Court can extend perpetuity period to 125 years when varying a trust (High Court)

Practical Law UK Legal Update Case Report 3-617-0382 (Approx. 4 pages)

Court can extend perpetuity period to 125 years when varying a trust (High Court)

Background

Perpetuity period of a trust

For a trust created on or after 6 April 2010, when the Perpetuities and Accumulations Act 2009 (PAA 2009) came into force, the perpetuity period is 125 years, even if the trust document purports to specify a different period (section 5, PAA 2009). It is not possible to extend the perpetuity period of a trust created before 6 April 2010 by exercising a special power of appointment under the trust on or after that date (section 15(1), PAA 2009).

However, it is possible to extend the perpetuity period of an existing trust in the following ways:

The court can do so when exercising its discretion under the Variation of Trusts Act 1958 (VTA 1958). The new perpetuity period can be one that is permitted under the law at the time of the court order but would not have been permitted when the trust was created (for example, see Wyndham v Egremont and others [2009] EWHC 2076 (Ch)).
The trustees of a trust that specifies a common law perpetuity period can replace it with a fixed period of 100 years if they believe it will be difficult to establish when all the measuring lives have ended (section 12, PAA 2009).

Before PAA 2009 came into force, the longest fixed perpetuity period that was permitted was 80 years (section 1, Perpetuities and Accumulations Act 1964).

For more information, see Practice notes:

Variation of Trusts Act 1958 and resettlement

The court has discretion under VTA 1958 to approve a variation of a trust on behalf of beneficiaries who cannot consent for themselves (for example, minor and potential unborn beneficiaries). However, the court cannot approve a resettlement of the trust assets (that is, it cannot create an entirely separate trust).

Resettlement of trust assets gives rise to a capital gains tax (CGT) charge because the trustees of the new trust become entitled to the assets as against the original trustees, even if they are the same persons (section 71(1), Taxation of Chargeable Gains Act 1992).

For more information, see Practice notes:

Facts

The trustees of a trust created in 1986 asked the High Court to approve a variation of the trust. The main purpose of the proposed variation was to allow the trustees to accumulate income so that they could use it to meet inheritance tax charges. However, the arrangements included an extension of the trust's 80-year perpetuity period.

As there were substantial unrealised capital gains in the trust fund, the trustees asked the court to declare that the variation was not a resettlement for CGT purposes. HMRC was not party to the proceedings, but had agreed in correspondence that, if the court approved the proposed arrangements under VTA 1958, HMRC would not argue that the variation was a resettlement (because the court did not have power to approve a resettlement under VTA 1958).

Decision

The High Court (Mr Jeremy Cousins QC, sitting as a deputy judge of the Chancery Division) approved the variation. The judgment mainly deals with the reasons why the court considered that the variation did not give rise to a resettlement of the trust fund.

The deputy judge considered that it was clear that there was no resettlement, because:

The parties intended to continue the existing trusts with modifications.
The beneficial interests under the trust were not exhausted.
The administrative powers remained the same.
The trustees remained the same.
The extension of the perpetuity period did not give rise to a resettlement (Wyndham v Egremont; IRC v Holmden and others [1967] UKHL 7).

Comment

The case was decided on its facts, applying established case law. However, two aspects of the decision are of wider interest:

It is the first reported case of which Practical Law Private Client is aware in which the court has used its discretion under VTA 1958 to extend a perpetuity period following the commencement of PAA 2009. The judgment does not say what the new perpetuity period was, but the deputy judge's statement that the application "afforded an opportunity to take advantage of the provisions of the perpetuity period as extended by section 5(1) of the Perpetuities and Accumulations Act 2009" (paragraph 7) suggests that it was 125 years. It is also unclear whether the new perpetuity period was to start from the date of the order (as was the case in Wyndham v Egremont) or from the date on which the trust was created.
HMRC's agreement that there would be no resettlement if the court approved the variation under VTA 1958 was helpful. Practitioners advising on similar cases could consider asking for a similar undertaking. However, this was not a borderline case on the facts and HMRC may be reluctant to commit themselves in a case where the facts point less clearly towards a variation rather than a resettlement.

Case

Allfrey v Allfrey and others [2015] EWHC 1717 (Ch) (Bailii).

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Court can extend perpetuity period to 125 years when varying a trust (High Court) | Practical Law