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EXTRA DIVISION, INNER HOUSE, COURT OF SESSION
[2024] CSIH 12
P423/23
Lord Malcolm
Lord Doherty
Lord Tyre
OPINION OF THE COURT
delivered by LORD TYRE
in the Petition
of
CHARLES HAROLD ALEXANDER BUTTER AND OTHERS
as Trustees of the Pitlochry Estate Trust
Petitioners
for
Approval of an arrangement under section 1 of the Trusts (Scotland) Act 1961
Respondent
Petitioners: Welsh; Turcan Connell
Minuter (adult beneficiaries): Colquhoun; Turcan Connell
Minuter (curator ad litem to child beneficiaries): Watt; Turcan Connell
Minuter (curator ad litem to child beneficiaries): MacLeod; Turcan Connell
10 May 2024
Introduction
[1]
In this application under section 1(1) of the Trusts (Scotland) Act 1961, the petitioners
seek the approval by the court, on behalf of minor and unborn beneficiaries, of an
2
arrangement varying trust purposes by postponing the date of vesting and by extending the
class of potential beneficiaries to include the widow of the current liferenter, restricted to an
interest in income only. Minutes were lodged on behalf of the adult beneficiaries, stating
that they consented to the arrangement, and by the curators ad litem to two classes of child
beneficiaries with differing interests, stating that they considered that the arrangement
would not be prejudicial to their respective wards.
The trust provisions
[2]
The trust was created by a deed of trust granted by the late Sir David Henry Butter
dated 28 April 1966 and registered in the Books of Council and Session on 14 November
1966. The deed of trust provided for the trust fund to be held for behoof of such members of
a wide category of family beneficiaries, and in such proportions, as the trustees might in
their sole discretion select. The trustees were empowered to exclude any persons from the
category of beneficiaries. They were obliged to exercise their power of selection in respect of
the whole trust fund not later than 1 January 2030, the trust capital vesting immediately
upon selection unless the minute of selection provided otherwise. In the event of any part of
the trust fund not having vested in one or more of the discretionary beneficiaries on or
before 1 January 2030, it would vest on 2 January 2030 equally among children and remoter
issue of the truster per stirpes. In the meantime, prior to the acquisition of vested rights in
capital, the trustees were empowered to pay the trust income to any one or more of the
discretionary beneficiaries in such proportions as they might determine.
[3]
The trustees have exercised the powers conferred on them as follows:
A liferent (for tax purposes, an interest in possession) of the trust estate was
conferred on the first petitioner with effect from his attainment of age 21 in 1981.
3
A revocable minute of selection was executed in 2022, providing that the capital
shall, subject to the first petitioner's liferent, vest on 1 January 2030 in the first
petitioner, if he is alive at that date, which failing his son B, if he is alive, which
failing his daughter A, if she is alive.
An irrevocable deed of exclusion was executed in 2023, excluding from any
benefit under the trust all of the discretionary beneficiaries except (i) the first
petitioner and his children and remoter issue, and (ii) another beneficiary named
Charles Morrison and his children and remoter issue.
The purpose of the proposed arrangement
[4]
The first petitioner is presently aged 64. His wife is aged 48. The first petitioner's
daughter A is aged 17 and his son B is aged 15. Notwithstanding the terms of the revocable
minute of selection, it is not the intention of the trustees that the trust capital will vest in the
first petitioner. The intention is that the capital will vest in due course in B. The trustees,
including the first petitioner, wish this to happen as soon as is practicable, but with due
regard firstly to B's young age, secondly to the impact of distribution of some trust assets on
the financial support available for other such assets, and thirdly to the mitigation of
liabilities to inheritance tax and capital gains tax.
[5]
The first petitioner's liferent is a qualifying, ie pre-2006, interest in possession. As
matters stand, a charge to inheritance tax will occur on the termination of his interest in
possession, whether by his death or by the vesting of capital on or before 1 January 2030 in
someone other than himself. Subject to availability of reliefs, charges to capital gains tax will
occur as and when assets are distributed from the trust, and when the remainder of the
capital in the trust fund vests. In the event of the death of the first petitioner prior to
4
distribution of the whole fund, assets remaining in trust would obtain a tax-free uplift in
base cost for CGT purposes.
[6]
The trustees wish to increase the flexibility available to them in the distribution of
capital to B. In order to achieve this, they seek to vary the terms of the trust (i) by
postponing the vesting date from 1 January 2030 until 1 January 2090; and (ii) by
introducing a life interest in favour of the first petitioner's wife in the event of the death of
the first petitioner. Postponement of vesting is considered to be in B's interests because it
will allow distribution of capital in a tax-efficient manner and thereby significantly increase
the funds eventually received by him. The prospect of a very substantial CGT charge
occurring on or before 1 January 2030 would be avoided or at least mitigated. The trustees
envisage that a period of around 10-15 years will be required to effect the transfer of the
trust estate into B's hands.
