Dick’s Trustees v Robertson (1901) 3 F.1021. In that case, the facts were more complicated. The settlor had granted a mineral lease before his death. However, the tenant never worked the mine and surrendered the lease two years after the testator’s death. Some years later, the trustees granted a lease of the same mine to a different tenant. The Court of Session treated the matter as being “ruled by previous decisions” which, in context, had to include Campbell v Wardlaw referred to above. The ratio of the decision is seen in the judgment of the Lord Justice-Clerk who held that the testator had granted a lease of the minerals in his property and, although the persons to whom he had granted that lease had not actually worked the minerals, the testator’s actions had turned those interests into “profit-producing subjects”.[48]The Court of Session applied the approach in the mining lease cases described above in Davidson’s Trustees v Ogilvie 1910 S.C. 24. The facts of that case bore some similarity to the case that is before me. Professor Davidson died in 1902 leaving his property to trustees to be held on trust with the “free annual income” to be paid to his niece for her lifetime and, upon her death, the residue to be divided equally among his children or survivors of them. During his lifetime, Professor Davidson had written academic books and articles. Some of those works were published during his lifetime. In some cases, publishers paid Professor Davidson a single lump sum in return for the book or article. (The report of the case does not explain whether Professor Davidson assigned the copyright outright or merely granted publishers a licence to publish works in a particular form and I will therefore describe the consideration that Professor Davidson received as being in return for the book or article.) That arrangement placed risk on the publisher, since they had paid Professor Davidson whether or not the book or article achieved commercial success. In other cases, the publisher paid Professor Davidson royalties in return for the book or article. That involved Professor Davidson taking risk since he would be paid only to the extent that sales were made. Sometimes Professor Davidson received a proportion of the profits generated from sales, which also involved Professor Davidson taking risk in the commercial success of the publications.[49]When he died, Professor Davidson left unpublished manuscripts which his trustees were under a duty to, and did, exploit. They received consideration from publishers in forms similar to those that Professor Davidson had received during his lifetime, reaching different arrangements with different publishers.[50]The question before the Court of Session was the extent to which sums paid by the publishers in relation to books and articles published both before and after Professor Davidson’s death should pass as income to the life tenant (Professor Davidson’s niece) or as capital to residuary beneficiaries.[51]The Court of Session declined to make any distinction between cases where Professor Davidson or his trustees received a lump sum and cases where he received a stream of royalties. Rather, the court concluded that, to the extent that books or articles were published before Professor Davidson’s death, consideration received for those books or articles after his death was income in nature. To the extent that Professor Davidson’s trustees received consideration after his death for exploiting manuscripts that had not been published at the date of his death, the consideration was capital in nature.[52]Both the Lord Justice-Clerk and Lord Ardwall treated the question as involving a determination of Professor Davidson’s intention. Lord Ardwall stated expressly that he derived assistance from the authorities on mining leases, holding that they too were cases about the intention of the settlor or testator concerned.[53]Lord Ardwall explained his reasoning on intention in relation to the works published before Professor Davidson’s death as follows: With regard to the literary works published before the testator’s death, he had been during his lifetime in receipt of the proceeds, so far as they consisted of royalties or profits, by way of income—income available for himself, to spend year by year as he pleased. In these circumstances he directs his trustees to give his niece the liferent use and enjoyment of the residue of his estate, and to pay to her the free annual income at two terms in the year. I cannot doubt that as a matter of intention we must hold that the free annual income of the estate means the free annual income of the estate as it existed at his death, of which those profits or royalties formed a part.[54]However, the manuscripts published after Professor Davidson’s death were different as Lord Ardwall explained as follows: But with regard to the other works, which have been published by the trustees since his death, I think these are in a totally different position. It was the trustees’ duty, as has been pointed out by your Lordship, to dispose of the manuscripts carrying with them copyright to the best advantage after the testator's death. At the testator's death they represented part of the capital of the estate. I do not think it can be held that these unpublished manuscripts and the copyright which they bore with them were anything else than capital. Now, what was the trustees’ duty with regard to that capital? I find that under the trust-deed the trustees have power to sell or dispose of all or any part or portion of the trust-estate and effects. I think these literary remains form part and portion of the truster's estate and effects; and the question which the trustees had to decide was how they could best be disposed of.[55]Lord Ardwall went on to explain that it did not matter whether, after Professor Davidson’s death, his trustees received consideration in the form of a lump sum, royalties, or a share of profits.
