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It would therefore be churlish for anyone to oppose the Bill, but I want to place a few points on record that I hope will be helpful. For example, Clause 1(1) is misleading. One starts by reading the Bill, and this clause suggests that the Bill contains the entire law of perpetuities. Only when they get to Clause 15 does the reader realise that the provisions apply prospectively, although including wills already made where the death occurs after commencement. The net effect of this prospective element is that the Law of Property Act 1925 and the Perpetuities and Accumulations Act 1964 will still be needed for about 100 years to come. This law, complicated as it is, is having yet another layer added to it, possibly needlessly, and it should be made plain
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Imagine oneself a lawyer dealing with instruments and settlements affected by perpetuities. You would start, depending on the will or the instrument, by looking at the common law as it was before 1964. If the gift failed under common law, you would then move on to the 1964 Act and see if that helped by the application of wait and see. Then, prospectively, there will be this new Bill or something very much like it. Imagine the ignorance among high street solicitors; I have mentioned the Chancery Bar but not them.
My one claim to fame is that I used to lecture on thisI did so for 20 years at Oxford. In a course of eight one-hour lectures we did no more than merely scrape the surface of the subject, and at the end of those eight hours I used to forget it until the following year came around. My second claim to fame was that when I first had the privilege of meeting the Prime Minister before last, Tony Blair, he told me that he remembered me from my lectures.
As soon as I left Oxford, your Lordships will be interested to know that perpetuities were removed as a compulsory part of the syllabus. There is now only one tutor, and he is retiring in three months time, who gives it two hours a year in tutorials. It is taught at University College, London, and to Cambridge graduates. There is an essay available for purchase online for baffled students who are prepared to download an essay if they need to hand one in. I doubt whether this subject is widely taught or known, and I suspectindeed, this has been said quite authoritatively in other common-law jurisdictionsthat wills are drawn up by lawyers in complete ignorance and carried out in the same state. There is an American film called Body Heat, starring Kathleen Turner, where the entire plot turns on the failure to notice the application of the rule against perpetuities in a will, although I suspect that I was the only person in the audience to have been overcome with excitement at that point.
Even where the rule is known by a skilled lawyer, the application of wait and seeI will not go on for too long about thismay often mean that the money is spent on the wrong person, because while one is waiting and seeing for maybe 125 years, or 80 years under current law, the trustees have the right to spend the money that is the subject of the trust on the prospective beneficiary, even though it may turn out in 50 years time that he or she was the wrong recipient.
Wait and see, which continues under this law, tempts the testator to reach out. If you know the law and that you have a period of 125 years, you might just as well try to apply conditions for as far ahead in the future as you possibly can on the chance that you might get what you want. That is because if the period of wait and see passes and the law then applies to exclude members of a class, you may very well achieve most of your objectives.
Moreover, some of the retained law is extremely controversial. Who are the lives in being for the purposes of wait and see under common law and under the
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It is therefore welcome that under Clause 12, a trustee who really does not know whether the lives have come to an end may choose to opt in to the new provisions. But the clause serves to demonstrate that the law could be retrospective, and there is no reason why it should not be. However, there will be problems: this involves not only who are the livesthe lives specified in the giftbut also the 1964 Act, which supplies a separate list. It is a question not only of who they are, but also whether they are still alive. It is therefore good that a fixed period of 125 years is provided, although it is probably too long and, of course, it is prospective. The much shorter period of 80 years was regarded as the proper length of time in the 1964 Act. As I have said, 125 years effectively removes any constraint on a testator when coupled with wait and see. Frankly, anything can be tried.
Having got this far inthat the testator can probably almost do what he likesthe whole rule becomes rather incredible and lacking in any sound base. It was based on a system of settlements when the age of majority was 21 and settled property was passed from generation to generation. That is simply not the case any more. We have held on to it because of our belief that you need some constraint on a testator or settlor to stop them reaching out too far in the future. Indeed, some extraordinary things in which I have had dealings in another job have now come to pass. We all take it for granted, as explained in paragraph 6 of the Explanatory Notes, that A cannot produce more children once dead. However, I need hardly remind at least the younger Members of the Committee that because of advances in fertility law, even it if it is not common, it is perfectly possible to produce children once you are dead. Perhaps I may remind noble Lords of the famous Diane Blood case. It happens quite often in the United States when soldiers freeze their sperm before going off to fight. The statement in paragraph 6 of the Explanatory Notes used to be perfectly valid and understandable, but is no longer so. Further, there is the much-laughed-at clause, or so my students told me, from the Perpetuities and Accumulations Act 1964, that a woman cannot conceive over the age of 55. Noble Lords will know that virtually every day in the red-top press we have yet another story of a woman of 60 or 65 who, with the benefits of modern science, gives birth to what is always termed my miracle baby. The law simply does not make sense any more. For aficionados of the topic, Barton Leachs famous dictum that the child en ventre sa frigidaire or the impossibility of the fertile octogenarian have indeed come to pass.
