Pierce & Ors v Wood & Ors

Section 249(6)(b) of the Income and Corporation Taxes Act 1988 treats an enhanced scrip dividend received by trustees as income for trust-law purposes as well as for income-tax purposes. The shares and their sale proceeds therefore remain trust income unless validly accumulated and converted into capital.

Accumulation depends on the particular facts. Non-distribution, reinvestment and accounting treatment do not by themselves establish an intention to accumulate. A deed that cannot achieve its expressed object cannot be construed as producing an unintended lesser effect contrary to the trustees’ fiduciary duties. Any alternative application of the Hastings-Bass principle was unnecessary.

The present trustees of three discretionary lifetime settlements sought directions concerning enhanced scrip dividends received by the settlements. The beneficiaries supported the application, and the proceedings were non-contentious.

The court considered whether the scrip dividend shares and their sale proceeds were income or capital for trust-law purposes, whether the trustees had accumulated them, and, if so, whether the relevant deeds were void or voidable under the Hastings-Bass principle.

1. Trust income. The effect of Income and Corporation Taxes Act 1988, section 249(6)(b), as construed in Howell v Trippier [2004] EWCA Civ 885, was that the scrip dividend shares were income in the trustees’ hands for trust-law purposes as well as for income-tax purposes. Their sale proceeds consequently retained that character.
2. Accumulation. Whether income had been converted into capital depended on the facts. The trustees had made no express or implied decision to accumulate the relevant income. Their failure to distribute, continued reinvestment and accounting treatment were consistent with the proceeds remaining income and did not prove accumulation.
3. 1998 deeds. The deeds, which sought to treat any section 249 distribution as capital, could not override section 249(6)(b) or convert the receipts into capital immediately. The court rejected construing them as an intention to accumulate the income, since that would require the trustees to act contrary to the best interests of the beneficiaries. The deeds were therefore nugatory so far as the legal character of the scrip dividends was concerned.
4. Hastings-Bass. It was unnecessary to decide the issue because no accumulation had occurred. If the deeds had been effective to exercise a discretion, however, the principle would have justified treating the exercise as void or voidable. The court also rejected the Revenue’s reliance on an observation in Sieff v Fox [2005] EWHC 1312 (Ch), because the later decision had rendered the deeds nugatory rather than merely producing an unexpected fiscal consequence.
5. The first and second questions in the Part 8 claim were answered in the claimants’ favour. The third question did not arise.