Conclusions to be drawn from these authorities
[56]The Defendants seek to derive from Davidson’s Trustees and the mining lease cases a principle that “royalties (whether from mines or intellectual property) are trust income if they are generated by the settlor’s exploitation of that asset during their lifetime, but that otherwise they are trust capital”. That principle, argue the Defendants, means that the Royalties received by the Settlement in this case were income because Reverend Awdry had been exploiting the copyrights in question during his lifetime. Indeed, the Royalties were the very consideration for exploitation during his lifetime.[57]I have sought to explain in my examination of the authorities above why I do not accept that argument. The authorities establish no “principle” of the kind for which the Defendants argue that is operative in the present case. That is because both the mining lease cases and Davidson’s Trustees were concerned with seeking to divine the intention of a testator/settlor in circumstances where that intention was otherwise unclear. In this case, as I have explained in paragraphs 34 to 43 above, I consider the Settlement’s intention to be clear on its face: the Royalties as and when received by the Settlement were to be capital of the Settlement. I therefore do not consider there is any room for, or need for, inferences as to Reverend Awdry’s intention of the kind described in Davidson’s Trustees and the mining lease cases.[58]That is not to say that the construction of the Settlement is conclusive of whether the Royalties are capital or income for trust law purposes. However, to the extent that there are overarching principles of trust law that prevent the Royalties from being treated as capital in the manner specified in the Settlement, in my judgment those principles are not to be found in the mining lease cases or in Davidson’s Trustees. The income stream cases The authorities
The income stream cases
[59]I was also shown a line of authorities that I will describe as the “income stream cases” that included Crawley v Crawley (1835) 7 Sim 426, Re Whitehead [1894] 1 Ch 678, Re Sherry [1913] 2 Ch 508, Re O’ Hagan (1932) WN 188, Re Fisher [1943] Ch 377, Re Payne [1943] 2 All ER 675, Re Hey’s Settlement Trusts [1945] Ch 294 and Re Guinness’s Settlement [1966] 1 WLR 1355.[60]In Crawley v Crawley, a testatrix had been granted a redeemable annuity of £400 per annum for 60 years which formed part of her residuary estate. Her executors could not sell the annuity and asked the court for a determination as to how it should be dealt with. The court held that, until the annuity could be sold, the executors had to invest each instalment of £400 that they received. The interest on the investments so made would be payable to the tenants for life of the residue. The principal amount of the investments would be capital. Thus Crawley v Crawley clearly does make some determination of a “capital versus income” issue. The reasoning of Crawley v Crawley is sparse but Re Whitehead proceeds on the basis that Crawley v Crawley decides that instalments of a terminable annuity are capital for trust law purposes.[61]Later authorities sought to provide an explanation of the “rule” in Crawley v Crawley. In Re Fisher, the deceased’s insurers agreed to pay his estate(i)£50 on death,(ii)£52 a year by monthly instalments for 20 years and(iii)£450 after the 20-year period expired. The question before the court was whether items (ii) and (iii) were income payable to the deceased’s widow. The court was invited to draw a distinction between the final payment of £450 and the periodic payments of £52, but the court declined to do so and, in explaining its conclusion, rationalised the approach of Crawley v Crawley: Mr. Hunt, on behalf of the intestate's widow, argued that the annual sums were income arising since the intestate’s death from his estate. He argued that they differed in some way from the 450l. which he said was capital and was a reversionary interest of the intestate excepted from the trust for sale. In