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Perpetuities And Accumulations Bill [HL]


 

These notes refer to the Perpetuities and Accumulations Bill [HL] as brought from the House of Lords on 20 July 2009

PERPETUITIES AND ACCUMULATIONS BILL [HL]


EXPLANATORY NOTES

INTRODUCTION

1.     These Explanatory Notes relate to the Perpetuities and Accumulations Bill [HL] as brought from the House of Lords on 20 July 2009. They have been provided by the Ministry of Justice in order to assist the reader of the Bill and to help inform debate on it. They do not form part of the Bill and have not been endorsed by Parliament.

2.     The Notes need to be read in conjunction with the Bill. They are not, and are not meant to be, a comprehensive description of the Bill. So, where a clause or part of a clause does not seem to require any explanation or comment, none is given.

3.     A glossary set out at the end of these Notes explains some of the terms used.

SUMMARY AND BACKGROUND

4.     The Bill will, subject to minor modifications, give effect to the recommendations set out in the Law Commission’s 1998 report The Rules Against Perpetuities and Excessive Accumulations (Law Com. 251) HC 579. The Bill will modify the operation of two legal rules known as the rule against perpetuities and the rule against excessive accumulations. The rules are most commonly encountered in the context of trusts. The two rules are distinct but related.

The rule against perpetuities

The common law rule

5.     The rule against perpetuities was developed by the courts at the end of the seventeenth century. The rule restricts the time period within which future interests in property must vest. The perpetuity period is the length of a life or lives in being, plus 21 years. A life in being means a life in being at the time of the disposition. Lives in being may be expressly specified in the instrument by which the disposition is made (for example, by using a royal lives clause like “the lineal descendants of Queen Victoria living at the time of my death”). If no lives are specified, the lives in being will be the persons whose lives are connected with the date of vesting of the disposition. So, for example, in a gift to “the first of A’s great-great-grandchildren to play chess with B”, where no such great-great-grandchildren have been born at the time of the gift, B’s is the measuring life - the life in being.

Bill 145                                              54/4

6.     The application of this common law rule, which still applies without statutory modifications to dispositions made before 16 July 1964, can be demonstrated by an example. X makes a gift of property in a will to the first of A’s children to attain the age of 21. On X’s death the will takes effect. It purports to create a property interest for the first of A’s children to meet the condition specified. The perpetuity period will begin to run on the date of X’s death and will continue for the remainder of A’s life plus 21 years. If one looks at the matter as at the date of X’s death, it is certain that any child of A will attain 21 (if at all) within 21 years of A’s death, since A cannot produce more children once dead. The gift therefore does not infringe the rule against perpetuities.

7.     On the other hand, a gift in X’s will to the first of A’s children to become a doctor would be void at common law, assuming none of them is already a doctor. It is not certain, at the date of X’s death, that any child of A will become a doctor (if at all) within 21 years of A’s death. It is certainly possible that a child of A may become a doctor within that time. However, looked at from the date of X’s death, it is possible that the first child of A to become a doctor may not do so until after the perpetuity period has expired. Hence the gift would be void at common law.

8.     The rule against perpetuities was originally developed in the context of family settlements to curtail control by one generation of the use of property by future generations. However, the rule has since been extended to apply to other types of property rights. It now also applies to future interests in property such as future easements, options to purchase and some rights of pre-emption.

Perpetuities and Accumulations Act 1964

9.     The Perpetuities and Accumulations Act 1964 (“the 1964 Act”), which came into force on 16 July 1964, modified the operation of the common law rule. The 1964 Act, which was based on the 1956 report of the Law Reform Committee (Fourth Report, The rule against perpetuities (1956) Cmnd 18), contained three key reforms to the existing rule. These reforms apply in relation to dispositions made on or after 16 July 1964.

10.     First, it allowed settlors to specify a fixed perpetuity period of up to 80 years instead of having to rely on the common law period of a life in being plus 21 years.

11.     Second, it introduced the principle of “wait and see”. This means that, where an interest in property could possibly vest outside the perpetuity period and so would be void at common law, it is permissible to “wait and see” whether the property will in fact vest within the perpetuity period. Only when it becomes clear that the gift cannot so vest will the gift be void. So in the example above (at paragraph 7), the gift would be void only if no child became a doctor within 21 years of A’s death.

12.     Third, the 1964 Act introduced a number of other “gift-saving” devices. Class closing rules are one such device which allow a gift to be saved by the exclusion of a beneficiary whose inclusion would invalidate a gift. Another ensures that a gift will not be invalid automatically just because it follows a previous interest which violates the rule.

