UNREVISED PROOF COPY Ev 1

House of LORDS

MINUTES OF EVIDENCE

TAKEN BEFORE

SPECIAL PUBLIC BILL COMMITTEE ON PERPETUITIES AND ACCUMULATIONS BILL [HL]

Perpetuities and Accumulations Bill [HL]

Wednesday 20 May 2009

LORD BACH and LORD JUSTICE ETHERTON

Evidence heard in Public Questions 1 - 23

USE OF THE TRANSCRIPT

Wednesday 20 May 2009

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Present

Clinton-Davis, L

Goodhart, L

Hart of Chilton, L

Henley, L

Hodgson of Astley Abbots, L

Kingsland, L

Lloyd of Berwick, L (Chairman)

Thomas of Gresford, L

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Witnesses: Lord Bach, Parliamentary Under-Secretary of State, Ministry of Justice, and Lord Justice Etherton, Chairman of the Law Commission, examined.

Q1 Chairman: Sir Terence, we are very grateful to you for coming to this our first meeting of the Special Public Bill Committee on this Bill. I am sure we will have questions to ask you on the very useful letter which you wrote to us and which we have all read. First, can I, perhaps, ask the Minister to say just a few words?

Lord Bach: Thank you very much, my Lord Chairman. Can I begin by congratulating you on your appointment as Chairman and say how much we are looking forward to working with you and with fellow Members of the Committee. I am grateful for the opportunity to give evidence at this session. I do not propose, obviously, to spend any time going over the details of the reforms proposed in the Bill; I will leave this, if I may, to Sir Terence, who will be speaking immediately after me, and, of course, other leading experts on the subject from whom we shall be hearing during the course of our sessions. What I have been asked to do is respond in very general terms to some of the points that were made in the Second Reading debate. Can I, first of all, reiterate our support for the Government's new procedure for Law Commission Bills. It is our hope that once the trial of these two Bills' procedure is completed the House will make it a permanent fixture for uncontentious Law Commission reforms. As to the points raised by noble Lords in Second Reading Committee (and I will just touch on them in passing), on the issue of charities, the noble Lord, Lord Hodgson, who, I am delighted to say, is a Member of the Committee, raised concerns about the possible effect of the Bill on charities. Let me first say that it is not the intent of the Bill to prejudice charities or to discourage philanthropic activity. The noble Lord asked the Government to consider the clause 2 exception from the rule against perpetuities for gifts over from one charity to another. He was concerned that the clause may be a narrowing of the current common law exception. That is not our intention, and we are therefore examining the current law and clause 2 to check that they match. The noble Lords Lord Kingsland and Lord Hodgson expressed concerns about the 21-year limit on accumulation that will be applied to charities. While the Government supports charitable giving and acknowledges its importance, we are not convinced that the 21-year period will deter charitable giving. The proposed period seems to us to strike a reasonable balance between freedom to accumulate and the public interest in ensuring that charitable trusts are properly administered. The noble Lord, Lord Kingsland went on to suggest that the "life of the settlor" could be allowed as an alternative maximum accumulation period for charities to the 21 years now permitted by the Bill. We look forward to discussing that suggestion. It does not immediately attract us. Two alternative periods would, of course, still be an improvement on the present six, but the length of a settlor's life is inherently uncertain and including it, we feel, would go against the general thrust of the Bill which is to remove measurements by lives. Specifying a standard period will give charitable trustees certainty. This will assist them in managing the affairs of the charity efficiently and we do not think will discourage charitable giving. The noble Baroness, Lady Deech, of course, made many points. Her preference was to abolish the rule against perpetuities. The Law Commission considered this possibility, of course, but did not find a consensus favouring the view. The reforms in the Bill, by contrast, are well-supported, and in the face of this consensus, pursuing abolition, we feel, would be a controversial option and would make the Bill unsuitable for the new procedure we are undertaking. On complexity, the noble Baroness pointed out that making the Bill almost entirely prospective will mean that for generations to come there will be three possible perpetuity regimes in force. Of course, we acknowledge that it would, in theory, be possible to design forms that are retrospective, but this would, we feel, greatly increase the risk of interference with existing settlements. We believe the approach taken by the Bill seems reasonable. It will be relatively simple to decide whether the new regime applies, and practitioners appear to have coped with the two present alternatives. Additionally, unlike the 1964 Act provisions, the Bill does not require an analysis of the common law position before the "wait and see" provisions can operate. Both the noble Baroness and the noble Lord, Lord Goodhart expressed the view that a 125-year perpetuity period may be too long. Of course, there is scope for options as to what is the most appropriate length for the new period. The Law Commission chose 125 years as it represented the outer limits of what was currently achievable with a little ingenuity and good fortune under the present "lives in being" system. On this basis, the 125-year period seems to be a reasonable solution. Accordingly, as the Bill, unlike the present law, does not provide any choice in relation to the length of the perpetuity period, it seems to us to be better to err on the side of generosity. Finally, my Lords, abolition of the rule against accumulations. The noble Lord, Lord Goodhart expressed reservations about the abolition of the rule against excessive accumulations for non-charitable trusts. He suggested that it might be better to allow trustees to accumulate for the life of the trust but not to be under a duty to do so. The Law Commission has, here, carefully examined the reasons for retaining the rule against excessive accumulations and found them wanting, except for in the case of charities. We look forward to discussing this possibility, but we think the Commission's reasoning is persuasive and that removing the rule as proposed in the Bill is the best way forward. My Lord Chairman, that is all I wish to say at this stage. Thank you for giving me the opportunity. I will, obviously, be happy to try to answer any questions that your Lordships might have, although I think it is likely that you may well receive more satisfactory answers to many questions on this very technical Bill from the eminent witnesses to appear before the Committee, who have a far, far greater knowledge of the subject than I do, not least, of course, the Chairman of the Law Commission himself, who, thankfully, is by my side.