So we come down to the rationale of why we are keeping this rule. We are taking a leap into the dark because no economic analysis of it has been made, as admitted by the Law Commission. We simply do not know what the economic effect of the law was or will be. One Harvard article suggested that states in the US that abolish the rule have more investments coming their way. The rule does not exist in Scotland to any extent, or indeed in several jurisdictions, with no ill-effects reported. No research has been made into whether life plus 21 years or 125 years is what testators either use or desire. The only justification for the rule is the so-called dead hand rationale, in other words: stop the dead hand of the long-since dead testator reaching out into the future. That rationale is several hundred years old with, as I have said, no research behind it. After all, ever since 1925, property legislation has freed up settled properties for sale. Taxation on settlements are penal, and it is taxation that will affect their status. The Trusts of Land and Appointments of Trustees Act 1996 gives extremely wide powers of investment. It is now impossible to create strict settlements.
However, the settlor, if he knows the law, can still exclude the power of the trustees to sell. The dead hand rationale has been undermined by tax law and by a testators perception of the need to shed conditions and rearrange gifts every now and then when new tax laws are passed. Who, in 1900, could have said what the needs of todays beneficiaries might be, or the requirements of complying with or avoiding tax today, 109 years later? Yet that is the sort of situation that will arise 100 years from now. If anything, it could be argued that there is too little freedom of testation. The Inheritance Tax Act 1984 takes away great chunks of property on death, while the Inheritance (Provision for Family and Dependants) Act 1975 ensures that family members receive property even where the testator did not want them to. Divorce settlements and the results of divorce will send property off in directions not foreseen.
One might say that it is time the settlor had a bit more liberty by abolishing the rule. The Bill, in effect, keeps a troublesome law while at the same time effectively removing its constraints because 125 years is such a long time. One might worry that, by making it easier to create future interests, we are encouraging donors and testators to suspend future ownership. Is making a gift, as this Bill will allow, to my descendants living in 125 years time, really a benefit to the public, and will it be welcomed by the family? A famous case called Green where a mother did not accept that her son had been lost in a wartime plane crash left her property,
Such cases will be cured by the power in this Bill for the trustees. Where the extent of the life is uncertain, trustees will be able to opt in to the fixed-length provision here. But that will take the property out of commerce for even longer. The common law had a lot to be said for it because if a gift was bad, you knew it right away. The conditions were lost and the property was freed up. Wait and see has actually made the situation worse. By helping gifts of vest, as this Bill will do, one helps one member of the family at the expense of another.
What is welcomed widely is that perpetuity will no longer apply to commercial interests, pensions and accumulations, and I think that that is right. There is concern in some quarters about removing the constraints on accumulation. It started with a case called Thellusson, which was a trust for prolonged accumulation, and it was feared at the time, almost 200 years ago, that the entire economy might have been sucked into this trust. In our present financial crisis, it is conceivable that a hedge fund might accumulate and suck up whatever is left of the entire economy. But it would be interesting to know whether economists think there is a real danger in removing this because we simply do not know; we have seen no economic analysis.
To conclude, I welcome the way in which the Bill positively applies perpetuities and takes them away from some other elements, I welcome the application of a fixed period of years, albeit I think it is rather long, and I welcome the drafting. My own preferences, though, would have been, first, abolition and, secondly, to leave it alone; however, if neither of those is on the cards, some consolidation of the three sets of law would be valuable.
Lord Lloyd of Berwick: I crave the indulgence of the Committee to say a few words in the gap. I did not put my name down to speak at Second Reading for the good reason that, as the prospective chairman of the committee that will be hearing evidence in due course, it seemed better that I should not express any view at all on the substance of the Bill. However, I did not want my silence today to be taken in any way as meaning that I had any doubts about the new procedure that we are adopting today for the first time; indeed, I warmly welcome it. The Minister said at the end of his introduction that he hoped that this would be the first of many Bills to adopt this course, and I entirely agree.
The noble and learned Lord, Lord Archer, said that he foresaw something of this kind many years ago when he was negotiating with Lord Scarman, the first chairman of the Law Commission. I just hope that the progress that the Bill takes through the House will fulfil some of his early hopes at that stage.