The rule against excessive accumulations

13.     A settlor of a trust may direct trustees to convert income into capital, instead of paying it immediately to an income beneficiary. The effect of such a direction is to build up a larger fund for the ultimate benefit of those beneficiaries that the settlor directs should be entitled to the capital in the future. For example, A may wish her grandson, B, who is currently 10 years old, to acquire a large fund that will enable him to buy a house as an adult. She may create a trust of £10,000 to vest in him after her death. Instead of designating a beneficiary who will be entitled to the income earned on this capital during her lifetime, or taking that income herself, A may instruct the trustees to accumulate it so that there will be a larger fund for B to draw upon once A dies.

14.     Accumulation, however, should be contrasted with the administrative retention of income, which is the retention of income to build up reserves not intended for the benefit of the person entitled to the capital fund.

15.     Unlike the rule against perpetuities, which originally developed as a common law rule, the rule against excessive accumulations is a statutory rule. It restricts the period during which income may be accumulated. The rule operates independently of, and in addition to, the rule against perpetuities. It came about as a direct response to the case of Thellusson v Woodford ((1799) 4 Ves 227, 338; 31 ER 117, 171; (1805) 11 Ves 112, 147; 32 ER 1030, 1044). In that case, the settlor’s direction that the income on his substantial estate should be accumulated meant that none of his descendants living at his death could enjoy any benefit from the estate; this prompted much public criticism at the time. In addition, it was feared that the ability to accumulate income indefinitely could result in such a concentration of wealth in private hands that it might compromise the economic independence of the nation or even threaten the power of the Crown.

16.     The current rule against excessive accumulations is set out in section 164 of the Law of Property Act 1925 (“the LPA 1925”) and section 13 of the 1964 Act, which permit a settlor to select one of six specified periods, after which an accumulation of income must cease. The periods under section 164 of the LPA 1925 are—

  • the life of the grantor or settlor;

  • a term of 21 years from the death of the grantor, settlor or testator;

  • the duration of the minority or respective minorities of any person or persons living or en ventre sa mere (conceived) at the death of the grantor, settlor or testator;

  • the minority or respective minorities of any person or persons who under the limitations of the instrument directing the accumulations would, for the time being, if of full age, be entitled to the income directed to be accumulated.

The periods under section 13 of the 1964 Act are—

  • a term of 21 years from the date of the disposition;

  • the duration of the minority or respective minorities of any person or persons in being at that date.

17.     Where a period is chosen by a settlor that is not one of the statutory periods, the closest statutory period is applied. Where the settlor omits to specify a period, the court will apply one of the periods, based on what it considers the settlor would have intended.

18.     The effect of the rule is to make any duty or power to accumulate have no effect to the extent that it exceeds the relevant statutory period. In these circumstances where a duty or power ceases to have effect, the income passes to the person who would have been entitled to it if no accumulation had been directed. The rule does not apply to settlements made by a corporate settlor.

SUMMARY

19.     The Bill aims to simplify and modernise the rule against perpetuities and the rule against excessive accumulations.

20.     The Bill applies the rule against perpetuities only to the estates, interests, rights or powers mentioned in the Bill. The estates, interests, rights and powers which the Bill deems to be within the application of the rule include—

  • successive estates or interests, including an estate or interest which arises (in the case of land) under a right of reverter on the determination of a determinable fee simple, or (in the case of property other than land) under a resulting trust on the determination of a determinable interest in that property;

  • an estate or interest subject to a condition precedent;

  • where an estate or interest is subject to a condition subsequent, any right of re-entry in respect of land (or equivalent right for property other than land) if the condition is broken;

  • successive interests under the doctrine of executory bequests;

  • powers of appointment.

  • A fundamental characteristic of all but one of these categories of estates, interests, rights and powers is that they exist under a trust. The exceptional category comprises successive interests under the doctrine of executory bequests (see paragraph 34 below). The rule under the Bill will not apply to future rights outside these categories, such as future easements, options to purchase, and rights of pre-emption.

21.     The Bill preserves the effect of the existing exceptions from the rule only where they are relevant to the rule as applied by the Bill. For example, the exception for gifts over from one charity to another, where a settlor specifies that a gift to one charity is to pass to another charity if a specified event occurs, is preserved by the Bill (see paragraphs 39 and 40 below). Similarly, interests arising under relevant pension schemes will remain exempt.

22.     For most cases, the Bill replaces the existing common law and statutory perpetuity periods with a single statutory perpetuity period of 125 years. The period will start from the date when the instrument creating the interest in question takes effect. However, and subject to two exceptions, if the instrument is created in the exercise of a special power of appointment, the perpetuity period will be the same period (in terms of duration and commencement date) as that applicable to the instrument which created the power. The exceptions are: interests or rights arising under an instrument (a) nominating benefits under a relevant pension scheme, or (b) made in the exercise of a power of advancement under such a scheme. In these cases, the perpetuity period will start when the member in question joined the scheme.

