|Perpetuities And Accumulations Bill [HL] - continued||House of Commons|
|back to previous text|
Clause 5: Perpetuity period
46. Clause 5 defines the length of the perpetuity period governing instruments to which the Bill applies (see clauses 1, 2 and 15). The perpetuity period for such instruments will be 125 years
47. Subsection (2) provides that subsection (1) applies whether or not the instrument specifies a perpetuity period, and that specifying a perpetuity period will be ineffective.
Clause 6: Start of the perpetuity period
48. Clause 6 specifies when the 125-year perpetuity period will start. Subsection (1) sets out the general rule that the perpetuity period commences when the instrument creating the estate, interest, right or power referred to in clause 1 takes effect. For this purpose a will takes effect on the death of the testator (clause 20(6)).
49. Subsection (2) provides that the perpetuity period for an instrument created in the exercise of a special power of appointment (clauses 11 and 20 define a special power of appointment) will begin on the date on which the instrument creating the power took effect. The Bill will apply to such instruments only where the instrument that created the special power takes effect on or after the commencement of the Bill (clause 15(1)(b)). The rule for instruments created in the exercise of a general power of appointment remains that the perpetuity period will be 125 years beginning on the date on which the power is exercised, not the date on which the general power was created.
50. Subsections (3) and (4) specify when the perpetuity period starts to run in the circumstances set out in clause 2(5), that is, where the interests or rights arise under an instrument nominating benefits under a relevant pension scheme, or under an instrument made in the exercise of a power of advancement arising under such a scheme. In these cases the perpetuity period of 125 years (clause 5(1)) will run from when the member joined the scheme.
51. The operation of the rule against perpetuities was modified by the 1964 Act, which introduced the wait and see principle. The wait and see principle means that the rule against perpetuities does not affect an estate or interest in property unless and until it becomes certain that the estate or interest will not vest within the perpetuity period. Clause 7 of the Bill applies this principle of wait and see to the rule against perpetuities in respect of instruments to which the Bill applies.
52. The clause asks in effect whether, within the terms of the instrument, the estate, interest, right or power in question might
outside the perpetuity period applicable to it.
53. If the answer is yes, then the principle of wait and see (set out in subsections (2), (4) and (6)) applies, and the estate, interest, right or power is valid if in fact it vests, is exercised or becomes exercisable within the perpetuity period. Only when it is clear that this will not happen, is the estate, interest, right or power void for perpetuity. In such a case, subsections (2)(b) and (4)(b) preserve the effectiveness of things already done in relation to the estate or interest, or by way of exercise of the right or power, during the wait and see period.
54. At common law, where a gift was made in favour of a group of people (a class) the whole gift was void if all of the possible members of the class of beneficiaries were not ascertainable during the perpetuity period. This was because at common law a gift would fail even if only a part of it might vest outside the perpetuity period. Class closing prevents this result by artificially closing the class to prevent potential members (for example, those yet unborn) from being taken into consideration.
55. The 1964 Act applies the wait and see principle to the class closing rule, meaning that all of the members who qualify for the gift during the perpetuity period will benefit. If all of the potential beneficiaries do not qualify during the wait and see period, section 4(4) of the 1964 Act allows for the exclusion of any members who did not qualify during the perpetuity period.
56. Clause 8 replicates the effect of section 4(4) of the 1964 Act. Clause 8 applies if it becomes apparent whether at the time the instrument takes effect or at some later stage that the estate or interest would be void for perpetuity if certain members (whether alive or unborn) are included in the class. Under subsection (2), once it is clear that an interest will be void for perpetuity if certain potential members are included in the class, they are excluded, provided their exclusion does not exhaust the class. Subsection (3) provides that, if the wait and see rule (clause 7(1) and (2)) also applies, clause 8 does not invalidate anything done during the wait and see period (clause 7(2)) in relation to the estate or interest. Subsection (4) specifies who is to be treated as a member or potential member of a class.
57. Clause 9 replicates the effect of section 6 of the 1964 Act. Subsection (1) provides that, where an estate or interest is void for remoteness, an estate or interest ulterior (or subsequent) to, and dependent on, the void estate or interest is not void for remoteness simply for that reason. This deals with the technical problem that, at common law, if a disposition was void for perpetuity, a subsequent disposition that depended on it was also void.