Lord Goodhart: I agree with the Minister that the proceedings we have started today are important, and I say that for the same reasons that he did. This is the first Bill dealt with under the new procedure for Law Commission Bills. It is a pilot scheme, a trial to see whether the new procedure works. If it does, that will reduce the amount of time spent by Law Commission Bills on the Floor of the House, which is likely to make it possible to get more non-controversial Law Commission Bills enacted, and to get them enacted more swiftly than they are now. That would be very desirable.
This Bill, which is technical and, I believe, non-controversial, is based on the Law Commissions report that was published 11 years ago, in 1998. Proceedings should have been possible that meant it could have been enacted within a matter of two or three years of the publication of the report. Of course controversial
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I turn to the Bill itself. Perpetuities and accumulations are a subject that I am familiar with; indeed, I am prepared to say that looking at it now makes me quite nostalgic. Trusts were a substantial part of my practice as a member of the Chancery Bar, and trusts require knowledge of the rule against perpetuities and the rule against accumulations. The rule against perpetuities limits the time for which money or other property can be held in a trust, and the rule against accumulations limits the time for which income yielded by assets held in those trusts can be added to trust capital instead of being distributed to beneficiaries as income. However, while those principles are in fact both quite simple, the mechanism by which they have been applied is immensely complicated. I will not add to what the Minister has said about how those rules operate, but they are plainly complicated and anachronistic and need to be simplified.
I have some doubts about the detail of two of the Law Commissions proposals that are proposed to be enacted in the Bill. My first doubt, which I share with the noble Baroness, Lady Deech, concerns whether the perpetuity period of 125 years is too long. I think that it plainly is because if such a rule had been in force in the past, it would mean that a trust set up in 1885 could still be in effect for a few more months. That seems to me pretty absurd. I therefore agree with the noble Baroness that this is a longer period than is needed. However, I do not agree with her that no perpetuity period should be imposed. I think it is desirable that there should be a limit on the time during which any owner of property can direct what happens to that property through creating a trust. If somebody wishes to set up a trust for a young, seriously disabled child who will never be able to manage his or her own affairs, and who might have a long life, that might suggest a maximum period of something like 100 years, given that a large number of people now live into their 90s. However, we can look at that point in detail later.
I also have doubts about the complete abolition of the rule against accumulations. The origin of that rule was the decision of a wealthy banker, Mr Thellusson, to leave a large part of his estate on trust to accumulate the income for the whole period of the trust, which was until the death of his last male descendant living at Mr Thellussons death. In theory, the effect of compound interest could have produced a gigantic sum of money by the end of the trust period. That is not so much a danger nowadays given the costs of running a trust, but I think it is still plainly undesirable that property should be locked up so that it cannot be applied for the benefit of anybody over a long period. While Mr Thellussons will was, to say the least, an eccentric action, under this Bill as it now stands there would be no way of preventing a new Thellusson creating a similar trust, which I do not think is desirable. My own preference is to allow the accumulation of income throughout a trust period but only as a power for the trustees to implement, not as an obligation imposed on them by the settlor or the testator. From
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I noted with interest what the noble Lord, Lord Hodgson, said. That is a matter of detail to be dealt with by the Special Public Bill Committee when that is set up, as it shortly will be, and it will need considering. I hope that he will give evidence on that matter to that committee when it is formed. The noble Baroness, Lady Deech, made an important point concerning what to do with the existing trusts, which may go on for many years. I do not think there is an absolute solution to that, but in some circumstances at any rate it may be possible for trustees to opt into the new law and get out of the more complicated old one. Those are the sort of technical issues that ought to be left to the Special Public Bill Committee, not debated on the Floor of your Lordships' House. Subject, therefore, to the points that I have just mentioned, I am strongly in favour of the Bill and in principle I am completely in favour of it. My concerns rest only on relatively subsidiary points. I hope that the Bill will now be formally sent on its way in a day or twos time to the Special Public Bill Committee. I look forward to the works of that committee.
Lord Kingsland: If we needed any reminder about the historic nature of this Second Reading, it could not have been brought home to us more forcefully than the intervention of the noble and learned Lord, Lord Archer. It is difficult to convince oneself that it is now more than 35 years since he became Her Majestys Solicitor-General, an office which he adorned for many years. I know, because he has told me on a previous occasion, how much he admired Lord Scarman; and his story about their conspiracy does not surprise me in the least. The fact that the noble and learned Lord, Lord Archer, not only took the trouble to come this afternoon but also contributed has enriched the whole occasion.
