Vandervell v Commissioners of Inland Revenue

The House of Lords held that a transfer of legal title will pass the beneficial interest where the transferor intends to divest himself of the whole estate, so section 53(1)(c) of the Law of Property Act 1925 does not require a separate written disposition of the equitable interest in that situation.

Where a donor creates an arrangement leaving the beneficial interest undefined, the equitable interest remains with the donor by operation of resulting trust until it is effectively and completely divested.

The appellant caused 100,000 'A' ordinary shares to be transferred to the Royal College of Surgeons to provide funds for a charitable chair. An option to repurchase those shares for £5,000 was granted to a trustee company. The Inland Revenue assessed the appellant under the Income Tax Act 1952, section 415, on the basis that he had not absolutely divested himself of the beneficial interest. The Special Commissioners and the Court of Appeal found a resulting trust in the appellant's favour in respect of the option and upheld the assessment. The appeal to the House of Lords raised (1) the effect of section 53(1)(c) of the Law of Property Act 1925 on the transfer of beneficial interests and (2) whether, on the facts, a resulting trust arose over the option (and thus the shares).

1. Outcome: Appeal dismissed by majority (3–2). Lords Upjohn, Wilberforce and Pearce would dismiss; Lords Reid and Donovan would allow. The Court therefore affirms that, on the facts found, the appellant did not divest himself absolutely of the source of income and the assessments stand.
2. Section 53(1)(c) LPA 1925: Per Lord Pearce, Lord Donovan and Lord Wilberforce, where the legal and beneficial estates are intended by the owner to be transferred together, a transfer of the legal estate effected in accordance with that intention will pass the beneficial interest without a separate writing under section 53(1)(c). The subsection is directed to dispositions of equitable interests divorced from the legal estate and does not impose extra-formal requirements where the transferor has done everything to transfer the whole estate (see per Lord Pearce; per Lord Wilberforce).
3. Resulting trust principle: The House restated that where a donor has not in law effectually divested himself of a beneficial interest, equity implies a resulting trust in his favour. The question is one of intention to be inferred from the primary facts and surrounding circumstances (per Lord Upjohn and Lord Wilberforce).
4. Application to the option: The majority (Lords Upjohn, Wilberforce and Pearce) held that on the facts the option was held by the trustee company on trusts not then defined, which produced a resulting trust back to the appellant in respect of the beneficial interest until the trusts were defined. That failure to divest the beneficial interest was fatal to the appellant's tax defence under s.415. Lords Reid and Donovan disagreed on the inference of intention and would have found the option was granted absolutely to the trustee company.
5. Practical guidance: Whether a resulting trust arises depends on the intention of the donor, inferred from documents and conduct. Where the beneficial interest is left "in the air" by an undefined trust arrangement, the beneficial interest remains with the settlor until effectively disposed of.
6. Order: Appeal dismissed (majority). Costs and consequential tax matters left to the tribunal process as appropriate.

• Court of Appeal – affirmed the Special Commissioners' finding that the trustee company held the option on trust and that a resulting trust arose; Court of Appeal decision upheld the assessments (reported in the Case Stated).
• Special Commissioners – found that the trustee company held the option and would hold the shares as trustee and made the assessments under the Income Tax Act 1952.