Commentary on Sections
Section 1: Disapplication of apportionment etc rules
24.Section 1 disapplies the specified statutory and equitable rules of apportionment for all trusts created or arising on or after the day on which the section comes into force: subsection (5). This includes a trust created by will, or arising under the intestacy rules, in relation to a death on or after that day; a trust established by a settlor in his or her lifetime; and a separate trust created by the exercise of a power associated with a trust already in existence. The rules are described at paragraph 12 above.
25.Subsection (1) disapplies the time apportionment rule imposed on trustees by section 2 of the Apportionment Act 1870. The effect is that an income receipt is due to the beneficiary who is entitled to income at the time when it arises. There is no longer any requirement to apportion an income receipt where the entitlement to income has changed during the period over which it accrued.
26.A further effect of subsection (1) is relevant to trusts where the trustees have power to maintain a class of beneficiaries out of income to which they are not yet absolutely entitled – for example, a trust “for the children of C”. Subsection (1) makes it unnecessary, when a child is born, to carry out an apportionment calculation to ascertain the income from which that child can be maintained.(4) Instead, income as it arises is available for the maintenance of the beneficiaries entitled to be maintained from it.
27.Subsection (2)(a) disapplies the first part of the rule in Howe v Earl of Dartmouth. The effect of subsection (2)(a) is that trustees will not be under an immediate obligation to sell residuary personalty where it consists of an unauthorised investment of a wasting and hazardous nature. They may still choose to do so in any event; but in some circumstances immediate sale would be unwise, and without the rule the trustees can exercise their discretion in the context of their general duty of care. Subsection (3) specifies that the trustees have power to sell where previously they had a duty to sell.
28.Subsection (2)(b) disapplies the second part of the rule in Howe v Earl of Dartmouth. The effect of the disapplication of the rule is that where a trust for interests in succession holds unauthorised investments consisting of hazardous or wasting property, and a trust for sale applies, the income beneficiary will be entitled to the actual income from such investments as it arises.
29.Subsection (2)(c) disapplies the rule in Re Earl of Chesterfield’s Trusts. The effect is that, where a trust for interests in succession holds property that does not in fact produce any income until it falls into possession (such as a reversionary interest), such property will be treated as capital when it comes into the possession of the trustees.
30.Subsection (2)(d) disapplies the rule known as the rule in Allhusen v Whittell. The effect of the disapplication of the rule is that where a testator’s residuary estate is left on trust for interests in succession, the debts, legacies, annuities and other charges payable from the residuary estate will only be payable out of capital.
31.Subsection (4) provides that subsections (1) to (3) are subject to contrary provision in the trust instrument, or in any power by which the trust was established. The effect of this subsection is that settlors or testators who wish to include any of the rules disapplied in subsections (1) and (2) may do so by excluding the section or by expressly invoking the rule by name in the trust instrument.
Section 2: Classification of certain corporate distributions as capital
32.Subsection (1) provides that where a trust receives a tax-exempt corporate distribution (as defined in subsection (3)) it is to be treated as a receipt of capital, rather than income. If it is received by a private trust for interests in succession, the distribution will therefore be held as capital rather than being paid out to the income beneficiary; and where the shareholders are the trustees of a charity with permanent endowment, the distribution will be held as capital by the trustees and added to the permanent endowment. “Distribution” here includes a distribution of assets, whether in cash or otherwise, and whether by dividend or otherwise.
33.This classification applies to all trusts, including those established before the commencement of the section (subsection (6)). It is subject to contrary intention in the trust instrument, or in any power by which the trust was established, as to the classification of such receipts (subsection (2)).
34.Subsections (1) and (3)(a) change the classification of shares distributed to a trust by way of dividend in the course of a demerger. They do so by reference to distributions falling within sections 1076, 1077 and 1078 of the Corporation Tax Act 2010, which provide that shares distributed in the course of certain direct or indirect demergers are exempt from income tax (they are “exempt distributions”). The effect of subsections (1) and (3)(a) of the section is that such shares are to be regarded as capital in the hands of trustee shareholders.
35.Subsection (3)(b) gives the Secretary of State a power to specify by order other tax-exempt distributions by corporate bodies which are to be treated as a receipt of capital by trustees.
36.Subsections (4) and (5) limit the Secretary of State’s power to make such an order by statutory instrument subject to a negative resolution procedure (subsection (5)). Subsection (4) provides that such an order can only be made where the distribution is not subject to income tax or capital gains tax, for example where an exemption from tax, similar to that applicable to distributions to which subsection (3)(a) applies, is extended to other corporate receipts.
