 House of Commons |
Session 2008 - 09 Publications on the internet General Committee Debates Perpetuities and Accumulations Bill [Lords] |
The Committee consisted of the following Members:Alan Sandall, Committee
Clerk † attended the
Committee Second Reading CommitteeMonday 19 October 2009[Mr. Roger Gale in the Chair]Perpetuities and Accumulations Bill [Lords]4.30
pm
The
Chairman: Before we start what I understand to be the
first process of this kind, I remind the Committee that this is a
Second Reading debate, not a Committee hearing. That means that the
usual Committee rules do not apply and that Members—other than
the Minister, who may, with the consent of the Committee, reply to the
debate—may speak only once. This is not like a Committee in
which Members may speak more than once. That does not, of course, deny
Members the right to intervene, as they could on the Floor of the
House, but they may make only one speech, and then that is
it. 4.31
pm
That
the Committee recommends that the Perpetuities and Accumulations Bill
[Lords] ought to be read a Second
time. It
is a delight to serve under your chairmanship, Mr. Gale,
especially in this rather novel
fashion. The
Bill gives effect to the Law Commission’s recommendations on the
law of perpetuities and accumulations. It was met with general support
in another place, and it will modernise, simplify and streamline the
present rules. I should like to put on record my thanks to the Law
Commission for its excellent and valuable work. The reforms are the
product of extensive consultation and represent a good example of the
Law Commission’s work to create a clear, simple, modern and
effective legal rule in areas of great
complexity. The
Bill is also noteworthy as it was the first to be considered in another
place under the new procedure for appropriate Law Commission Bills. It
was subjected to close examination by the Special Public Bill
Committee, which took evidence from experts, and amended in that
Committee to reflect the consensus view across all
parties. The
rules against perpetuities and excessive accumulation are almost
certainly not widely known, but they are fundamental to a part of trust
and property law, and apply whenever a will or a trust is drawn up. The
rule against perpetuities strikes a balance between the present
owner’s right to dispose of his or her property and the rights
of future owners of that property to do the same. For example, a person
might want to leave money to the first of their descendants to live on
Mars. Until someone does so, the money will be held in trust, but that
might not be the best economic use for it.
The rule
against perpetuities specifies when the condition will be valid. Until
1964, that rule was entirely set out in case law, with the common law
rule being that one could tie up property for the duration of a
“life in being”, plus 21 years. That formula was broadly
intended to cover
the life of one’s children and the minority of one’s
grandchildren. A gift that might end up vesting after this period could
expire would be void from the outset. Some of the harsher results
created by the common law were remedied by the Perpetuities and
Accumulations Act 1964, which allowed one to wait and see whether a
gift would fall foul of the rule, rather than declaring it void right
from the start.
The Bill
implements reforms to reduce the complexity of the rule by doing two
things. First, it restricts the scope of the application of the rule.
Under existing law the rule has been applied to contracts, options to
purchase and other transactions that can be characterised essentially
as part of commercially negotiated contracts, and there is no
justification. Secondly, it eliminates the arcane “life in
being” formula and replaces it with a fixed 125-year perpetuity
period.
The rule on
excessive accumulations is statutory and limits how long a person can
add the income made on invested funds to trust capital without
distributing it to beneficiaries. Again, that is too complicated. A
settlor may choose one of six different periods, which is hard enough
in itself, but if no period is chosen, it is up to the court to decide
what the person would have intended. More importantly, that is
unnecessary. Accumulating income in a private trust will not unbalance
the economy as was feared when that rule was invented.
In the case
of property held on trust for charitable purposes, there remains a good
reason for having a rule against excessive accumulations. A charity is
created to provide a public benefit, and the application of a statutory
accumulation period for charities ensures that that benefit is not
unreasonably delayed.
The
explanatory notes explain the current law and the proposed changes. I
suspect that few lawyers claim to be experts in this very complicated
area of law, so excuse me, Mr. Gale, for not getting too
involved in the Bill’s technicalities—you might
ultimately thank me for that. I will, however, give an outline of the
clauses. Clauses
1 to 6 set out the scope of the rule against perpetuities and how the
period is to be determined in any case. Clause 1 defines the reformed
scope of the application, and the rule will be restricted to
circumstances in which it is needed, and disapplied when it
unnecessarily interferes. The rule will apply, for example, to family
settlement arrangements, but not to a future easement for a road to
access a proposed housing development. Clause 2 preserves existing
exceptions to the rule, and clause 3 creates a power for the Lord
Chancellor to make orders to create further exceptions to the
application of the rule, if necessary. Clause 4 abolishes the existing
statutory exceptions where the Bill applies, because they will be
unnecessary, and clause 5 imposes a mandatory fixed 125-year period of
perpetuity for trusts taking effect after the commencement of the Bill.
