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28 Apr 2009 : Column GC1

Grand Committee

Tuesday, 28 April 2009.

3.30 pm

The Deputy Chairman of Committees (Baroness McIntosh of Hudnall): Before the Minister moves that the Bill be considered, I remind noble Lords that in the case of the Bill and the order, the Motions before the Committee will be that the Committee do consider the Bill or the order in question. I should perhaps make it clear that the Motions to give the Bill a Second Reading and to approve the order will be moved in the Chamber in the usual way.

Perpetuities and Accumulations Bill [HL]

Bill Main page
Copy of the Bill
Explanatory Notes

Second Reading Committee

Moved By Lord Bach

The Parliamentary Under-Secretary of State, Ministry of Justice (Lord Bach): Every Bill that comes before your Lordships’ House is in some way special, but the Perpetuities and Accumulations Bill is particularly so for three reasons. First, it will reform the long-standing rule of English and Welsh trust and property law known as the rule against perpetuities and the rule against excessive accumulations. Secondly, it is a Law Commission Bill, and there have been all too few such Bills in Parliament in recent years. Thirdly, it is the first Bill in the trial of the new procedure for Law Commission Bills approved by the House last year. We hope that this Bill will be the first of many to use the procedure. This may very well be the first time that a Second Reading of any Bill has been heard in the Moses Room. No doubt inquiries will be made to see whether that statement is accurate. Perhaps we are making history in a small way this afternoon.

Before I consider those three themes in greater detail, I thank those who have been particularly instrumental in developing the new procedure. My noble friend Lady Ashton, as one of my predecessors at the Ministry of Justice, and as Leader of the House, worked closely with the noble Lords, Lord Kingsland and Lord Goodhart, and the noble and learned Lord, Lord Lloyd of Berwick, to develop an acceptable new procedure for Law Commission Bills. The noble Lord, Lord Brabazon of Tara, and members of the Procedure Committee recommended that the procedure be given a two-Bill trial, which is worthy of thanks. I am grateful to them all.

In thanking those who have contributed to the development of the new procedure, I should not omit to mention Sir Terence Etherton, the chairman of the Law Commission, without whose vigorous prompting we may not have been here today.

The development of the new procedure was only possible because of the co-operation between all parts of your Lordships’ House—the Government, the

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opposition parties and the Cross Benches—and I hope that we will carry this spirit through our debate, because a new procedure is founded on the principle of consensus.

Few, if any, bodies outside Parliament can claim to have had such an influence on our laws as the Law Commission. It has established an international reputation for excellence of legal research and analysis. However, all too often and for all too long, potential Law Commission Bills have languished unimplemented because parliamentary time could not be found for them. The new procedure is intended to address part of this problem. It is not intended for every Law Commission Bill. However, it will be suitable for what might be described as unspectacular but worthy law reform; work that will not command headlines on the front page, but without which our laws will become out of date and dislocated from the real world. It is work that this House, if I may say so, seems to me to be especially suited to scrutinise and carry forward.

I turn now, not without some trepidation, to describe the content of what can only be described as a very technical Bill. The overall aim, which is based on the result of extensive consultation, is to modernise, simplify and streamline the rule against perpetuities and the rule against excessive accumulations. Clauses 1 to 12 deal with the reforms to the operation of the rule against perpetuities, and Clauses 13 and 14 deal with the reform of the rule against excessive accumulations. The remaining clauses are ancillary to these substantive reforms. As the rules are largely independent of one another, I shall deal with each in turn.

The rule against perpetuities is an old common law rule that originally developed in the context of family trusts. The first question facing a prospective settlor, or more likely his or her lawyer, is whether the rule applies. This is defined by common law and not by statute. Over time, the scope of the rule has been extended from family trust-type situations to include commercial transactions such as options, rights of pre-emption and future easements. The rule therefore now reaches into areas well beyond its original justification.

Clauses 1 and 2 define precisely when the rule is to apply and when it is not to apply. It will apply only in three sets of circumstances: successive interests in trusts or executory bequests, non-successive interests subject to conditions precedent, and rights exercisable on breach of conditions subsequent. If it transpires that the rule still applies where it ought not to do so, Clause 3 provides an order-making power for the Lord Chancellor to specify exceptions. This is subject to the affirmative resolution procedure. Where the rule applies, Clause 2 preserves the present exception for gifts over from one charity to another and extends the current exception for pension schemes to all personal occupational and public service schemes. By necessary implication from Clause 1, the rule will no longer apply in other cases. Options, rights of pre-emption and future easements currently subject to this rule will cease to be so. This major reform responds to the concerns of the consultees that the rule was unnecessarily complicating commercial transactions.