Section 3: Power to compensate income beneficiary
37.Section 3 provides trustees with a power to compensate income beneficiaries where there has been a tax-exempt distribution classified as capital under section 2 (subsection (1)(a)). This power can only be exercised where the trustees are satisfied that it is likely there would have been a receipt of income from the body corporate, had the distribution not been made (subsection (1)(b)). For example, a demerging company may have not have paid a dividend which would otherwise have been paid (or may have paid a smaller dividend) because the directors decided instead to “roll up” profits in the demerger shares.
38.Subsections (2) and (3) enable trustees to use capital in order to put an income beneficiary, to the extent that it is practicable, in the position in which the trustees consider he or she would have been if the trust had received the income which they are satisfied was not paid because of the tax-exempt distribution. Thus in the above example, the trustees could make a payment to the income beneficiary to make up for the non-receipt of the dividend (or larger dividend) which they have concluded would have been paid if the demerger had not occurred. They could alternatively transfer trust property (such as shares) to the income beneficiary. Any such payment or transfer is treated as a receipt of capital in the hands of the income beneficiary.
39.Subsection (4) defines “income beneficiary”; this term is not limited to beneficiaries who are entitled to receive income as of right, but includes beneficiaries who may receive income at the trustees’ discretion. It is defined in terms of persons who are entitled to or may benefit from the income, and does not include, for example, a charitable purpose.
Section 4: Total return investment by charities
40.Section 4 enables the trustees of a charity with permanent endowment to invest on a total return basis by making a resolution to adopt a Charity Commission total return investment scheme, where they consider that it is in the interests of the charity to do so.
41.Accordingly, Section 4 inserts two new sections in the Charities Act 2011. New section 104A enables the trustees, if a specified condition is met, to make a resolution replacing the restrictions with respect to expenditure of capital that are imposed by the terms applicable to the permanent endowment with the requirements of the Charity Commission’s total return scheme. New section 104B enables the Charity Commission to make regulations setting out the details of its total return investment scheme and procedural provisions regarding charity trustees’ resolutions to adopt the scheme.
42.Section 104A applies to all charities with permanent endowment: section 104A(1) and (5). Section 104A(2) enables the charity trustees to pass a resolution in respect of part or the whole of the permanent endowment fund where they consider that it ought to be freed from the applicable restrictions to enable investment without the need to maintain a balance between capital and income returns. The effect is that the relevant restrictions on capital expenditure no longer apply to the fund affected by the resolution; instead, the Charity Commission’s total return investment regulations apply (section 104A(4)). The charity trustees must be satisfied that this is in the charity’s interests in order to pass a resolution under section 104A(2): section 104A(3).
43.“Available endowment fund” is defined in section 104A(5); this is the same definition as is found in sections 281 and 282 of the Charities Act 2011. The effect of this definition is that section 104A applies separately to each part of a charity’s permanent endowment which is subject to separate trusts. Where a charity has more than one available endowment fund, a separate resolution will be needed for each fund that the trustees wish to manage in accordance with the Charity Commission’s total return investment scheme.
44.Section 104B sets out the Charity Commission’s power to make regulations. Section 104B(1)(a) enables regulations to be made concerning resolutions under section 104A.
45.Section 104B(1)(b) enables the Charity Commission to make regulations concerning the investment of the relevant fund on a total return basis, and the expenditure from such a fund. “Relevant fund” is defined in subsection (6), and includes both the fund affected by the resolution under section 104A and all investment returns on it, both capital and income.
46.Section 104B(2) and (3) contain illustrative lists of requirements and restrictions that may be included in the regulations made under section 104B(1)(a) and (b); it will be for the Charity Commission to decide on the specific provisions. For example, the Charity Commission may make regulations under section 104B(1)(a) requiring charity trustees to notify the Commission of the making of a resolution within a specified period of it being passed, and regulations under section 104B(1)(b) may impose restrictions on expenditure or require investment and allocation of investment returns in such a way as to maintain the long term capital value of the fund, so far as practicable. Nothing in this section affects the general duties of charity trustees, for example to have regard to both present and future needs of the charity.
47.Section 104B(1)(c) enables the Charity Commission to make regulations about action the charity trustees need to take in respect of a part or the whole of a fund if a resolution previously made under section 104A ceases to apply to it.
48.Provisions for the accumulation of income (that is, converting income to capital) may be included in the regulations made under section 104B(1)(b) and (c). Section 104B(4) states that any such provisions are not subject to section 14(3) of the Perpetuities and Accumulations Act 2009, which restricts any accumulation of income to the statutory accumulation period of 21 years.
Section 5: Crown application, commencement and extent
49.Subsection (3) provides for sections 5 and 6 of the Act to come into force on the day on which it is passed. The remaining sections will come into force on such day as the Secretary of State specifies by order made by statutory instrument. Subsection (4) makes it clear that such an order may specify different days for different purposes, and the Secretary of State is given power to make additional provision in that regard, for example to meet any additional requirements for transitional provisions.
Overturning Re Joel [1967] Ch 14.