Clause 6 defines when the perpetuity starts for estates, interests,
rights and powers within clause 1, which clarifies the
law. Clauses
7 to 11 broadly replicate the effect of reforms introduced by the 1964
Act in relation to the rule as it applies under clauses 1 to 6. Clause
12 is the only provision that will apply to existing trusts. Perpetuity
periods are usually defined by reference to a “life in
being”. In practice, it can be difficult to discover when the
measuring life or lives in being has ended, so it can be time-consuming
and expensive to determine when a
trust is supposed to end. Clause 12 therefore allows trustees of
existing trusts to opt into a 100-year perpetuity period if they
believe that it is difficult or not reasonably practicable to determine
whether the perpetuity period applicable to the trust has
ended. Clause
13 abolishes accumulations restrictions for trusts created after the
commencement of the Bill, and clause 14 limits accumulations for
instruments to the extent that they provide for property to be held on
trust for charitable purposes. While private trusts will be allowed to
accumulate for the length of the perpetuity period, charitable trusts
will be subject to a statutory limit. Charitable trusts will be able to
accumulate for 21 years or for the life of the settlor or,
if there are more than one, a specified settlor. Provision can also be
made for a different period by the Charity Commission or the courts
where appropriate after considering the individual circumstances of the
particular
charity. Clause
15 defines the application of the Bill and, as I have said, with the
exception of clause 12, the Bill’s provisions will operate for
trusts created after its commencement. That is important, because if
the general legal framework of a trust is changed, it can have an
effect on the distribution of the property subject to the trust, which
may have an adverse or unexpected result for some beneficiaries. Clause
16 repeals certain provisions that will no longer be necessary, and
clause 17 defines the application to the Crown. Clause 18 ensures that
a separate legal rule about non-charitable trusts is not affected by
the Bill, and clause 19 ensures that the Bill will apply to oral, as
well as written,
trusts. As
I have said, this is a technical Bill, but it is relevant to a large
number of people. Trusts are an important means of sharing private and
charitable wealth. Ensuring that the underlying rules are modern will
help to increase the attractiveness of the law of England and Wales to
investors. I would like to thank everyone who has contributed to the
formulation of the
Bill. 4.40
pm Mr.
Henry Bellingham (North-West Norfolk) (Con): It is a
pleasure to serve under your chairmanship, Mr. Gale. I thank
the Minister for explaining the position so clearly. I declare an
interest as a barrister who practised a certain amount of chancery law
during my time at the
Bar. As
the Minister pointed out, the Bill’s passage is taking place
under new procedures so that when the Law Commission has recommended
simplification and improvements to aspects of law, Bills brought before
the House, with agreement through the usual channels—especially
when the Bills are not controversial—can be expedited and
brought into law much more quickly.
On Friday,
the House debated the remaining stages of the Law Commission Bill,
which will help the Law Commission to improve its relationship to
Parliament. The Lord Chancellor will have to report to Parliament on
the work and recommendations of the commission, and also explain to
Parliament why those recommendations have not been taken up and brought
into law. All too often Law Commission recommendations simply gather
dust on shelves. I understand that the consultation that led to this
Bill started in 1992. The Law Commission came out with its report on
perpetuities and accumulations in 1998, and we are now in 2009, so it
has been a long haul.
As the
Minister pointed out, the Bill affects a substantial number of our
constituents, although many of them probably do not know that they will
be affected because the whole area of trust law moves in a fairly
mysterious way. However, it is important that trust law is updated and
that it is made as simple and as user-friendly as possible, so we
welcome the Bill.
Although I
welcome the fast-track procedure, it is a pity—given the paucity
of legislation before the House and the number of days on which we are
basically inventing business to take on the Floor of the
House—that it could not be dealt with on the Floor in the normal
way. That would not have slowed the progress of the Bill in any way,
shape or form, and it could have widened our discussion and given other
hon. Members a chance to participate. However, that is obviously a
matter for the usual channels.
Restricting
the application of the rule of perpetuities to successive estates and
interests in property is a good thing. Under this Bill, the rule will
no longer apply to rights over property such as options, rights of
pre-emption and future easements, which the Minister mentioned. It will
also exclude all pension schemes. I therefore welcome the first part of
the Bill. Although strong arguments were made in another place about
the extension of the fixed perpetuity period from 80 to 125 years, we
need as little complexity as possible, and the more time afforded to
sort out difficulties, the better, so the proposal makes
sense.
