Gartside v IRC [1968] AC 53

Key Point

The beneficiaries of a non-exhaustive discretionary trust have no immediate right to possession in the capital or income held in trust, although they have the right to require the trustees to exercise their discretion in good faith

The testator, by his will in 1934, left ¼ of his estate to trustees to hold on a non-exhaustive discretionary trust for his son, his son’s wife or children first, and after his son’s death for his son’s children that had reached the age of 21, should he have any
The testator died in 1941
In 1962 the trustees exercised the power of advancement (i.e. declaring that they held the investments and income on trust for the beneficiaries absolutely should they attain 21 years) in favour of the testator’s grandsonsUnder section 43 of the Finance Act 1940, the advancement would be subject to estate duty should it be proven that the beneficiaries of the trust fund had an “interest in possession” in the trust fund prior to the advancements
The defendant trustees of the testator’s will succeeded at first instance but the Court of Appeal allowed an appeal in favour of the claimants, Inland Revenue; the respondent trustees then appealed to the House of Lords

Whether the beneficiaries of the discretionary trust had an “interest in possession” in the trust fund

Appeal allowed; the advancement was not subject to estate duty
The beneficiaries of the non-exhaustive discretionary trust did not have an “interest in possession” for the purposes of section 43 of the Finance Act 1940
The only right of an object of a discretionary trust of income is to require the trustees to consider from time to time whether to apply the whole or some part of the income for their benefit; this does not constitute an interest in the whole fund or any part of it for the purposes of section 43 (per Lord Reid)

The principle

‘No object of a discretionary trust has, as such, any legal right to or in the capital. His sole interest, if it be an “interest” within the scope of these provisions, is with regard to the income: he can require the trustees to exercise, in bona fide, their discretion as to how it shall be distributed, and he can take and enjoy whatever part of the income the trustees choose to give him. I cannot see any ground for holding that he can have any “interest” in the capital if he has no interest in the income.’: p.606D

Do you have any case notes on company, IP or family law you would like to contribute?

Meaning of interest ‘in possession’

‘To have an interest in possession does not merely mean that you possess the interest. You also possess an interest in expectancy, for you may be able to assign it and you can rely on it to prevent the trustees from dissipating the trust fund. “In possession” must mean that your interest enables you to claim now whatever may be the subject of the interest. For instance, if it is the current income from a certain fund your claim may yield nothing if there is no income, but your claim is a valid claim, and if there is any income you are entitled to get it. But a right to require trustees to consider whether they will pay you something does not enable you to claim anything.’

Exhaustive trusts

“Where the trustees are bound to distribute the whole income among the discretionary beneficiaries and have no power to retain any part of it or use any part of it for any other purposes…you can say with absolute certainty that the individual rights of the beneficiaries when added up or taken together will extend to the whole income…And that may lead to important results where the trust is of that character. But that is not this case.”: p.606B

Argument of a ‘group or class right’ rejected

It was argued that ‘all the objects together have a single class or group interest which does extend to the whole interest of the fund’
However, ‘two or more persons cannot have a single right unless they hold it jointly or in common’ and ‘clearly objects of a discretionary trust do not have that: they each have individual rights: they are in competition with each other and what the trustees give to one is his alone’

Lord Reid drew a distinction between a discretionary trust which is:
- exhaustive (i.e. the trustees are bound to distribute the income to the beneficiaries), in which case the beneficiaries may have a proprietary interest; and
- non-exhaustive (i.e. the trustees have the discretion to retain the income), as in Gartside, in which case the beneficiaries will have no proprietary interest
In order to reach the conclusion that the grandchildren had no ‘interest’ in the fund, the House of Lords rejected the argument that the class of beneficiaries together had a group or class interest in a fund (cf. the rule in Saunders v Vautier?)