Having defined when the rule is to apply, the Bill defines the perpetuity period. At present, that period is the length of a “life or lives in being” designated by

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the creator of a trust, plus an additional 21 years, or a fixed period of up to 80 years. Subject to one exception, Clause 5 provides that where the Bill applies, the perpetuity period will be 125 years. This is broadly the maximum likely to be achieved under the present law and present life expectancies. The exception is that where an existing special power of appointment is exercised, the period will be the same as that which applies to the trust from which the power derives. This broadly preserves the effect of the present law.

Clause 6 defines when the period will start. The general rule is that it will begin when the instrument creating the relevant interests takes effect. But for special powers of appointment, as under the present law, the period will start at the date the instrument creating the power took effect.

The Bill is in general only prospective and will not, subject to one beneficial exception, affect the terms of existing trusts or wills. The exception is that where the trustees of a pre-commencement trust believe that it is difficult or not reasonably practicable to calculate whether a perpetuity period defined by reference to “lives in being” has ended, they can opt in to a fixed period under the Bill of 100 years.

The remaining clauses applying to perpetuities broadly replicate instruments to which the Bill applies the effect of the “wait and see” and class-closing reforms effected by the Perpetuities and Accumulations Act 1964, an Act that, if I may mention in passing, was built upon the work of the Law Reform Committee in 1956. It was work in which the father of the noble Lord, Lord Goodhart, played a prominent part. I am sure that he would be delighted to see his son continuing in the family tradition today.

The second of the rules to be reformed is the rule against excessive accumulations. Broadly speaking, accumulation is the rolling up of trust income into capital. This rule, originating in a statute enacted at the turn of the 19th century in respect of the Thellusson case of 1799, limits how long income can be added to capital, rather than being distributed to beneficiaries. Currently, six alternative statutory periods can apply. The rule applies to trusts created by natural persons, but not trusts set up by corporations.

The Law Commission found that for most cases the rationale for the rule had disappeared and recommended that the current rule be abolished for all but charitable trusts. Charitable trustees are under a duty to distribute funds to provide for the charitable purposes for which the trust was established. The Bill therefore repeals the present rules but retains a statutory accumulation period of 21 years for property held on trust for charitable purposes. This period will however not apply where the court or the Charity Commission under their existing powers have made specific provision for a charity.

As in the case of the reforms to the rule against perpetuities, these reforms will apply only to instruments taking effect after the Bill comes into force unless the instrument is a will made before that date and taking effect after it. In that case, the present law will apply.

Having completed this brief and, I fear, far from expert summary of the principal provisions of the Bill, perhaps I may mention one final general point. The Bill

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is not intended to affect income from taxation. However, with a Bill of this complexity, dealing with matters over such a long time period, it is difficult to be absolutely certain that the Bill would not have any effect on revenue. If, however, any unintended effect on revenue becomes apparent, the Government will act swiftly to remove any unintended Exchequer consequences in the unlikely event that they arise.

The Deputy Chairman of Committees: I failed to notify the Committee that if there were to be a Division the Committee would adjourn for 10 minutes to allow Members to vote.

3.42 pm

Sitting suspended for a Division in the House.

3.50 pm

The Deputy Chairman of Committees: I think that all Members of the Committee have returned, so I think that we should return in the interests of using time well.

Lord Bach: I remind the Grand Committee that we are today taking part in the first Second Reading Committee debate in this Room in the long history of the House. The reforms that we propose in the Bill are based on consultation with experts—of course their comments have been taken into account. Some may have wished for more radical reform, but that was not the consensus. I hope that this modest but important Bill will be the first of many to use the new procedure. I beg to move.

3.51 pm

Lord Hodgson of Astley Abbotts: I thank the Minister very much for explaining a complex, technical Bill and for the new procedure under which we are to operate, in which we are, in racing terms, the first out of the traps. I begin by declaring interests—charitable interests which are on the Register. Perhaps in the light of the subject matter that we are discussing, I should draw the Committee’s attention to the fact that I am president of the National Council of Voluntary Organisations, which of course has some interest in our proceedings. That having been said, I am not a lawyer, and I shall leave the legal aspects to my noble friend Lord Kingsland, who has already forgotten more law than I will ever know, and focus instead on one or two practical implications that could be tweaked in the Bill and which may represent an improvement.

As I said, I welcome this new approach, because speeding up the modernisation of legislation is very important. I had a bit of a baptism of fire on this when dealing with what was originally the Company Law Reform Bill—on which I had the honour of representing the party on the Front Bench—which became the Companies Act 2006. As one dug into that, one saw how the 2006 Bill was going to amend the 2004 Act, which amended the 1989 Act, the 1985 Act and, in a few cases, as far back as the 1929 Act. The archaeological layers meant, as the Minister said in his opening remarks, that often provisions have become

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entirely dislocated from the real world and completely incomprehensible other than to the specialist. We were able, thanks to the Government’s good offices, including the Minister’s colleague, the noble Lord, Lord Sainsbury, to expand the Bill to bring everything into one place in a much bigger Bill—a 1,300-clause Bill. There were a couple of exceptions, including community interest companies, which we shall of course touch on later in our debates. In so far as this is part of the same process, I welcome it.

