26 May 2011 - Court of Appeal allows appeal in Southgate v Sutton

The Court of Appeal has allowed an appeal against a decision by Mr Justice Mann that the trustees of a substantial family trust could not be given a power to create a sub-fund under section 57 of the Trustee Act 1925. The Court of Appeal has also allowed an appeal in respect of a second issue in the case, namely the trustees' bid for approval of the exercise of the statutory power of advancement under section 32 of the Trustee Act 1925.

The case concerned a settlement made by four brothers for each of their families. Under the terms of the settlement the fund was to ultimately be divided between the issue of the brothers on a 'per stirpes' basis. There were cross-accruer provisions within each stirps and in favour of other stirps if any failed.

The Appellants, who were the beneficiaries of one of the branches, were resident in the United States for tax purposes. If the fund was left as it was, both the fund and the Appellants could have faced potentially disastrous tax consequences owing to the combined effect of UK and US tax provisions.

The trustees asked the court to confer a power on them under section 57 of the Trustee Act 1925 to create a sub-fund to be administered by US-appointed trustees, with the Appellants being entitled to beneficial interests in the whole of the property appropriated to the sub-fund. The aim was to reduce liability to taxes in both the UK and US.

The trustees sought approval of the use of the statutory power of advancement in order to extinguish the cross-accruer provisions in the settlement, in order to save further tax.

Mr Justice Mann refused in a 2009 High Court judgment (which can be found here) to grant the section 57 power on the grounds that the effect of the transaction would be to render the beneficial interests in the trust property 'conceptually different', meaning that the court was not able to confer the power within the terms of the statute. The Judge objected in particular to the fact that, on the creation of the sub-fund, trusts would be created of divided shares in place of the former trusts of income over an undivided fund.

The Judge then went on to refuse the application in relation to the power of advancement, on the grounds that the extinguishment of cross-accruer rights did not amount to a dealing with the trust property vested in the trustees (as was required under s. 32) but a variation of the underlying trusts.

The Appellants appealed and were supported by the trustees. The Court of Appeal has now unanimously overturned Mr Justice Mann's decision, holding that the conferral of the section 57 power would not render the trusts 'conceptually different'. In fact, the court held, the effect on the beneficial interests under the trust would be incidental only, meaning that the court was able to confer the power.

On appeal, the parties proposed a new form of draft resolution for exercising the power of advancement, which sought to take account of Mr Justice Mann's concerns. The Court of Appeal accepted that the new draft was within the trustees' powers under section 32.

Shân Warnock-Smith QC appeared successfully for the trustees. The Court of Appeal judgment can be found here.