Vandervell v Inland Revenue Commissioners

Vandervell v Inland Revenue Commissioners [1967] 2 AC 291 is a leading English trusts law

English trusts law

English trusts law is the original and foundational law of trusts in the world, and a unique contribution of English law to the legal system. Trusts are part of the law of property, and arise where one person gives assets English trusts law is the original and foundational law of trusts in the...

case, concerning resulting trusts

Resulting trusts in English law

Resulting trusts in English law are trusts created where property is not properly disposed of. It comes from the Latin resultare, meaning to spring back, and was defined by Megarry VC as "essentially a property concept; any property that a man does not effectually dispose of remains his own". These...

. It demonstrates that the mere intention to not have a resulting trust (for example, to avoid taxes) does not make it so.

Facts

Tony Vandervell

Guy Anthony "Tony" Vandervell was an English industrialist, motor racing financier, and founder of the Vanwall Formula One racing team.-Biography:Vandervell was the son of Charles Vandervell, founder of CAV, later Lucas CAV...

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

Pharmacology

Pharmacology is the branch of medicine and biology concerned with the study of drug action. More specifically, it is the study of the interactions that occur between a living organism and chemicals that affect normal or abnormal biochemical function...

. He also wanted to avoid paying tax on the donation. At the time, stamp duty

Stamp duty

Stamp duty is a tax that is levied on documents. Historically, this included the majority of legal documents such as cheques, receipts, military commissions, marriage licences and land transactions. A physical stamp had to be attached to or impressed upon the document to denote that stamp duty...

applied to outright donations and taxes applied to any income through dividends on company shares. However, since the Royal College of Surgeons was a charity it was not liable to pay tax on any income.

So 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 back the shares back for £5000. He then instructed the company to declare a dividend

Dividend

Dividends are payments made by a corporation to its shareholder members. It is the portion of corporate profits paid out to stockholders. When a corporation earns a profit or surplus, that money can be put to two uses: it can either be re-invested in the business , or it can be distributed to...

on the shares. So while the shares were in the possession of the Royal College of Surgeons, it paid out £145,000 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 1961, the Inland Revenue made a claim for tax on the transfer.

The Inland Revenue argued that Vandervell retained an equitable interest in the shares. They were still his, even though the shares were possessed by the College, he had the option to get them back. They 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

Law of Property Act 1925

The Law of Property Act 1925 is a statute of the United Kingdom Parliament. It forms part of an interrelated programme of legisation introduced by Lord Chancellor Lord Birkenhead between 1922 and 1925. The programme was intended to modernise the English law of real property...

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 the value of those shares.

Judgment

The House of Lords, by three to two, found that Vandervell was indeed liable to pay tax on the £145,000 of dividends given to the Royal College of Surgeons. The House of Lords held that LPA 1925 s 53(1)(c) was not applicable to situations where a beneficiary directs his trustees, by way of his Saunders v Vautier
Saunders v Vautier
Saunders v Vautier is a leading English trusts law case. It laid down the rule of equity which provides that, if all of the beneficiaries in the trust are of adult age and under no disability, the beneficiaries may require the trustee to transfer the legal estate to them and thereby terminate the...

right to do so, to transfer full legal and equitable ownership to someone else. As such, Vandervell had successfully divested himself of ownership (legal and equitable) in the shares, notwithstanding that he did so by means of an oral instruction. He was thus not liable to pay tax on the shares.

However, Vandervell was not so fortunate in respect of the option to purchase. The option to purchase a substantial fraction of the company for only £5000 was extremely valuable. As such, Vandervell, if he retained an interest in it, would have to pay considerable surtax on it. The House of Lords held by a 3-2 majority that whilst the trust company had the legal title to the option, Vandervell had not successfully divested himself of an equitable interest in the option. As such, the option was held on a resulting trust

Resulting trust

A resulting trust is the creation of an implied trust by operation of law, as where property gets transferred to one who pays nothing for it; and then is implied to have held the property for benefit of another person. The trust property is said to "result" back to the transferor...

for Vandervell. It was held that a resulting trust would arise where equitable interest had not successfully been divested, because an equitable interest cannot merely hang, unattached to an owner. As such, Vandervell was liable to pay surtax on the option.

Lord Wilberforce said that there was,

Facts

Judgment

See also