Inland Revenue Commissioners v Broadway Cottages Trust

A trust is valid only if the Court can control and execute it. A discretionary trust of income is void where trustees must select recipients from a class that cannot be completely ascertained, even though individual membership can be determined. The Court cannot cure the defect by replacing trustees or creating an arbitrary default trust. Nor can an irrevocable power of appointment be extracted from an invalid trust. Income paid under such a clause is held on resulting trust for the settlor and is not income of the charitable recipient.

The Special Commissioners decided that Broadway Cottages Trust and The Sunnylands Trust were entitled to exemption under section 37(1)(b) of the Income Tax Act 1918 for sums received from trustees of a settlement. Mr Justice Wynn-Parry allowed the Commissioners of Inland Revenue’s appeals and held that the settlement created no valid trust of income.

The charities appealed to the Court of Appeal. The settlement contained a discretionary trust of income for the settlor’s wife and a broad class of beneficiaries, including the two charities. The class was individually ascertainable but could not be exhaustively enumerated. The central issue was whether the discretionary selection mechanism made the trust valid and whether the sums received were income of the charities.

1. Appeals dismissed. The appeals by Broadway Cottages Trust and The Sunnylands Trust were dismissed with costs. Leave to appeal to the House of Lords was granted.
2. The charities’ status and their general entitlement to exemption under section 37(1)(b) of the Income Tax Act 1918 were not in dispute. The issue was whether the payments received were income of the charities.
3. The Court adopted the principle stated in Morice v The Bishop of Durham, 10 Vesey 522: a valid trust must be capable of control and execution by the Court. Validity must be assessed by considering what might happen, including trustee failure or refusal to act, rather than merely what was likely to happen in practice.
4. The trust of income was void for uncertainty. The trustees had an uncontrolled discretion to select one or more beneficiaries from a class which could not be exhaustively ascertained. The Court could neither compel a distribution, exercise the trustees’ discretion itself, nor execute a default trust for the whole class. Replacing the trustees would merely substitute another body with the same uncontrolled discretion and would not amount to execution of the trust.
5. The Court accepted the reasoning in In re Ogden, 1933 Ch 678, and treated the relations authorities as sui generis. They provided no basis for creating an arbitrarily restricted trust in default of selection. An invalid trust could not be converted into a separate irrevocable power of appointment. The income was instead held on resulting trust for the settlor. The settlor’s authorisation of earlier payments did not make them income of the charities for tax purposes.

1. Court of Appeal. Dismissed both appeals with costs and granted leave to appeal to the House of Lords.
2. High Court. Mr Justice Wynn-Parry allowed the Commissioners of Inland Revenue’s appeals from the Special Commissioners.
3. Special Commissioners. Held that Broadway Cottages Trust and The Sunnylands Trust were entitled to exemption in respect of the sums received.