Apportionment
47.Section 25 of the Act implements recommendation 29 in the Report on Trust Law. It relates to a trustee’s power to apportion trust assets to beneficiaries as they see fit in accordance with the purposes of the trust. This section re-enacts the Powers of Appointment Act 1874, which allows trustees, if they consider it appropriate to do so and subject always to the trustee’s fiduciary duty and duty to give effect to the trust purposes, to exercise their power of apportionment of trust property in such a way that a particular beneficiary receives nothing. The 1874 Act is repealed by section 87 and schedule 2 of the Act. This provision is of particular relevance in cases where a trust deed provides for a deliberately broad class of beneficiaries including those who have only a remote possibility of ever benefiting.
48.Section 26 of the Act implements recommendation 28 which relates to section 2 of the Apportionment Act 1870. The 1870 Act changed the common law (under which an instalment of an annuity, rent and interest on heritable bonds did not vest until the time for payment arrived); section 2 of the 1870 Act provides that all rents, annuities, dividends and other periodical payments in the nature of interest are to be considered as accruing from day to day and are therefore apportionable timewise. Time apportionment is of practical importance where a liferent begins or terminates between dates upon which a periodic payment falls due. Such payments may have to be apportioned between the liferenter and those entitled to income before the liferent commenced or after it terminates. Time apportionment at the beginning and end of a liferent can produce the result that liferenters receive little or no income at the start of the liferent (which may be the very time when they are most in need of it). Time apportionment is also relevant to Scottish trust practice on the sale or purchase of income producing investments. The effect of section 26 is that, as a default, trustees are not bound to apply the rules of time apportionment in section 2 of the Apportionment Act 1870 but may instead elect to allow the sums to accrue as they arise.
49.Section 27 implements recommendation 27. The intention is to disapply certain 19th century common law rules which oblige trustees to make “equitable apportionment” of trust assets in particular situations. The principal rules of equitable apportionment are as follows:
The rule in Howe v Earl of Dartmouth (1802) 7 Ves 137. If a trust is created over moveable property which comprises wasting assets or unauthorised investments (investments which are outwith the trustees’ powers), such property must generally be sold and the proceeds invested in authorised securities. The rule is founded on the need to balance the interests of income and capital beneficiaries. Wasting assets may not outlive the liferent, and unauthorised investments historically were likely to produce a high income but with a serious risk to capital. A second branch of the rule deals with a situation where the wasting assets or unauthorised investments have not been sold: in that event the trust property is treated as between income beneficiaries and capital beneficiaries as if the property in question had been sold and the proceeds invested in proper investments. The income beneficiaries are then entitled to a “fair equivalent” of the sums that such assets would have yielded on sale.
The rule in Re Earl of Chesterfield’s Trusts (1883) 24 Ch 643. This rule applies where a truster is entitled to reversionary property, moveable in nature and not currently yielding income, and directs it to be sold but leaves the time of sale to the discretion of trustees, who decline to sell it until it falls into possession. In that event, a number of complex calculations must be undertaken. Essentially the trustees are to ascertain the sum which, with accumulations of compound interest (assuming yearly rests and after deducting tax), would, on the day when the reversion falls in or is realised, amount to the sum actually received. The sum ascertained in that way is treated as capital.
The rule in Allhusen v Whittell (1867) 4 Eq 295. This is the corresponding rule relating to debts, liabilities and other charges payable out of trust property. The general rule requires that, as liferenters are entitled to the profits of the trust property, they must also bear the burdens attending the liferented subjects, including debts payable in respect of those subjects. This may include repairing and similar obligations.
50.The common law rules have been disapplied in England and Wales by section 1 of the Trusts (Capital and Income) Act 2013. Since there is some doubt as to whether all of the rules are in fact part of Scots law, the provision does not follow the 2013 Act’s technique of referring to the rules by name. The intended effect, however, is identical.