Q2 Chairman: May I thank you, Lord Bach, for that very useful summary of the points which were made at the Second Reading. That is very helpful to us all. Could I, perhaps, also thank you for your letter of 13 May which set out, it seemed to me, rather clearly the respect in which the Bill now differs from the draft Bill in the Law Commission's report. I am sure there will be some questions for you. Perhaps, Sir Terence now could say what he would like to say. We also have read your letter.

Lord Justice Etherton: My Lord Chairman, thank you very much, and I am very grateful for this opportunity to give evidence to the Committee. All I wanted to say by way of general observation at the beginning is this: first of all, I would like to take this opportunity to thank most sincerely those who have brought about this new procedure which marks such a special milestone in the history of the Law Commission of England and Wales, which is pre-eminent in the world among 60 independent law commissions. In particular, I would like to thank you, my Lord Chairman, Baroness Ashton, Lord Kingsland, Lord Goodhart and Lord Bach, and the other ministers and officials both at the Ministry of Justice and its predecessor the Department for Constitutional Affairs, who brought this about. It is something which Lord Scarman himself hoped more than 40 years ago would happen. It has taken this amount of time to get here but it is a milestone. At a recent meeting of the Commonwealth law reform bodies in Hong Kong, this and the other law reforms passing through Parliament at the moment were of great interest and great admiration to the law commissions in the Commonwealth and elsewhere. I wanted to make that tribute and thanks to everybody as well.

Q3 Chairman: Thank you very much.

Lord Justice Etherton: Secondly, so far as concerns this Bill, I would like to make the following observation: it is my experience that when we come to the law for particular technical subjects there is rarely only one answer, but what gives legitimacy to the recommendations and the reports of the Commission is the widespread consultation which it undertakes. It undertakes that consultation not merely by having its own specialist advisory body, in most cases, and by consulting individual interest groups, holding lectures and seminars, but by having at least one full public consultation in the course of the project, which this had. In fact, this particular project, because of the time it has taken to get to this stage, has had no less than three substantive consultations. In 1993, as part of the general consultation for the project, 62 consultees responded (and I will come back to that, in a moment); in 2002, prior to the possibility of the accumulation provisions being implemented by way of regulatory reform, there was a further consultation on the accumulation principle, and, finally, post the production of this Bill in draft, for the purpose of introduction at this stage, there was a further consultation undertaken by the Ministry of Justice. Now, amongst the consultees who have responded are some which represent large numbers of practitioners. So one must not be misled by saying that 62 does not sound so many; there were 27 who responded in 2002; there were 14 who were consulted in 2008. In particular, I would like to mention some of these: the Chancery Bar Association comprises over 1,000 practitioners, most of whom will have some familiarity with this area. STEP (the Society of Trust and Estate Practitioners) comprises over 14,000 specialists in this area worldwide, of whom over 5,000 practise in this country. The Law Society goes without saying. I would like, also, to mention the Trust and Law Committee. This is a very eminent committee set up in 1994, chaired by, originally, Sir John Vinelott, after retirement as a Chancery Judge, currently chaired by Sir Peter Gibson, a retired Lord Justice of Appeal, and comprises academics and practitioners who are concerned with the development of estate or trust law. What I can say to you is that every one of our principal proposals is supported by STEP and by the Chancery Bar Association. In particular, in relation to this draft Bill, of the 14 consultees who were consulted it has been approved as it stands now by the Chancery Bar Association, by the Trust Law Committee, by STEP and by the Law Society. I think it is important to bear that in mind because there are many people, and I am sure there are eminent Members of this Committee, other peers and Members of the House of Commons, who had individual views, which I do not think do not carry merit but, at the end of the day, something like this must carry a consensus among those who are practising in the field all the time. That, my Lord Chairman, is all I wanted to say by way of general observation.

