Thomas v Marshall

An absolute and unconditional gift of money or investments to a settlor’s infant, unmarried child may constitute a “settlement” under section 21 of the Finance Act 1936. The statutory definition enlarges the ordinary meaning of “settlement” by including any transfer of assets. Each expression in that definition bears its ordinary meaning unless the statutory context requires a restriction.

Where income is paid to or for the child by virtue or in consequence of such a transfer, it is treated as the settlor’s income. Whether the necessary causal connection exists is a factual question for the Commissioners.

The appellant made absolute and unconditional gifts for his two infant children. He paid money into Post Office Savings Bank accounts in their names and bought Defence Bonds for them. The Inspector of Taxes treated the resulting interest as the appellant’s income under section 21 of the Finance Act 1936.

The Commissioners, Donovan J and the Court of Appeal successively upheld that treatment. Before the House of Lords, it was common ground that the appellant was the settlor and that income was paid to the children by virtue or in consequence of the gifts. The sole issue was whether the absolute gifts were “settlements” within section 21.

1. Appeal dismissed unanimously, with costs. Lord Morton of Henryton delivered the leading speech. Lord Normand, Lord Oaksey, Lord Reid and Lord Cohen concurred.

2. Per Lord Morton, section 21(9)(b) of the Finance Act 1936 enlarges “settlement” beyond its ordinary meaning. Wherever that word occurs in section 21, it must be read as including each listed transaction, including a disposition, trust, covenant, agreement, arrangement or transfer of assets. A listed transaction need not possess the characteristics of a settlement in the ordinary sense.

3. The use of the appellant’s money to make deposits into a child’s account and to purchase Defence Bonds in the child’s name constituted transfers of assets in the ordinary meaning of that expression. The gifts therefore fell within the statutory definition despite being absolute and unconditional. The Court of Appeal’s decision in Hood-Barrs v C.I.R., 27 T.C. 385, was correct and indistinguishable.

4. The statutory language supplied no basis for requiring a restraint on alienation, a division between income and capital beneficiaries, or a separation of legal and equitable ownership. Importing the ordinary character of a settlement into each expression in the definition would defeat its enlarging function and generate uncertainty.

5. Possible difficulty in deciding whether later income arose “by virtue or in consequence of” a gift concerns application, not construction. The Commissioners must determine that causal question on the facts of each case.

6. The authorities concerning other statutory schemes did not justify a narrower construction. St. Aubyn v Attorney-General [1952] AC 15 concerned the distinct context of section 46 of the Finance Act 1940. Lord Normand expressly qualified the potentially broad language in his earlier speech. The bankruptcy authorities permitted a restriction because section 47 of the Bankruptcy Act 1883 had the particular object of avoiding transactions against a trustee in bankruptcy. Section 21 contained no comparable restriction and was framed to encompass a wide range of transactions producing income for a settlor’s child.

1. House of Lords: The appeal was dismissed unanimously, affirming the conclusion that the gifts were settlements under section 21 of the Finance Act 1936.
2. Court of Appeal: The court affirmed the decision below and answered the statutory question in the affirmative.
3. High Court: Donovan J held that the absolute gifts were settlements within section 21.
4. Commissioners: The Commissioners upheld the assessment treating the relevant interest as the appellant’s income.