23.     The Bill preserves, in relation to the rule as it will apply under the Bill, the effect of the reforms introduced in 1964, such as the wait and see principle and the class closing provision.

24.     The Bill will repeal the present rule against excessive accumulations and substitute for it a much narrower statutory restriction on accumulations applying to instruments to the extent that they provide for property to be held on trust for charitable purposes. The maximum accumulation period will be 21 years unless the trust instrument specifies that the duty or power to accumulate is to cease to have effect on the death of the settlor or, where there are multiple settlors, the death of one of them identified by name or by the order of their deaths. The Bill’s restrictions on accumulations will not apply in cases where the court or the Charity Commission has made specific provision.

25.     The Bill will generally apply to instruments taking effect on or after the day on which the Bill comes into force, but there are two classes of instrument to which the Bill (other than clause 12) will not apply even though they take effect on or after the commencement day. They are—

  • wills executed before, but taking effect on or after, the commencement day; and

  • instruments taking effect on or after the commencement day which are made in the exercise of a special power of appointment, where the special power was created by an instrument which took effect before that day.

26.     Clause 12 differs from the other provisions of the Bill in that it will apply to wills executed before the Bill comes into force, whether or not the will in question takes effect before commencement, and to instruments (other than wills) taking effect before commencement.

27.     Clause 12 will give trustees of pre-commencement trusts, where the perpetuity period is defined by reference to a life or lives and it is difficult or not reasonably practicable to ascertain whether the lives have ended (and therefore whether the perpetuity period has ended), a right to opt for a fixed period of 100 years.

28.     It is possible to create trusts orally rather than in writing. The provisions of the Bill will apply equally to such trusts.

TERRITORIAL EXTENT AND APPLICATION

29.     The Bill extends to England and Wales. It does not affect the functions of the National Assembly for Wales.

COMMENTARY ON CLAUSES

Application of the rule against perpetuities

Clause 1: Application of the rule

30.     Clause 1 defines the circumstances in which the rule against perpetuities will apply. Only the estates, interests, powers and rights mentioned in clause 1 will be subject to the rule against perpetuities. As a result, the scope of the rule will be narrowed. It will not apply, for example, to most future easements, options and rights of pre- emption, which will fall outside these categories. Most of the existing exceptions to the rule do not need to be replicated, as they will not fall within clause 1.

31.     Subsection (2) applies the rule against perpetuities to each of the successive estates and interests created by an instrument which limits property in trust. This means that where property is given to be held on trust for A, then for B, and thereafter goes to C absolutely, the rule has to be applied to the interests of A, B and C separately. Any of successive estates or interests may be subject to a contingency. For example, a trust is created where the terms are that A will be entitled to the income for life from A’s 18th birthday; then, subject to A’s interest, the capital will pass to whichever of B and C survive A; or, if both survive, to B and C in equal shares; or, if neither survive, then to charity X. Here the interests of A, B, C and X are all subject to the rule. Subsection (7) provides that the following estates and interests are within the scope of subsection (2)—

  • an estate or interest arising under a right of reverter on the termination of a determinable freehold interest in land. For example, Y grants land to trustees to be held on trust for a youth football club until the land ceases to be used as a football pitch. If in fact the land ceases to be so used, it reverts to Y (or to Y’s estate, if Y is deceased). The effect of the Bill is that Y’s interest under a right of reverter is treated as a successive interest arising on the determination of the determinable estate and is therefore subject to the rule against perpetuities.

  • an estate or interest arising under a resulting trust on the determination of a prior determinable interest. For example, Y gives a painting to trustees to be held on trust for a specified museum until the painting ceases to be on display at the museum. If the painting ceases to be displayed, the interest of the museum ceases and the painting will be held on automatic resulting trust for Y or (if Y is deceased) for Y’s estate. The Bill subjects Y’s interest under the automatic resulting trust to the rule against perpetuities.

32.     Subsection (3) applies the rule against perpetuities to an estate or interest in property held on trust which is subject to a condition precedent but which is not one of successive estates or interests, that is, where it is the sole estate or interest created by the trust instrument. The condition precedent might be a condition to be fulfilled by a particular person, for example, a gift “to X provided he becomes a train driver”. Or it might determine who should receive the property: for example, a gift “to the first person to land on Mars” or “to my first great-great-grandchild”.