58. Subsection (2) provides that, where a prior disposition is void for remoteness, the subsequent interest may take effect earlier than it otherwise would (though it can do so only if any other conditions attached to it have been fulfilled).
59. Clause 10 provides that, if an estate (in land) arising under a right of reverter or an interest (in property other than land) arising under a resulting trust on the determination of a determinable interest is void under the rule, the determinable estate or interest becomes absolute. This replicates the effect of section 12 of the 1964 Act
60. The Bill refers at various points to powers of appointment, special powers of appointment and general powers of appointment. Clause 11 defines when a power of appointment is a special power of appointment for the purposes of the Bill. The definition has substantially the same effect as section 7 of the 1964 Act, which does not apply by virtue of clause 16. Powers of appointment not falling within the clause 11 definition are classed as general powers; these are tantamount to outright ownership.
61. A power of appointment may be given so as to be exercisable in a variety of ways. The Bill divides these into three categories.
62. Subsections (1) and (2) define when a power is a special power of appointment for the purposes of a power exercisable otherwise than by will. All such powers will be special powers unless they are exercisable by one person only and that person (being of full age and capacity) could transfer all the property subject to the power to himself or herself without having to obtain consent from anyone else and without complying with any other condition.
63. Subsections (3) and (4) make analogous provision in relation to special powers exercisable by will.
64. Subsections (5) and (6) apply to powers exercisable by will or otherwise. In such cases, the power will be a special power of appointment if it satisfies either subsection (2) or subsection (4).
65. Clause 12 applies to instruments which have taken effect (or, in the case of wills, been executed) before the Bill comes into force, and which have a lives in being perpetuity period. Where it is difficult or not reasonably practicable to ascertain whether the lives have ended, and therefore whether the perpetuity period has ended, under clause 12 the trustees have a power to opt in to a 100-year perpetuity period. To exercise the opt-in the trustees must execute a deed stating that the trustees believe it is difficult or not reasonably practicable to know if the perpetuity period has ended, and that subsection (2) is to apply (subsection (1)). This deed cannot be revoked (subsection (3)). The effect of the opt-in is that the trust is deemed to have always had a perpetuity period of 100 years and is subject to clauses 6 to 11 of the Bill. Sections 1 to 12 of the 1964 Act are treated as if they did not apply (and never applied) in relation to the trust (subsection (2)).
66. The power is necessarily a fiduciary power, and so must be exercised in the best interests of the beneficiaries. The power does not enable the trustees to opt in to the provisions in the Bill relating to accumulations.
Clause 13: Abolition of restrictions
67. Accumulation is the process whereby, under the terms of a trust, the trustees are authorised or required to accumulate income, thereby converting it into capital. Clause 13 abolishes the present rule against excessive accumulations. Because that rule is entirely statutory, the repeal of the four relevant statutory provisions necessarily abrogates it. The repeals only apply to instruments creating powers and duties to accumulate and taking effect after the Bill comes into force, other than wills made before that date. Instruments taking effect before commencement of the Bill are not affected.
68. The removal of the statutory restrictions on accumulations does not mean that it will be possible to accumulate income in perpetuity. This is because the rule against perpetuities, in effect, limits the life of a trust and so provides an upper limit on any accumulation.
69. Clause 14 makes specific provision in relation to charitable trusts. The clause provides that any power or duty to accumulate will be subject to a maximum period of 21 years, unless the trust instrument specifies that the power or duty to accumulate ceases to have effect on the death of the settlor or, where there are multiple settlors, the death of a settlor identified by name or order of death (subsection (5)). The 21 year period starts from the first day when the power or duty must or may be exercised (subsection (4)).
70. If a trust instrument provides for an accumulation period longer than 21 years, then (except where subsection (5) applies) the power or duty to accumulate ceases to have effect after 21 years (subsection (3)). Subsection (6) provides that the income is then distributed or applied as it would have been had there been no duty or power to accumulate in the terms of the trust. This follows the model of the existing legislation on accumulations: see the Law of Property Act 1925, section 164(1).
71. Subsection (2) provides that the 21-year restriction on accumulation does not apply where the provision in the instrument has been made by a court or the Charity Commission for England and Wales.
