St Aubyn v Attorney General (No.2)

Factual and Procedural Background

The Deceased held a life interest in landed and investment assets settled by an 1879 instrument (“the Resettlement”). In March 1927 he and a co-holder of an overriding power of appointment re-organised those assets. The assets were sold to Company A for £1.7 million. Part of the consideration (£950,000) was paid immediately, of which £850,000 was reinvested into 50,000 ordinary shares of Company A held by the Appellant Trustees. The Deceased received (a) 100,000 preference shares in Company A for a £100,000 cash subscription and (b) a right to £750,000 payable by forty half-yearly instalments. The Deceased then executed a deed extinguishing his life interest in the ordinary shares, leaving them held on new trusts that excluded him entirely.

The Deceased died on 10 November 1940. Estate duty was paid on the preference shares and the outstanding instalments, but the Crown demanded additional duty on (i) the ordinary shares under ss. 43 and 56 Finance Act 1940, and (ii) alternatively, a proportion of Company A’s assets under s. 46 of the same Act. Judge Croom-Johnson dismissed both claims. The Court of Appeal allowed the Crown’s claim under ss. 43/56 but made no order on the s. 46 claim. The Appellant Trustees appealed to the House of Lords on the first claim; the Crown cross-appealed on the second.

Legal Issues Presented

1. Whether, after the 1927 transactions, the ordinary shares were retained by the new owners “to the entire exclusion” of the Deceased so as to escape estate duty under s. 43 Finance Act 1940.
2. If not, whether s. 56 (the “statutory hypothesis” for companies) nonetheless deemed the exclusion test unsatisfied.
3. In the alternative, whether the Deceased had “transferred” property to Company A otherwise than in a fiduciary capacity so that duty was chargeable on part of Company A’s assets under s. 46.
4. Whether cash paid for preference shares and periodical company loans to the Deceased constituted “transfers” and “benefits” for the purposes of s. 46.

Arguments of the Parties

Appellant Trustees’ Arguments

• The Deceased surrendered his life interest in the ordinary shares absolutely; those shares were thereafter enjoyed by the new beneficiaries to his total exclusion, satisfying s. 43(2)(a).
• The Deceased’s separate acquisition of preference shares and the instalment debt was not a “benefit referable” to the ordinary shares, and any benefit he retained related to different property.
• S. 56’s corporate hypothesis did not change this analysis; even on the assumed trust model the equitable interests remained distinct.
• Under s. 46 the Deceased transferred nothing in a non-fiduciary capacity; payment for shares was not a “transfer of property,” and the conveyance of land and investments was made in a fiduciary capacity.

Crown’s Arguments

• The instalment debt and preference shareholding meant the Deceased still derived contractual benefits from the same fund that produced the ordinary shares, defeating “entire exclusion” under s. 43.
• Applying s. 56, the Company was to be treated as a trustee; on that footing the Deceased retained beneficial rights in the same trust fund, again defeating exclusion.
• Alternatively, under s. 46 the Deceased had “transferred” the land, investments and £100,000 subscription monies otherwise than in a fiduciary capacity (via associated operations under s. 58), while company loans within three years of death were “benefits.”

Table of Precedents Cited

Court's Reasoning and Analysis

On ss. 43/56 the majority (Judges Simonds, Normand and Oaksey) held:

• The property in which the life interest subsisted was the 50,000 ordinary shares.
• After the 1927 deed, the Trustees immediately and bona fide enjoyed those shares; the Deceased’s preference shares and instalment rights were separate assets, not benefits “referable” to the ordinary shares.
• S. 56’s “statutory hypothesis” did not alter the conclusion; even if the Company was treated as a trustee, the equitable interests corresponding to ordinary shares remained distinct from the instalment and preference interests.
• Accordingly the exclusion test in s. 43(2)(a) was satisfied and no duty was chargeable on the ordinary shares.

On s. 46 the House was divided. Judges Simonds, Normand and Oaksey concluded that any property the Deceased caused to pass to Company A was transferred in a fiduciary capacity, or that cash subscriptions were not “transfers” at all; therefore the statutory pre-condition for a company charge failed. Judges Radcliffe and Tucker dissented, holding that certain assets (investments, land and the £100,000 subscription) were transferred otherwise than in a fiduciary capacity and that company loans were “benefits,” so duty would have been payable. The majority view prevailed.

Holding and Implications

Appeal ALLOWED; Cross-appeal DISMISSED.

The House of Lords restored in toto the first-instance order dismissing both Crown claims. The decision confirms that, for estate duty purposes, the exclusion test in s. 43 Finance Act 1940 is met where the donor retains only distinct and separate property interests. It also narrows the scope of s. 56 by treating the corporate “statutory hypothesis” as preserving distinctions between separate equitable interests. No new duty was imposed on Company A, and the ruling limits Crown attempts to extend liability under ss. 43, 56 and 46 in similar reconstruction schemes.