As I
understand it, the provisions will apply prospectively, but can the
Minister tell the Committee—or the House—about the
position regarding wills when death occurs after the Bill’s
commencement? Is it a fair reading of the situation that the Law of
Property Act 1925 and the Perpetuities and Accumulations Act 1964 will
probably still be needed for another 100 years? One point raised in the
House of Lords on a couple of occasions, although I do not think a
satisfactory answer was ever given, was the question of who were the
“lives in being” for the purposes of “wait and
see” under common law and the 1964 Act? Will the Minister
address that
point? I
welcome making the accumulations rule more straightforward and
comprehensible. Some concerns have been raised about the default
position for charitable trusts which, as the Minister mentioned, will
be 21 years. That could be set aside by a court, or by the
Charity Commission, under clause 14(2). That will become less relevant,
because I suspect that charitable trusts will be used much less
frequently due to the new existence of community interest companies and
charitable incorporated organisations, which were introduced under the
Charities Act 2006. Of course a charity could go to court or the
Charity Commission to have the accumulation rule lifted, but is the
21-year provision still a little onerous? Given that a lot of charities
now look at total return, rather than at income on the one hand and
capital gains on the other, it might be somewhat burdensome to tie
their hands, even for 21
years. How
easy will an application to the court be? Will the process be simple,
or an extremely expensive one that will benefit people in my former
profession? Will the Department discuss such issues with the charity
commissioners to ensure that applications made to the commission on the
21 years and the exemptions under clause 14(2) will be dealt with
extremely swiftly and expeditiously?
Paragraph 25
of the explanatory notes says that existing trust instruments and wills
taking effect before commencement will “generally” not be
affected by the Bill. What does “generally” mean in that
context? Does it mean that some elements will be retrospective? If that
is the case, which ones? Will the Minister elaborate a little more? If
she has to seek further and better instruction and write to me, I will
be perfectly understanding. This point is important, because the word
“generally” implies
exceptions. With
those questions, Conservatives Members support the Bill and the new
expedited procedure for getting Law Commission Bills moved forward. The
Law Commission Bill also has all-party support, and I hope that it will
become an Act soon. We very much hope that the excellent improvements
that the Law Commission recommends are brought forward as quickly as
possible because, after all, the commission’s whole raison
d’être is to improve the law, and to ensure that ancient
statutes that are no longer applicable are repealed, and that laws
relevant to our constituents that are non-controversial and might not
otherwise see the light of day are brought forward as quickly as
possible. 4.47
pm David
Howarth (Cambridge) (LD): I know that people think that
this is an obscure subject but, as Lady Deech pointed out in the House
of Lords, the plot of the film “Body Heat”, turns on the
rule against perpetuities. She wondered whether she was the only person
in the world who got excited at that point in film, but I got excited
as well. It is also the only bit of land law that I understand so it is
a shame to abolish it, but that is obviously not a good reason to
oppose the
Bill. The
Minister laid out the main advantages of the Bill: the disapplication
of the rule in what are essentially commercial transactions; getting
rid of the “lives in being plus 21 years” measure, which
is difficult to apply in many cases, replacing it with a bright-line
rule of 125 years; and the abolition, except for charities,
of the rule against accumulations, which was introduced in the early
19th century in, I have to say, a panic of the sort that we are very
familiar with these days. It is a good Bill in principle and I wish it
well. The
debate in the House of Lords produced some interesting questions, but,
I think, only one big policy issue remains: would it be a good idea to
go further than the Bill suggests and abolish the rule altogether? The
economic arguments for the rule against perpetuity are not entirely
clear, but there are two of them. First, on the whole, trustees tend to
be less entrepreneurial and take fewer risks in their investment
decisions than beneficiaries, so, over the long term, the economy will
be less innovative and productive. Secondly, if we allow trusts to go
on for many years, it may often be unclear who is entitled to the
benefit of the trust. The trust may end up with tens of thousands of
beneficiaries and most of the money taken up trying to find out who
they are. The trust will disappear in transaction costs, or
lawyers’ fees as they are more rightly
known. On
the other side, there is an argument that for many people the desire to
control their property after they are dead is an important motivation
for what they do when
they are alive; they tend to work harder to build up their assets so
that they can control the future. Therefore, if we were to go the other
way we would lose that incentive. It is difficult to judge the net
effect of those two possibilities—there is no real evidence. In
the US, half the states have abolished the rule and half have not, and
there is some evidence from there about the effects. However, it merely
seems to show that if a state abolishes the rule it attracts a lot of
trust business from other states, and that has to do mainly with
taxation, rather than trust, rules: if accumulated income is not taxed,
it attracts business in. The big issue there is whether that is good
for the economy. Trust administration business is attracted into the
country, but is that the kind of economy that the country wants to rely
on? The
other arguments about whether the rule should be abolished altogether
concern fairness between generations, and that is difficult to judge.
