Vandervell v IRC

Vandervell v Inland Revenue Commissioners [1967] 2 AC 291 is a leading English trusts law case, concerning resulting trusts. It demonstrates that the mere intention to not have a resulting trust (for example, to avoid taxes) does not make it so.

Vandervell v IRC
Court	House of Lords
Decided	24 November 1966
Citation	[1967] 2 AC 291
Case history
Prior action	[1966] Ch 261
Court membership
Judges sitting	Lord Reid, Lord Pearce, Lord Upjohn, Lord Donovan and Lord Wilberforce
Keywords
Resulting trust

This case was the first in a series of decisions involving Tony Vandervell's trusts and his tax liability. It concerned whether an oral instruction to transfer an equitable interest in shares complied with the writing requirement under Law of Property Act 1925, section 53(1)(c), and so whether receipt of dividends was subject to tax. The second was Re Vandervell Trustees Ltd,^[1] which involved the Special Commissioner of the Inland Revenue's ability to amend tax assessments. The third was Re Vandervell Trustees Ltd (No 2),^[2] which concerned whether Vandervell could be taxed on dividend income (as beneficiary of a resulting trust) if the exercise of an option had validly transferred the beneficial interest in that income to another trust (of which he was not a beneficiary).

Facts

Tony Vandervell was a wealthy racing car manufacturer with a company called Vandervell Products Ltd. He wanted to donate to the Royal College of Surgeons, to establish a chair of pharmacology. He also wanted to avoid paying tax on the donation. At the time, stamp duty applied to outright donations and taxes applied to any income through dividends on company shares.^[3] However, since the Royal College of Surgeons was a charity it was not liable to pay tax on any income.

Vandervell orally instructed his trust company (Vandervell Trustees Ltd, which was also set up to administer his money for his children) to transfer 100,000 shares in Vandervell Products Ltd to the Royal College of Surgeons, with an option for the trustees to purchase the shares back for £5000. He then instructed the company to declare a dividend on the shares. So while the shares were in the possession of the Royal College of Surgeons, it paid out £245,000 in dividends up to 1961. Vandervell had hoped this would mean that he would avoid tax (as opposed to simply getting income for himself, on which he would pay tax, and then giving the money to the College). Unfortunately, in 1960, the Inland Revenue assessed Vandervell as being liable to surtax on the dividends on the shares, as if he had not disposed of them.^[4]

The Inland Revenue argued that Vandervell retained an equitable interest in the shares. They were still his, as even though the shares were possessed by the College, he had the option to get them back. They also argued his oral instruction to the trust company was not capable of transferring the equitable interest, because it did not comply with the formality requirements specified in Law of Property Act 1925 section 53(1)(c). This section requires signed writing to evidence the existence of a disposition. So he should be liable to pay tax on dividends from those shares.^[5]

Judgment

The House of Lords, by three to two, found that Vandervell was indeed liable to pay tax on the £245,000 of dividends given to the Royal College of Surgeons. The House of Lords held that the Law of Property Act 1925, section 53(1)(c), was not applicable to situations where a beneficiary directs his trustees, by way of his Saunders v Vautier right to do so, to transfer full legal and equitable^[6] ownership to someone else. The case is a proposition that an oral declaration to a bare trustee to transfer the trust property to a third party absolutely for his own benefit is a valid disposition. However, Vandervell had not successfully divested himself of ownership (legal and equitable) in the shares, since the Trust Company had an option to purchase the shares back from the RCS. If the settlor does not divest himself adequately as in Vandervell v IRC a resulting trust would operate. The consequence was that Vandervell, as the beneficiary, would remain liable to surtax on the associated dividend income.

Lord Wilberforce said that there was,

no need, or room to invoke a presumption. The conclusion, on the facts found, is simply that the option was vested in the trustee company as a trustee on trusts, not defined at the time, possibly to be defined later. But the equitable, or beneficial interest, cannot remain in the air: the consequence in law must be that it remains in the settlor.

See also

• English trusts law
• Resulting trusts in English law
• Re Vandervell's Trusts (No 2) [1974] Ch 269
• Tinsley v Milligan [1994] 1 AC 340
• Tribe v Tribe [1996] Ch 107
• Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669
• Air Jamaica Ltd v Charlton [1999] 1 WLR 1399
• Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567
• Twinsectra Ltd v Yardley [2002] 2 AC 164

Notes

1. [1971] AC 912
2. [1974] EWCA Civ 7
3. See now ICTA 1988 ss 684-685
4. Subsequently, the trustees exercised the option and took back the shares.
5. See C Mitchell and D Hayton, Trusts and Equitable Remedies (Sweet & Maxwell 2010) 114-115
6. nb Lord Browne-Wilkinson's rejection of such terminology in Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669

References

• RC Nolan, ‘Vandervell v IRC: A Case of Overreaching’ [2002] CLJ 169, argued that a trustee should not have to take instructions from a beneficiary with a limited interest in shares, because that would be contrary to the principle that a registered owner should vote in the interests of all beneficiaries.