[7]
The purpose of creation of the life interest in favour of the first petitioner's wife is
said to be to mitigate the tax consequences were the first petitioner to die, survived by her,
before the distributions of capital from the trust had been completed. Her interest would
qualify as a "transitional serial interest" for inheritance tax purposes so that no IHT charge
would occur on the death of the first petitioner. There would also be a tax-free uplift for
CGT purposes. It is not the trustees' intention that the creation of the life interest would
delay or postpone the distribution of capital to B.
Submission for the petitioners
[8]
On behalf of the petitioners it was submitted that the present application was
identical to the arrangement approved by the court in Trustees of Aboyne Castle Estate Trust,
Petitioners [2022] CSIH 31. Whilst an additional life interest was being inserted between the
5
first petitioner and his children, the interest of that beneficiary was expressly limited. Given
that the decision to distribute capital remained with the trustees and not the liferenter, there
was little or no risk to B's eventual receipt of the trust fund. The avoidance of significant
capital taxation was a real, tangible, and immediate increase in the value of the children's
ultimate interest in the funds. Currently, no minor or unborn beneficiary had a vested
entitlement. It could not reasonably be said that, as a result of the proposed restructuring,
the minor beneficiaries were placed in any worse position than that in which they already
found themselves. Their interest would be in a fund with a significantly increased value and
the proposed variation was to their benefit.
[9]
As regards Charles Morrison's children, their interest remained no more than a hope
of benefiting from the trust assets. They had no vested interest in the income or capital of
the trust as matters stood.
Decision
[10]
We are satisfied that the postponement of the vesting date from 1 January 2030 until
1 January 2090 is not prejudicial to any of the minor beneficiaries upon whose behalf the
court is asked to approve the arrangement. The prospect of their obtaining a vested interest
in capital is rendered more rather than less likely by the removal of a deadline which will
occur when B will be only 20 years old.
[11]
The creation of the successive liferent in favour of the first petitioner's wife in
effect, in favour of his widow has however caused us some concern. The facts of the
present case are not entirely on all fours with those of the Aboyne Castle petition. In that case
the liferenter was aged 48 and there was no material disparity of age between the spouses.
The purpose of introducing the widow's life interest was simply to address the risk of the
6
liferenter's untimely death, and it was critical to the court's decision that the variation was
unlikely to make any difference to the time at which the capital beneficiaries acquired their
entitlements. In the present application there is a significant disparity in ages 16 years
and the first petitioner is aged 64. It must be recognised that there is therefore a greater
prospect of the successive liferent taking effect. Looked at from the point of view of tax
mitigation, that eventuality would have the substantial tax benefit of an uplift in CGT base
value, without triggering any charge to IHT. We acknowledge that that would be a benefit
accruing to the capital beneficiaries upon whose behalf the court is asked to approve the
arrangement. Our concern is that the prospect of such a tax benefit might encourage the
trustees to delay the distribution of capital. That, of course, would increase the risk that B
might unfortunately fail to survive until he obtained a vested interest, so that far from
receiving an estate enhanced by tax saving, he would have received nothing.
[12]
In these circumstances the court considered it necessary, before deciding whether or
not to approve the arrangement, to seek an indication of when the trustees propose to begin
to advance capital to the beneficiaries, the sums likely to be advanced each year, and the
period of years over which it is anticipated that advances of capital will be made, together
with a written assurance that it was not the trustees' intention that the insertion of the
widow as a potential liferentrix would delay or postpone distribution of capital other than in
the event of the first petitioner's untimely death. The trustees provided a written response
in which it was confirmed that their intention was to distribute assets to B as early as was
prudent and practicable, having regard to his age and to the desirability of mitigating CGT
by making staggered distributions. Because the CGT consequences of distributions would
have to be assessed from year to year, it was not possible for the trustees to commit
themselves to distributing a specific proportion of trust assets each year, but the intention
7
was to make them as quickly and efficiently as possible. The trustees further confirmed that
it was not their intention that the proposed liferent in favour of the first petitioners' widow
would delay or postpone the distribution of capital to B. The sole purpose of creating the
new transitional serial interest was to protect against the risk of Charles' premature death
prior to the completion of the distribution of capital.
[13]
As the court observed in Aboyne Castle Trust, a proposal of this kind involves
weighing the potential disadvantages of postponement of vesting against the economic
benefits of facilitating the distribution of the trust estate in a tax-efficient manner. We
emphasise that every such case has to be considered on its own facts, and that it is not
within the power of the court to approve a scheme driven by tax mitigation, however
appealing, if the potential financial benefit is outweighed by the risk that a beneficiary's
interest may be defeated altogether. In the present case, having received the above
assurances as to the trustees' intentions, we are satisfied that when the whole circumstances
of the trust are considered, the proposed arrangement is not prejudicial to the interests of
any of the existing children of the first petitioner or of Charles Morrison, and that it is one
that the court can properly approve on their behalf and on behalf of their issue of whatever
degree of the who may be born after the date of approval. We accordingly grant the prayer
of the petition.
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