33.     Subsection (4) provides that, where an instrument creates an estate or interest subject to a condition subsequent, the rule against perpetuities applies to the rights of the persons who will become entitled to the property if the condition is broken. For example, A transfers a piano to trustees to hold on trust for A’s grandchildren in equal shares on condition that none of them becomes a solicitor by the age of 30. The trust instrument provides that if, in breach of the condition, one of A’s grandchildren does become a solicitor by the age of 30, the piano will pass to charity B. The effect of subsection (4) is that the rule against perpetuities applies to the right of charity B to take the piano on breach of the condition. If none of A’s grandchildren breaches the condition within the perpetuity period, charity B’s interest will fail to take effect, and each grandchild’s interest will become absolute.

34.     Under the doctrine of executory bequests it is possible to create successive legal interests in personal property by will without using a trust. Subsection (5) applies the rule against perpetuities to each of the successive interests.

35.     Subsection (6) applies the rule to powers of appointment, with the result that a power of appointment must become exercisable within the perpetuity period or it will be void (and, if it is a special power, may be exercised only within the perpetuity period - see clause 7(3) to (6)). For example, C creates a trust with a special power of appointment exercisable by trustees once one or more of C’s grandchildren has attained the age of 40. The power of appointment will be void if none of the grandchildren reaches the age of 40 within the perpetuity period. Powers of appointment are defined in clauses 11 and 20.

36.     Subsection (8) provides that clause 1 has effect subject to the exceptions made by clause 2 or 3.

37.     Subsection (9) repeals the second limb of section 4(3) of the Law of Property Act 1925 which provides that rights of entry affecting a legal freehold estate are confined to the perpetuity period. The repeal is with reference to instruments taking effect on or after commencement of the Bill (clause 15) and is made because after commencement clause 1 will define when the rule applies.

Clause 2: Exceptions to the rule’s application

38.     Clause 2 provides for certain general exceptions to the application of the rule against perpetuities (subsection (1)).

39.     Subsections (2) and (3) replicate existing exceptions to the application of the rule against perpetuities. The subsections apply in certain circumstances where provision has been made for property to pass from one charity to another. Subsection (2) applies where a charity is granted an estate or interest in property with a gift over to another charity on the occurrence of a specified determining event. A “charity” is defined by section 1(1) of the Charities Act 2006 as “an institution which is established for charitable purposes only and falls to be subject to the control of the High Court in the exercise of its jurisdiction with respect to charities”. In the 2006 Act, “institution” means “an institution whether incorporated or not, and includes a trust or undertaking” (section 78(5)). For example, land is given to be held on trust for charity A but, if charity A ceases to require the land for its charitable purposes, the land is to pass to charity B. The rule against perpetuities will not apply to charity B’s estate or interest. The same result will follow if the gift over is for charitable purposes rather than to a named charity.

40.     Subsection (3) applies where property is given to one charity subject to a condition subsequent, with a provision that, if the condition is broken, the property shall pass to another charity. For example, a painting is granted on trust to charity A on condition that it is displayed to the public, but to charity B if charity A breaks the condition. Charity B’s right to claim possession of the painting is not subject to the rule.

41.     Subsections (4) and (5) together define the exception from the rule against perpetuities for interests and rights arising under relevant pension schemes as defined in sections 1 and 181 of the Pension Schemes Act 1993 (clause 20(4) and (5)). The basic exception is described in subsection (4) as covering interests and rights arising under such pension schemes.

42.     Subsection (5) removes from the ambit of subsection (4) interests and rights arising under two types of private trust created in respect of property subject to a pension scheme. These are defined as interests and rights arising under an instrument (a) nominating benefits under the pension scheme or (b) made in the exercise of a power of advancement arising under the scheme. By way of example of the first, a member may make a nomination binding on the pension scheme trustees for a trust to be created with certain pension benefits in favour of a nominated person (typically death in service benefits). The interests under the trust will be subject to the rule. An example of the second is that pension scheme trustees may exercise a power of advancement to make capital payments to trustees in favour of relatives of a member before any entitlement to a pension arises. This capital sum may be settled in such a way that it creates successive interests. These interests will be subject to the rule against perpetuities.

Clause 3: Power to specify exceptions

43.     Clause 3 gives the Lord Chancellor power to make an order specifying further exceptions to the rule against perpetuities. The power would be exercisable by statutory instrument, subject to affirmative resolution by each House.

44.     The power will avoid the need for further primary legislation to deal with as yet unforeseen arrangements that might arise in the future. For example, a new form of financial instrument might be devised which has considerable advantages over existing trust instrument vehicles, but which would be unworkable if the rule against perpetuities were to apply.

Clause 4: Abolition of existing exceptions

45.     Clause 4 provides that certain existing statutory exceptions to the rule against perpetuities will cease to have effect. These exceptions will be unnecessary in light of clauses 1 and 2. They will, however, continue to be relevant to instruments which took effect before commencement, to wills that were executed before commencement, and to post-commencement instruments made in the exercise of a special power of appointment created by an instrument taking effect before commencement (clause 15).

 
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