Clause 15: Application of the Act
72. Clause 15 prescribes the instruments to which the Bill will apply.
73. The general rule is that the clauses of the Bill listed in subsection (1) will apply to instruments which take effect on or after the day on which the Bill comes into force. But they will not apply where the instrument is a will executed before that day or is made in the exercise of a special power of appointment created by an instrument which took effect before that day. For such wills or such instruments made in the exercise of a special power the present law will, subject to subsection (2), continue to apply. Wills are deemed to take effect on the death of the testator (clause 20(6)). A reference to a will in the Bill includes a reference to a codicil (clause 20(7)).
74. Subsection (2) provides that clause 12 (pre-commencement instruments: period difficult to ascertain) applies to instruments which take effect before the date the Bill comes into force, and to wills executed before that date even if they take effect after that date. By subsection (3), clause 12 cannot apply if before the commencement day the terms of the trust were exhausted or the trust property became held on charitable trusts by way of a final disposition of the property.
75. This clause excludes the application of sections 1 to 14 of the 1964 Act in relation to instruments to which the Bill is to apply.
76. Clause 17 applies the provisions of the Bill to the Crown. In the case of the rule against perpetuities, it applies the provisions of the Bill to Crown interests subject to the rule, but does not extend the application of the rule.
77. As a general rule, a trust may not be created for a non-charitable purpose. However, a small category of non-charitable purpose trusts may be regarded as valid, such as trusts for the maintenance of gravestones. These trusts are valid only if their duration is limited. The permitted period is a period equivalent to (but distinct from) the perpetuity period.
78. The Bill is concerned with the law relating to the avoidance of future interests for remoteness rather than the duration of trusts. Clause 18 ensures that the period permitted for the duration of non-charitable purpose trusts is not affected by the Bill. The period will continue to be a life or lives in being plus 21 years, or 21 years if there is no relevant life in being.
79. Clause 19 corresponds to section 15(6) of the 1964 Act. The scope of the application of the rule against perpetuities and excessive accumulations under the Bill is defined by reference to instruments. Typically these instruments will be a trust deed or a will. However, it is possible to create a trust orally, without the use of writing. For the purposes of the Bill, such a trust is treated as if it were made by written instrument.
80. Clause 20 provides definitions for a number of terms used in the Bill.
81. Clause 21 introduces the Schedule listing the repeals made by the Bill. The repeals apply in relation to instruments taking effect from the day on which the Bill comes into force unless the instrument is a will executed before that day, or an instrument exercising a special power of appointment created by an instrument made before that day (see Schedule and clause 15).
82. Implementation of the provisions of the Bill would impose no additional burden on the Consolidated Fund or the National Loans Fund. Nor would the Bill have an effect on public expenditure.
83. The Government does not expect this Bill to cause a reduction in Capital Gains Tax or Inheritance Tax. However, the effect of the Bill on tax receipts cannot be predicted with certainty and changes to the tax regime might be considered if tax receipts did unexpectedly fall.
84. No significant change in the workload of any Government department or agency is anticipated on implementation of this Bill.
85. An Impact Assessment of the Bills provisions has been published alongside the Bill, and sets out the impact of the Bill on small business, carbon emission and equality (race, disability and gender). The Bill would be neutral in effect on the areas examined in the Impact Assessment. The Impact Assessment is available for Peers from the Printed Paper Office in the House of Lords, and for Members of the House of Commons from the Vote Office.
86. The Bill is compatible with the Convention rights. It engages Article 1 of the First Protocol to the Convention (respect for property rights) only potentially, as the rules against perpetuities and excessive accumulations do not operate so as to deprive a testator, settlor or trustees of possessions within the meaning of the first part of the Article, and the expectations of (potential) beneficiaries do not have sufficient concreteness to amount to possessions for the purposes of the Article. Further the Bill reforms the two rules with prospective effect and does not generally affect existing instruments and dispositions. The Bill appears only to engage the second part of the Article, which accords states a very wide discretion to control the use of property in accordance with the general interest, and the relevant interests are appropriately balanced. Section 19 of the Human Rights Act 1998 requires the Minister in charge of a Bill in either House of Parliament to make a statement about the compatibility of the provisions of the Bill with the Convention rights (as defined by section 1 of that Act). The statement has to be made before second reading. The Lord Chancellor and Secretary of State for Justice, the Rt. Hon. Jack Straw MP, has made the following statement--
87. Clauses 22 to 24 (inclusive) will come into force on Royal Assent (clause 22(1)). The remainder of the Bill will come into force on such day as the Lord Chancellor may specify by order (clause 22(2)).