The initial stage of this new procedure involves the three political parties agreeing that this Bill is uncontroversial. I was perfectly happy to do that and continued in this sublime state of ignorance until I heard the intervention of the noble Baroness, Lady Deech, whose intermittently excoriating remarks about the Governments draft led me to believe that we are going to have a much more exciting Committee stage than I thought we would. We are extremely lucky that the noble Baroness has taken an interest in this matter. She reminded your Lordships that she lectured on this subject at Oxford University for 20 years. But she modestly failed also to say that she plays a prominent part in the footnotes of the Law Commissions Bill, particularly in respect of an article entitled, Lives in Being Revived, which appeared in the greatest legal periodical that we publish in this country, the Law Quarterly Review. I look forward greatly to later stages of this Bill when I know that the noble Baroness will play a prominent part.
The noble Lord, Lord Goodhart, made what I believe the noble Lord, Lord Bach, would describe as a characteristically Goodhartian intervention. The noble
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However, the Opposition have their own well established track record in this sphere. My noble friend Lord Henley is a member of the committee. Indeed, he sits beside me as I speak. His great-great-great-great grandfather was Robert Henley, the Earl of Northington, who, in 1759, sitting in your Lordships House as Lord Keeper, handed down a much admired and much cited judgment on perpetuities and entails in the leading case of Marlborough (Duke) v Earl Godolphin. He said, inter alia:
The common law seemed wisely to consider that the real property of this state ought, to a degree, to be put in commerce, to be left free to answer the exigencies of the possessors and their families, and therefore permitted no perpetuities by way of entails: although it allowed contingent remainders, it afforded them no protection ... if the law would permit the confinement of an estate beyond a life in being, and the time for a remaindermans minority to expire.
I also observe that we are extremely fortunate to have heard this afternoon from my noble friend Lord Hodgson, whose combined experience of intensive work on charities law when it came before your Lordships' House not long ago, together with his experience in the City, has given us a great deal of matters to think about.
Unlike many of your Lordships who have spoken this afternoon, I have been rather taken by the Bill. I suppose that the reason for that is the way in which I approached it by, first, looking carefullysome might say uncharacteristically carefullyat the Law Commission report, which I find a most impressive document. I start as someone who has no experience in practice of this subject; so I am perhaps impressed in a way that some who are more familiar with it were not.
A property owner is thinking of making a will or creating a trust. How far into the future should the law allow him or her to reach when tying up that property? Can he or she control the devolution of that property indefinitely? For a lifetime? For a fixed period of years? How far should one generation be given the freedom to dispose of property in ways that will restrict the freedom of the next?.
As your Lordships know, since Lord Nottingham's judgment in the Duke of Norfolk case in 1681, there has been a rule against perpetuities, requiring future dispositions of property to vest within a prescribed time limit and making void those dispositions that fall outside it. Despite its name, the rule is concerned with the commencement of interests rather than their duration.
Historicallyas, again, I am sure your Lordships are well awarethe rule falls into two phases. For dispositions taking place before 16 July 1964, the date when the Perpetuities and Accumulations Act took effect, the common law rule prevailed. That is to say that a future interest in property will be void from the date that the instrument that seeks to create it takes effect if there is the merest chance that the interest may invest outside the perpetuity period. This period comprises one or more lives in being plus 21 years. After 15 July 1964, the interest will be void only if it is inevitable that it vests outside the perpetuity period. It is therefore necessary to wait and see to determine whether or not the interest will vest within the prescribed common law period. The 1964 Act furnishes an alternative perpetuity period of up to 80 years and 21 years for options.
Your Lordships have heard the trenchant criticisms made by the noble Baroness, Lady Deech, about the deficiencies in the wait and see approach. She is quite right in saying that that concept is preserved in the new law. I must confess that I find her observations most illuminating in that regard. I shall find myself in Committee being more inquiring about that matter than I might otherwise have been.
As far as accumulations are concerned, at common lawagain, as we have learnt this afternoonthey were permitted for the duration of the perpetuity period. The modern ruleagain, as we have learnt this afternoonhas its origin in the Accumulation Act 1800, which followed the notorious case of Thellusson v Woodford, whose judgment was handed down in 1799. In its existing state, the law prescribes no fewer than six periods during which the accumulation of income is permitted. Four are set out in Section 164 of the Law of Property Act 1925, and two more in Section 13 of the 1964 Act.
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