On one side is the freedom of people now to do what they want with
their own property, and on the other is the freedom of people in the
future to do what they want with property that comes to them. Getting
to a single rule that balances those two interests is
difficult. It
seems that the Law Commission has taken a practical way out of the
problem. Effectively, it says that the rule should be abolished for all
purposes in ordinary life; 125 years is long enough for anyone doing
ordinary wills or trust business to be satisfied. The reason for
keeping a rule at all is just as a long stop, to prevent ludicrous
trusts. Even though we do not know the overall balance between the
economic arguments, we know that those sorts of trusts would be
harmful, and even though we do not know what the exact balance of
fairness between generations should be, we know that exaggerated trusts
would be unfair.
The one
example that Dr. Harpum gave in evidence to the House of Lords is a
good one. It is what I call the Futurama trust, in which someone leaves
their estate to the first lineal descendent to reach the age of 18
after the year 3000. We can argue about whether there should be a rule
overall, but such a trust would plainly be a waste of everyone’s
time, and unfair between the generations. Therefore, a long-stop rule
is perfectly acceptable and is the way out of the problem. The Law
Commission has chosen that way, and the House should accept
it. There
was some discussion in the Lords about retrospectivity—a topic
dear to all our hearts at the moment—and whether one could apply
the new rules to not just new trusts but existing arrangements. I
suppose that there is a division of interests between transactional
lawyers: those setting up new trusts and who think that one should
bother only about what to do in the future, for whom the Bill is
perfectly acceptable, and lawyers dealing mainly with
disputes—litigation—some of whom think that there might
be an opportunity here to simplify previous cases by applying the new
clear rules retrospectively. The problem with that is that if someone
tried to do it they would end up with all sorts of disputes about the
Human Rights Act and the application of the first protocol to the
European convention on human rights. It is not clear who would win that
sort of dispute, only that there would be a dispute. One immediately
loses the advantages that one gets from simplifying the law
retrospectively, because there will be a dispute. On balance,
therefore, although the issue is a bit messy, the Law Commission has
got that one right as well. It means,
of course, that having knowledge of the old law is still relevant, which
is good for me since I am one of the few people who could be bothered
with the old
law. In
passing, may I ask the Minister about a point that came from the Lords,
as it would be helpful to put the answer on the record? It is about the
relevance of the old law under clause 7 of the Bill. Clause 7(1) talks
about subsection (2) applying
“if...an
estate or interest would be void on the ground that it might not become
vested until too remote a
time.” Lady
Deech in the Lords claimed that that provision would require people to
understand the old law in order to apply the new law. It would not,
because clause 7 is not about the old law; it is simply about clause 5.
It is about the new period. It would be helpful if the Minister put
that on the record in a more authoritative way than I could, so that
that confusion does not
continue. Two
other outstanding issues came out of the Lords debate. One is the new
rule on accumulations—the abolition of the rule against
accumulations except for charities. The question is whether the new
more liberal rule should apply even to existing trusts where there is a
special power to create a new trust out of an existing one. There was
debate about that in the Lords. As I understand it, the answer at the
moment is no. However, some late evidence that came before the Lords
Committee argued very strongly the other way. Lord Bach said in the
Lords Committee on 30 June that
“it is
unfortunate that this powerful counterargument has entered the arena at
a very late stage
indeed.” He
went on to say that perhaps we in this House could clear up the matter.
It would be helpful if the Minister let the Committee know whether the
Government intend to clear up that particular point in this
House.
The second
and slightly more fundamental point is that it became clear in evidence
to the Lords—the hon. Member for North-West Norfolk made this
point—that the rule about charities being allowed to accumulate
for 21 years was not exactly enthusiastically proposed by the Law
Commission. It has more to do with the views of the Charity Commission.
Since the hon. Gentleman declared an interest, I should declare an
interest on this point because as a fellow of a Cambridge college I am
in effect a trustee of a charity. It is important that the Minister say
something about the problems raised by the hon. Gentleman, in
particular about how this restriction on accumulations by charities
fits in with the total return method now adopted by many charities as
their investment strategy. It was said in evidence to the Lords
Committee that the issues are totally separate and that there will be
no effect. Lord Hodgson was particularly concerned that the overall
effect would be to put charities at the mercy of the Charity
Commission, rather than in a position to decide their own strategies as
of right.
With those
minor concerns, which I hope the Minister can clear up either now or
later, I am happy to join the hon. Gentleman in wishing the Bill
well.
4.59
pm
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