my judgment, this argument is unsound. The foundation of it was the fact that the annual sums are described in the policy as income, but words cannot alter things. An oak tree remains an oak tree, although parties as a matter of convention between themselves agree to call it an acorn. Save in respect of amount and dates of payment, no distinction is, in my judgment, to be drawn between the annual sums payable under the policy and the sum of 450l. All the sums become payable after the intestate's death. All of them are payable under the same contract. All of them come from the same source. It is not possible to point to any property of which the intestate was possessed when he died and to predicate of the annual sums that they are income arising from that property since the intestate’s death. There was not, and is not, any tree belonging to the intestate of which the annual payments are the fruits. Mr. Hunt suggested that the annual sums might be regarded as income of the sum of 450l, but this suggestion is pure fancy, the creation of a fertile brain. It has no foundation in fact. There is no sum of 450l. invested and producing an annual income of 52l. In my judgment, when the intestate died, the annual sums and the 450l. were all part of the capital of the intestate's personal estate.[62]Bennett J’s rationalisation of Crawley v Crawley, therefore, was that there could be no “fruit” (income) without “tree” (capital). Since the instalments in Re Fisher and the annuity payments in Crawley v Crawley, could not be characterised as the fruit of some other capital asset, they could not be income. The only possibility left was that they were capital.[63]Re Payne adopted the same rationalisation as did the judgment of Cohen J in Re Hey’s Settlement Trusts. At p309 of the report in Re Hey’s Settlement Trusts, Cohen J emphasised a point made in the extract from Re Fisher quoted in paragraph 61 that, to be income of a settled fund, payments needed to be fruit of a capital asset also in that settled fund.[64]It is right to point out that the development in the authorities that I have summarised above did not proceed in a purely linear fashion. The “principle” of Crawley v Crawley was not applied in Re Sherry or in Re O’Hagan. In Re Sherry, the point was not argued. In Re O’Hagan, the point was argued, but Clauson J proceeded on the basis that “[i]t was well settled that a terminable annuity ought to be treated as property which, though terminable, was to be treated as part of the testator’s estate producing income…” Crawley v Crawley was cited to Clauson J, but the report of the judgment contains no explanation of why he reached that conclusion which was the diametric opposite of that reached in Crawley v Crawley.[65]In Re Hey’s Settlement Trusts, Cohen J expressly declined to follow Re O’Hagan.[66]In Re Guinness’s Settlement, Goff J considered the strand of authorities in some detail. He noted the lack of reasoning in Re Sherry and the unsatisfactory nature of the conclusion in Re O’Hagan. Having conducted his survey of the authorities, Goff J said: Mr. Goulding has argued that if one accepts the decision in In re Hey's Settlement Trusts, rather than that in In re O'Hagan, one produces nice and almost capricious distinctions in that the income under a lease or a royalty arising from minerals owned by a testator apart from the land would be treated as income of the testator’s estate and so would income arising from an estate pur autre vie in land, as Mr. Goulding submits, and there is no real distinction between that interest and an interest pur autre vie in personalty. I feel the force of such submissions but I cannot say that In re Hey’s Settlement Trusts was necessarily wrong or contrary to authority or principle and as this is a matter of administration I think it would be wrong for me to import fresh confusion by resurrecting In re O’Hagan. I propose, therefore, simply to follow the decision in In re Hey’s Settlement Trusts and if that be wrong it will be for the Court of Appeal hereafter and not for me to say so.
