VANDERVELL v IRC

General Principle:

The creation of a trust can allow for the legal ownership and equitable benefit to be divided.

Name:

Vandervell v IRC [1967] 2 AC 291

Facts:

Mr Vandervall was a rich businessman who wanted to save paying tax and attempted to create tax avoiding schemes. In 1958 Mr Vandervell instructed his trustees to transfer some shares they held for him to the Royal College of Surgeons (“RCofS”) which was a charity. With an option in the transfer he could buy back the shares in the future for £5000. In 1961 the RCS had received more than £150,000 in dividends from the shares and Vandervell’s trustees exercised the option to repurchase. The Inland Revenue claimed tax from Vandervell on the basis that he had not disposed of his interest in the shares for the period 1958 – 1961 because there was no writing.

Ratio:

In Vandervell v IRC The House of Lords found that the option had created an automatic resulting trust for Vandervall and that therefore he retained an interest in the shares and had to pay tax on them. The RCofS could not have been taxed because it is a charity and was exempt from that taxation. House of Lords also stated obiter that where the legal and the equitable interest are intended to be transferred together there is no need for a separate written disposition of the equitable interest.

Application:

In Vandervell v IRC although the tax avoidance scheme failed and Vandervall was made to pay tax on the shares of the company, the case demonstrates the attempted splitting of ownership and benefit.

Analysis:

Joby was a beneficiary of a trust which had been established by his late mother, and he received all of the income from that trust for his life. At a meeting with the trustees of that trust he instructed them to pay the income from that trust in future to his daughter Jessie. The validity of the instructed disposition depends on the existence of a “subsisting equitable interest (SEI)”. Provided by s.53(1)(c) LPA 1925, if there is a “SEI” at the time of the disposition, the instruction needs to be evidenced in writing, otherwise the disposition is void. Applied, firstly, it is unknown whether Joby had the power to direct a transfer of legal title of the trust established by his mother. Secondly, Joby only directed the trustee to transfer the beneficial interest (income of that trust) but not the legal title to Jessie (Vandervell v IRC [1967]). Thus, the beneficial interest and the legal title remained separated at the time of the instruction and there was a “SEI” (Grey v IRC [1960]). Joby’s direction would only be valid if there is written evidence (s.53(1)(c)). From the facts, it is unlikely that there is any, so Joby’s instruction is likely void. Therefore, Joby’s beneficial interest of that trust would likely be part of Joby’s estate. You need to consider the possibility of a sub-trust (Grainge v Wilberforce 1889; and Re Lashmer 1891).