Gartside v Inland Revenue Comrs

An object of a discretionary trust has a right to proper consideration by the trustees and to the protection of a court of equity. Where the trustees may accumulate the whole income, however, neither an individual object nor the objects collectively has an interest extending to any ascertainable part of that income for estate duty purposes.

An interest under the relevant estate duty provisions must have a definite extent by reference to the whole or part of the property's income. A mere possibility of benefit is therefore neither such an interest nor an interest in possession. Combining contingent interests in expectancy with discretionary rights cannot create an interest in possession.

A testator directed his trustees, during his son's life, to distribute as much income as they thought fit among the son, his wife and children, and to accumulate any surplus. The trustees could later apply accumulated income for the same class. Shortly before the permissible accumulation period ended, they advanced investments worth about £47,000 for the son's twin children.

After the son died, the Inland Revenue claimed estate duty on the advanced property under section 43(1) of the Finance Act 1940. The Crown contended that the advances had determined interests in possession which would otherwise have ceased on the son's death. The lower courts accepted that the discretionary beneficiaries had interests and principally considered whether those interests were in possession. The central issue was whether their discretionary rights constituted interests, or interests in possession, within the estate duty legislation.

1. Appeal allowed unanimously. Lord Reid and Lord Wilberforce delivered the substantive speeches. Lord Morris of Borth-y-Gest and Lord Guest agreed with Lord Reid; Lord Hodson agreed with Lord Wilberforce. The House restored the judgment of Ungoed-Thomas J.
2. Per Lord Reid and Lord Wilberforce, the word “interest” in section 43(1) of the Finance Act 1940 referred to the same kind of interest as section 2(1)(b) of the Finance Act 1894. Sections 2(1)(b) and 7(7) required an interest whose cesser produced an ascertainable benefit. It must extend to the whole income or to a definite part of it.
3. The discretionary beneficiaries had no such interest. Each had a right to be considered as a potential recipient, to require a bona fide exercise of discretion, and to obtain equitable protection. Those rights had substance, but no definable extent in the income. The trustees could accumulate the whole income. Consequently, neither an individual beneficiary nor the beneficiaries collectively could demand any part of it.
4. Per Lord Reid, even if the discretionary rights could be called interests, they were not interests in possession. An interest in possession enables its holder presently to claim the subject of the interest. A right merely to require trustees to consider making a payment provides no right to claim that payment.
5. Per Lord Wilberforce, the grandchildren's interests under the primary accumulation trust were interests in expectancy. The beneficiaries under the power to distribute accumulations had no relevant interest. Combining those distinct rights could not produce an interest in possession. The advances therefore determined no interest within section 43.
6. The decisions concerning reserved benefits under section 38(2)(c) of the Customs and Inland Revenue Act 1881 did not govern section 2(1)(b) of the 1894 Act. Their wider construction of “interest” reflected a different statutory purpose and a charge measured by the whole property. Nor could authorities decided under section 1 of the 1894 Act be translated retrospectively into authorities on section 2(1)(b).

1. House of Lords: Allowed the appeal unanimously and restored the judgment of Ungoed-Thomas J.
2. Court of Appeal: Accepted substantially the Crown's contention that the discretionary beneficiaries had interests and held that an interest in possession could be found. Citation not stated in the judgment.
3. High Court: Ungoed-Thomas J rejected the Crown's claim; his observations are reported at [1966] 3 WLR 778.