Analysis
[67]Academic commentators may well be interested in whether the income stream cases truly are a separate strand of authority from the mining lease cases and Davidson’s Trustees. In his thoughtful oral submissions, Mr MacDougald drew parallels between the two strands and pointed out instances in which the income stream cases referred to the mining lease cases and questions of a settlor’s intention.[68]However, I do not consider that this academic issue needs to be resolved in order to deal with the present application. If the income stream cases are simply an approach to ascertaining intention then they cannot override the intention that I consider to be clearly expressed in the Settlement. If, by contrast, they set out wider principles as to what is income for general trust law purposes, I find myself in the same position as Goff J. He held that the income stream cases stand for the proposition formulated by Bennett J in Re Fisher and refined by Cohen J in Re Hey’s Settlement Trusts. Speaking for myself, I prefer the reasoning in Re Hey’s Settlement Trusts to that in Re O’Hagan. However, even if I did not, I consider that I should follow the judgment of Goff J in Re Guinness’s Settlement reached after a detailed survey of the authorities. If Goff J’s statement of the applicable principles is wrong, I consider it is for the Court of Appeal rather than me to correct it.[69]The Defendants argue that the judgments in Re Whitehead, Re Hey’s Settlement and Re Guinness’s Settlement can be distinguished as involving situations where one trust fund(a) (A) had an interest in possession in another trust fund(b) (B) and a settlor or testator had settled trust capital but retained (or failed to dispose of) trust income. I do not agree. Re Hey’s Settlement and Re Guinness’s Settlement appear to set out some principle, whether it be an approach to ascertaining intention, or wider principles of trust law, that stand separate from the particular factual circumstances to which the Defendants refer.[70]The Royalties received by the Settlement are most naturally analysed as “fruit” of the copyrights in the Railway Series. Those copyrights are not assets of the Settlement. Accordingly, the principle formulated in Re Hey’s Settlement and Re Guinness’s Settlement leads to the conclusion that the Royalties are the capital of the Settlement.[71]The Defendants argue that this is the wrong way of looking at matters. They submit that the Royalties received by the Settlement are fruit of the right to receive those Royalties which is an asset of the Settlement (see the analysis in paragraphs 29 to 31 above). I acknowledge that this is an alternative way of looking at matters. However, I am not satisfied that trust law principles require the matter to be viewed in that way.[72]In the first place, I consider the analysis to be unduly reductionist. Almost all payments can be analysed as being received pursuant to some kind of right to receive those payments. The Defendants’ approach would therefore deprive the principle formulated in Re Hey’s Settlement and Re Guiness’s Settlement of much effect. Moreover, in my judgment a variant of the Defendants’ approach was expressly rejected in the following passage of Re Hey’s Settlement: Mr. Winterbotham, for the testator's widow, admits that if he is to succeed he must satisfy me that the income of the settled fund, which is payable to the testator's executors as a result of my previous decision, is income of property forming part of the testator's estate. When asked: “What property ?” he said that the property is an estate pur autre vie, and that the payments which the testator's executors would from time to time receive out of the income of the settled fund would be income arising from that property. This argument is, at first sight, attractive, but if the matter were free from authority I should have said it was specious, for it seems to me that, although it is true that the payments are income of a fund, they are income of the settled fund and not of any property forming part of the estate, and that, on the contrary, in the aggregate, they constitute an asset of the testator's estate.[73]I also consider that the Defendants’ characterisation of the “tree” as being the right to receive Royalties is at odds with the judgment of the Court of Session in Freer’s Trustees v Freer 1897 24 R 437. In that case, a testator entered into a contract of copartnery with a Mr Muir shortly before his death. Under that contract of copartnery, the testator’s executors were to receive one-third of the future profits of the partnership business which, after the testator’s death would be carried on by Mr Muir. The question arose whether the share of profits was capital or income of Mr Freer’s estate with the Court of Session concluding that it was capital.[74]In a judgment that can be seen as presaging the analysis later set out in Re Hey’s Settlement, the Court of Session held that the significant point was that Mr Freer’s executors did not acquire any interest in Mr Muir’s business: they just had a debt claim entitling them to receive a sum calculated by reference to the profits of that business. The sums they were due, therefore, represented the fruit of a tree (Mr Muir’s ongoing business) but since that tree was not an asset of Mr Freer’s estate, those sums were capital and not income. If the Court of Session had held that the tree was the contractual right to receive payment, the result in Freer’s Trustees would have been different since, self-evidently, the right to receive payment was indeed an asset of Mr Freer’s estate.