The Minister was unduly modest when he explained the history of the Bill. I understand that the initial consultation on this Bill took place in 1993. It was the subject of a Law Commission report in 1998, a constitutional affairs department report in 2002, more consultation in 2008 and now, 16 years on, we have the Bill. That shows that there is a need to speed up the procedure.

I turn to the Bill itself. My first point concerns the issue of perpetuities. Obviously, I find perpetuity a complex issue, given concepts such as “lives in being”. I ask for one clarification. I hope that the Bill team will forgive me when I say that when I read the Explanatory Notes trying to unravel the matter, I got to paragraph 6 on page 2. The fourth sentence says:

“The perpetuity period will be the life of A plus 21 years, measured from the date of X’s death”.

Should it not read,

rather than,

“From” indicates a continuum; “at” represents a point in time. This is a single point of measurement. I would be grateful if the Minister could confirm that. If I am wrong, it merely shows that perpetuities are even more complicated than I thought they were.

Specifically, I welcome the extension of the fixed perpetuity period to 125 years from 80 years in Clause 5. Clearly, we want as little complexity as possible. The more time that is offered in terms of the period, the greater time there is to sort out any difficulties that may arise. Therefore, the principle of Clause 5 is greatly to be welcomed. However, there is a problem with Clause 2 on exceptions to the rule’s application. This concerns successive gifts to a charity. For example, charity A receives a gift but is unable, does not wish to or cannot fulfil the conditions of the gift, and so the gift goes to charity B and so on. Paragraph 39 of the Explanatory Notes lays this out very clearly. The exception for successive charitable gifts arises because any gift to a charity, whether to a named charity such as the lifeboats or to an exclusively charitable purpose, fulfils what I understand is the legal requirement for certainty. Therefore, it does not matter if the charitable purpose alters, because it remains a charitable purpose.

Clause 2 does not refer to the second of these gifts for charitable purposes, only to gifts to a charity in subsections (2) and (3). The definitions on page 17 of the Explanatory Notes state that a charity is:

“An organisation established for charitable purposes only”.

The 1964 Act allowed gifts for charitable purposes to be excluded from perpetuities. Therefore, when we consider the Bill in more detail, I hope that the

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Government will think again about this because it represents a narrowing of the way in which perpetuities operate. In this highly technical area there may be an answer to this question, but a simple amendment to the relevant subsections of Clause 2 would enable us to address this apparent narrowing.

My second point concerns accumulations. Although we welcome making the accumulations rule much more straightforward and comprehensible, the charitable sector is concerned about the default provision of 21 years for charitable trusts. The Minister made clear in his opening remarks that there is an opportunity in Clause 14(2) for this to be set aside by a court or the Charity Commission. I accept that. It is also true that charitable trusts will probably be used less frequently in the future because we now have community interest companies and charitable incorporated organisations under the Charities Act 2006. Therefore, the trust structure may be used less in the future. Nevertheless, some people may wish to use trusts. I also accept that it will apply only going forward, not going back, although paragraph 25 at the top of page 6 of the Explanatory Notes states:

“Accordingly existing trust instruments and wills, that is, those taking effect before commencement, will generally not be affected by the Bill”.

As I say, I am not a lawyer, but when I see words such as “generally” I begin to wonder what they mean in reality. I think that we should be doing everything that we can to encourage philanthropic endeavour, and this 21-year rule is an unduly heavy and inflexible sledgehammer.

I will illuminate the argument with three brief examples. Trusts may have what are known as wasting assets. The wasting assets could be in two particular forms. There will be leaseholds, where the trust’s only asset is the lease of a property with an expiry date. When the lease comes to an end, the property reverts to the original owner; the trust no longer has any asset or any income and therefore will have to cease its operations. In such circumstances, it surely would be appropriate for the trust to be converting income to capital in the latter years of those leases in order to provide for endowment to enable it to carry on its original purposes. Many of these leases will run for longer than 21 years; they may be 99 years.

This comes to its sharpest point on things such as copyright. I think it was Westminster School that benefited enormously from the endowment of AA Milne’s copyright on the Winnie the Pooh books. While Westminster School had a sufficiently large endowment to be able to avoid converting income to capital, because it had other capital endowment of its own, a charity with a single asset which was a valuable copyright would find, as the copyright began to run out, that it had to either cease operation or convert income to capital to provide a sum of money to enable it to continue operations. My Oxford college, being a poor college of relatively modern foundation, had at one time great hopes of getting the Reverend W Awdry’s Thomas the Tank Engine books as he was a member of the college, but unfortunately it was unrequited in the end.