Accumulate/accumulation: The conversion of income arising from trust property into capital. It should be distinguished from the administrative retention of income.
Administrative retention of income: The temporary retention of income, usually as an administrative precaution against unseen future deficiencies. The retention of income for such purposes does not convert it to capital; it is a separate concept from the accumulation of income.
Appoint: To exercise a power of appointment.
Beneficiary: A legal person (that is, an individual or a corporation) who is entitled to the benefit of trust property, that is, entitled to it for his, her or its own benefit, and not merely as a trustee holding it for others.
Capital: Trust property that constitutes a pool or fund of assets, to which a particular class of beneficiaries under the trust in question may be entitled. Where there is a trust one class of beneficiaries may be entitled to the capital, and others to the income derived from it. Capital is to be distinguished from the income earned on those assets. For example, A may settle money on trust to be held first for the benefit of B for life, and then absolutely for the benefit of C. In this situation, B is entitled only to the income earned on the fund (for example, the interest earned by its investment in a bank) during Bs lifetime, while C will be entitled to the money (that is, the capital sum) after Bs death.
Charitable purposes: A charitable purpose must be for the public benefit and fall within one of the descriptions of purposes provided in section 2 of the Charities Act 2006.
Charity: see paragraph 39 of the Explanatory Notes.
Charity Commission for England and Wales: The statutory organisation which acts as the regulator and registrar of charities.
Class-closing rules: Gift-saving devices that allow potential beneficiaries whose interest would vest outside the perpetuity period to be excluded from a class of beneficiaries. This has the effect of saving the interest of the beneficiaries whose interest vests within the period. Class closing rules exist at common law and under section 4 of the Perpetuities and Accumulations Act 1964.
Codicil: An addition or supplement to an executed will or testament. It must be executed with all the formalities appropriate to the execution of a will.
Common law: Rules of law that have been derived from the decisions of the courts rather than enacted in statute by Parliament.
Condition precedent: A condition which delays the vesting of an interest until the occurrence of a specified event. For example, to X if he or she graduates from medical school. A condition may be in terms of a description rather than an event. A gift to the first person to land on Mars, or to my first great-great-grandchild, is a gift to whatever person satisfies the stated condition.
Condition subsequent: A condition which provides for an interest to come to an end on the occurrence or non-occurrence of a specified event. For example, a gift of money could be made to B provided B does not qualify as a doctor. If B does qualify as a doctor, Bs right to the money will come to an end.
Determinable interest in property: An interest that is to come to an end on the happening of a specified event. A determinable estate, such as a determinable fee simple, carries a similar meaning in relation to land. For example, a gift of a sum of money to A until As house is no longer used as an orphanage. Whilst this type of limitation is very similar to a condition subsequent there is a subtle difference in the construction of the condition that has legal consequences. If a gift is worded in a way that suggests the event will happen, rather than might happen, a determinable interest is createdthe end is determinate. When the condition is fulfilled, the interest comes to an end.
Easement: A right of one landowner over anothers land. For example, the owner of Blackacre grants a right to the owner of Whiteacre to walk along a path through Blackacre.
Estate: An entitlement to land for a particular time period, which may be fixed (a lease), uncertain (for example, a life estate) or infinite (a fee simple). Under the Law of Property Act 1925, many estates in land (such as life estates or estates subject to conditions precedent) can now exist only in the context of trusts. The exceptions are the fee simple absolute in possession (freehold) and the term of years absolute (leasehold).
Instrument: A formal legal document.
Income: Assets that represent the earnings on property held on trust, to which a particular class of beneficiaries under the trust in question may be entitled. Income may be contrasted with capital and capital gains.
Life in being: A human being who is alive at the date of a disposition. A child who has been conceived but has not yet been born also qualifies as a life in being provided that the child is in fact born alive. 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 As great-great-grandchildren to play chess with B, where no such great-great-grandchildren have been born at the time of the gift, Bs is the measuring life - the life in being.
Non-charitable purpose trust: A trust for purposes (and so not made in favour of an ascertainable group of beneficiaries) where the purposes are not charitable purposes. Very few such trusts are valid. Their duration must be confined to a period equivalent to the common law perpetuity period. An example of such a trust is a trust for the upkeep of tombs.
|© Parliamentary copyright 2009||Prepared: 21 July 2009|