[75]The Defendants characterise the approach in paragraph 70 as unduly formalistic. They suggest that if it is right, settlors could have by-passed the restrictions in s164 of the LPA (while it was in force) by assigning income streams separate from underlying capital assets. So, for example, they argue that the analysis I favour would permit a testator who wished his trustees to be free to accumulate dividends from a family company for longer than the period specified in s164 to assign the right to those dividends to his trustee without also assigning shares in the company itself and so have the dividends treated as capital of the trust.[76]I make no finding as to whether such planning would, or would not, have sidestepped the requirements of s164. However, the possibility of such planning does not alter my conclusion. First, no such planning is presently before the court. Second, the Defendants’ objection is, in substance, that Re Hey’s Settlement was wrongly decided and that Goff J was wrong, in Re Guinness’s Settlement, to follow Re Hey’s Settlement. I am not myself convinced of this. However, ultimately it would be a matter for the Court of Appeal to overrule these authorities if they are wrongly decided.[77]Overall, I regard it as much more realistic to regard the Royalties as fruit of the copyright in the Railway Series rather than as fruit of a right to receive payment. I therefore consider that the analysis in paragraph 70 above is to be preferred. The PL Travers case The authority
The PL Travers case
[78]In PL Travers Will Trust v HMRC [2014] SFTD 265, the First-tier Tribunal (Tax Chamber) (the FTT) determined the correct tax treatment of royalty payments received by the trustees of the will of PL Travers, the author of the Mary Poppins series of books.[79]The facts of PL Travers were complicated, but the following high-level summary suffices to put the FTT’s decision in context: i) PL Travers was the first owner of the copyright in the Mary Poppins books. ii) In 1960, she assigned the right to make motion picture adaptations of those books to Disney. She did not assign the dramatic radio or television rights to Disney. However, she undertook not to exploit those retained rights except by arrangement with Disney and on such terms and conditions as were mutually agreed with Disney ([15] of the FTT decision). iii) In May 1994, PL Travers made an agreement with “CML” with a view to staging a musical based on the Mary Poppins books. Because of the provision referred to in paragraph ii) above, the approval and co-operation of Disney would be needed to stage that musical. iv) By Clause 2 of the agreement with CML, PL Travers granted an exclusive licence to cause a musical based on the Mary Poppins books to be written and staged with Disney’s consent ([18] of the FTT decision). The agreement specified royalties that would be payable for the grant of that licence. v) PL Travers died in 1996. Although discussions with Disney had been ongoing before her death, the necessary consents and agreement from Disney to the staging of a musical had not been obtained by the time she died. vi) PL Travers’s will constituted a “Trust Fund”. Income of that Trust Fund was to be dealt with in a certain way and capital to vest in beneficiaries 80 years after the Trust Fund was constituted ([53] to [59] of the FTT decision). vii) After PL Travers died, agreement was reached with Disney as to the staging of a musical. In the light of that agreement, in 2004, PL Travers’s trustees agreed to amend the 1994 agreement with CML. One effect of that amendment was that PL Travers’s trustees assigned to CML the right to stage a musical, rather than merely licensing them to do so (with Disney’s consent). That assignment meant that CML acquired “the right to perform or licence others to perform further acts restricted by PL Travers’s copyright over and above those covered by [clause 2 of the unamended 1994 agreement]” (see [67] of the FTT decision). viii) Royalties remained payable under the 1994 agreement as amended in 2004, but the royalty rates were altered. ix) In 2004 a musical of the Mary Poppins books was staged triggering the trustees’ receipt of royalties from CML.[80]The question arose as to whether the royalties that the trustees received were capital or income for trust law purposes. That question arose not in the context of any dispute between beneficiaries of PL Travers’s will trusts but in the context of determining the trustees’ tax liability. HMRC argued that, insofar as PL Travers’s will trusts purported to treat royalties as capital, that was tantamount to a mislabelling that resulted in income being accumulated for a period in excess of that permitted by s164 of LPA 1925. That in turn would result in the royalties being taxed at the rate applicable to trusts in what was then s686 of the Income and Corporation Taxes Act 1988 (see [60] of the FTT decision).