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Wasting assets is one thing. Secondly, there is building up the sum endowed. The Minister and I in our different ways might decide that we wish to set up a charitable trust for a purpose that we feel is very worthwhile, and we get proper charitable permission but, being men of modest means, we can put only a smallish sum of capital in. We decide that during the rest of our lives, to have a decent sum of money for its future operation of our trust, we will roll up all the income and keep it in the capital so that there is a bigger pot for the trustees to work on after our death. The Minister and I—I think I am a few years ahead of the Minister—have a reasonable hope of passing 21 years, and therefore we would find that the rule as presently drafted would impact on us. That is a mistake because anything that encourages people to set up trusts and to accumulate income and build up the sum during a lifetime seems to me to be entirely sensible. Under the present rules you can do that, because the life of a settlor is the limit on accumulations at present.

Lastly, and perhaps most importantly, there is what I call the “total return” approach to investment management. Historically, people have considered the return on their investment as being two parts—a flow of capital gain and a flow of income. The income comes from dividends and interest on bonds, and the capital gain comes from the increase in asset values. In recent years, those two streams have become increasingly co-mingled. They have become co-mingled because tax rates for private individuals have become much the same and therefore whether you took it as income or capital gains does not really matter, and because of the emergence of the new asset classes, such as private equity, where there is no income, only capital gains. Therefore, the total return concept of investment management has emerged. If you are looking for a 10 per cent return, you do not really mind whether it is 10 per cent capital gain or 10 per cent income, or some mixture of the two. I am concerned that in the way that we are currently looking at the Bill, with a 21-year life, some charitable trusts will find that the total return concept actually begins to work against the efficient operation of their investment management.

I have already accepted that Clause 14(2) provides a let-out. We are trying to work to a situation where we have certainty and where a philanthropist knows what he or she can do. It may be that you can hope that the court or the Charity Commission will deal with you kindly, but we could try to increase that certainty by providing something a little less inflexible than the present approach. It is bureaucratic. I also think that it brings the Charity Commission into an invidious position of having to make value judgments about the readiness and appropriateness of rolling up income and converting it to capital.

I conclude by welcoming the Bill’s general approach. I have raised a couple of points which I hope the Government will consider and reflect on as we work through the Bill. The Charity Commission’s strategic plan for 2008-11 gives it six tasks, two of which are to be innovative and responsive. I hope that the Government can be innovative and responsive as regards these questions.

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4.06 pm

Lord Archer of Sandwell: As my noble friend Lord Bach and the noble Lord, Lord Hodgson, reminded us, today we are makers of history for various reasons which they elicited, but, most particularly, because we are participating in the new procedure to expedite Law Commission Bills. If that is not the sole topic of conversation in the village where I live, at least we will have something to relate on future winter evenings. For much too long, the excellent work of the Law Commission has gathered dust on remote shelves because the business managers of successive Governments have found more pressing work for the two Chambers. The report on which this Bill is based was dated 1998.

I do not presume to match the expertise of the noble Lord, Lord Hodgson, nor of the noble Lord, Lord Goodhart. I intervene simply because, long ago, a distinguished predecessor of Sir Terence, Lord Scarman, and I plotted to introduce a more expeditious procedure for Law Commission Bills. But our efforts never came to fruition. I suspect that somewhere out there, he is now looking down on us with that enigmatic smile on his face. I regret that I was unable to attend the Second Reading last week of the Law Commission Bill, but I hope that the Government will accept my belated congratulations.

I must confess that so far as I recollect, the last time I had occasion to discuss perpetuities and accumulations was while attempting a question in my law finals. I have grasped that sometimes the mysteries of the law really do engage with the real world. This Bill is not just an exercise in esoteric logic, nor even simply concerned with preserving intact vast estates. It is an attempt to enable ordinary people to make reasonable dispositions of their property without tripping over archaic tangles which, no doubt, once related to genuine practical problems. This is the Law Commission doing what I believe Lord Gardiner originally intended that it should; namely, building bridges between the law and the real world. It deserves to succeed.

Baroness Deech: This is a once-in-a-generation opportunity. There has been no legislation on this since 1964, so I welcome the consensus that appears to lie behind the Bill. It is important to listen to the Chancery Bar, because it will be dealing with this. It is also a happy occasion to see a new procedure for Law Commission Bills. My very first job on graduation was with the commission under the late Lord Scarman, to whom we owe so much.

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