[81]The PL Travers decision was, accordingly, not concerned only with the construction of PL Travers’s will trusts. It was also concerned with the more general question of whether the royalties were income for “trust law purposes” (see [60] to [75] of the FTT’s decision).[82]Although the question was not purely one of construction, or of divining PL Travers’s objective intention, the FTT derived assistance from the mining lease cases. It reached the following conclusions, dividing its analysis between what I will term “new exploitation” (that CML was permitted to undertake for the first time pursuant to the 2004 agreement) and “existing exploitation” (that was already permitted under the 1994 agreement prior to its amendment in 2004). As regards existing exploitation, the FTT divided its analysis into existing exploitation effected prior to PL Travers’s death and existing exploitation effected after her death.[83]The FTT concluded as follows: i) Royalties from new exploitation were capital in nature for trust law purposes by analogy with Davidson’s Trustees. Those royalties were received as consideration for disposal of a capital asset (being the “relevant portions of copyright” that(i) had not been assigned to Disney as described in paragraph 79.ii) above and(ii) had passed to PL Travers’ trustees on her death). By selling a capital asset of the trust for cash royalties, the trustees were simply replacing a capital asset with cash. They were not accumulating income. Accordingly, royalties from new exploitation were capital for trust law purposes (see [68] of the FTT decision). ii) Royalties received after the 2004 assignment in respect of existing exploitation were capital in nature for trust law purposes. That was because the 2004 assignment operated to assign the copyright which was the wellspring of the right to royalties in return for existing exploitation. The FTT, at [71] of its decision, made an analogy with a freeholder of land assigning a reversionary interest in a lease for a rent. If the freeholder had retained that interest, the rent received would have been income in nature. However, consideration for the assignment of the reversion was capital in nature and royalties receivable after 2004 for existing exploitation should be capital for a similar reason. iii) However, royalties receivable prior to 2004 in respect of existing exploitation were different. They were income in nature as they represented a stream of payments generated by the underlying copyrights which PL Travers’ trustees held until 2004. The FTT observed that “if an analogy with the [mineral lease cases] is relevant these royalties are a stream of payments the potential for which was opened up by PL Travers in her lifetime” (see [73] of the FTT’s decision).
Analysis
[84]PL Travers is not binding on me, but its careful analysis is instructive. The FTT notes (at [62]) that the question of whether a particular receipt is income or capital for trust law purposes may not be conclusively determined by a construction of the trust instrument in question or inferences as to a settlor’s intention. All parties are agreed on that proposition.[85]The FTT does refer to the mining lease cases and Davidson’s Trustees in its analysis of whether royalty receipts are capital or income for general trust law purposes. However, I do not consider that it goes so far as to say that the mining lease cases set out overarching trust law principles that override any objective indication of intention that can be found in the words of a trust instrument. That much is clear from the FTT’s tentative reference to the relevance of analogies with the mining lease cases to which I have referred in paragraph 83.iii) above.[86]I do not, therefore, see anything in PL Travers that causes me to doubt the conclusion I have expressed in paragraphs 57 and 58 above.[87]The only respect in which the PL Travers decision concludes that royalties were income for trust law purposes was in relation to pre-2004 receipts from existing exploitation. However, the FTT reached that conclusion on the basis that these receipts were in relation to the exploitation of parts of the relevant copyright owned by the trustees. The facts of the present case are therefore different from those before the FTT in PL Travers since the Trustees have never owned any part of the copyright in the Railway Series (see paragraph 32 above). That makes all the difference to the analysis since it is precisely because the Trustees do not own the copyright in the Railway Series that the principles set out in the income-stream cases are engaged (see paragraphs 70 and 77 above).[88]Overall, I see nothing in PL Travers that is inconsistent with a conclusion that the Royalties that the Trustees received are capital for trust law purposes.
Conclusion
[89]Overall, I see nothing to override the intention plainly expressed in the Settlement itself. I consider that the Royalties received by the Trustees are capital for trust law purposes. I would invite the parties to agree an order giving effect to this judgment and dealing with consequential matters such as costs. If they cannot agree, there will need to be a further hearing on consequential matters.