Chairman: Thank you very much. Firstly, to ask if there are any initial questions you would like to ask of either of our two witnesses.

Q4 Lord Clinton-Davis: You mentioned, Sir Terence, the Law Society, of which I am a member. Did they have any reservations at all about the Bill? If so, what were they?

Lord Justice Etherton: My understanding, sir, so I am told (and I will be corrected if I am wrong) is that the Law Society had no adverse observations about the Bill as it now stands.

Chairman: Thank you, Lord Clinton-Davis. Do you have any follow-up questions on that?

Q5 Lord Hodgson of Astley Abbots: Mr Lord Chairman, perhaps I should declare, again, an interest in that I am President of the National Council of Voluntary Organisations, but I should also declare that I am not a lawyer, therefore if some of my questions are breathtaking in their naivety I apologise in advance. Could I begin by pressing the Minister on his question of charitable purposes and charities, (for which I am grateful, in his letter to me) saying that it is not intended to narrow the clause. He invited me to suggest to him examples of how this clause might work to the disadvantage, and rather than try and make this up as if I know it myself perhaps I may just quote briefly from a letter: "It may be objected that the reference in clause 2(2) to an interest vesting in 'a charity' does not appear to cover a trust for charitable purposes rather than for a charitable institution which was in existence in advance of the disposition. In other words, whereas clause 2(2) clearly provides that where there is a gift to (say) the RSPCA with a gift over to the RSPB if the RSPCA should cease to have its head office in West Sussex, the gift to the RSPB can take effect at any time, it is not clear that a trust over for the charitable purpose of conserving bird life would also be excepted from the perpetuity rule." That is the point. In those sentences, the insertion of a few words "of all trustees for charitable purposes in clause 2(2)/2(3)" would actually meet the issue. Sir Terence, very properly, reminded us in opening, as regards to this, that that would make it clear beyond peradventure that the two types of cases were covered.

Lord Bach: All I can say on this, and I will pass over to Sir Terence on this, if Lord Hodgson will forgive me, is, as I said in my opening remarks, that my officials are considering the points made by the noble Lord in his Second Reading speech. I wonder if I could ask Sir Terence, through you, my Lord Chairman, to deal with the quotation that Lord Hodgson used?

Lord Justice Etherton: Yes, my Lord Chairman, if I may. I am not sure who was the originator of the letter but what I can say is that a distinguished Chancery lawyer, Francesca Quint, recently wrote an article in which she raised this very point. The point arose, I am afraid, because of the glossary in the explanatory notes. There is no problem with the Bill, which I have explained; the problem is with the glossary in the explanatory notes. The short answer to the point is that a charity is defined in the Charities Act to include not only an institution but charitable trusts, and it will therefore catch all circumstances. I ought to say that that definition, under the Act, is not restricted, as it were, to the Act itself (the 2006 Charities Act); it applied generally to the law of England and Wales on charities. Accordingly, since charities must either be vesting in a charitable corporation or held on some trust, there is no question but that, as a matter of substantive law, the reference to a charity here will encompass all charitable trusts. Francesca Quint accepts that; she is happy with that. The problem arises because of the definition in the glossary in the explanatory notes which refers to a charitable institution and it was thought, by looking at that, I think, that it therefore did not cover ----

Q6 Chairman: Which page is that?

Lord Justice Etherton: Page 17. It refers to an organisation. So it was thought that, therefore, that might not include a pure trust. The answer is to be found in the Charities Act 2006 itself which defines "charity" for this purpose, as others, as including a charitable trust. So she does accept that. I do not think she is the originator of your letter, but that is the answer, as a matter of law. The answer is to change the glossary.

Chairman: Do you want to follow up on that?

Q7 Lord Hodgson of Astley Abbots: Am I permitted to go on and ask another question? If there is now agreement amongst all parties that this issue does cover charitable purposes as well as a charity, then I suspect we have reached a satisfactory outcome. The other question, if I could, is, again, from a non-legal point of view. I consulted a gerontologist about the perpetuities rule - the application thereof. He had two observations to make about the way perpetuities might work. He pointed out that as of this moment it is a fact that three-quarters of the people who have ever reached the age of 65 are alive and living today, such is the rate of expansion of life expectancy. His second supposition was that there is living today someone who will live to 200. If that were to become a reality, as opposed to a supposition, what would be the implications for this Bill, and would we, if we knew that, wish to make some other changes now?

Lord Justice Etherton: What are the implications for the Bill? There are no implications for the Bill as such - it works perfectly well with the 125 year period - but it is true to say, as was pointed out by Lord Bach in his opening comments, that the period of 125 years was selected as the most appropriate period by the Law Commission on the best estimate that we currently have for the longest period for a "life in being" plus 21 years today. Various different periods have been suggested (I think, on the Second Reading, Lord Goodhart suggested 100 years might be more appropriate). I should make clear, on the consultation that we had in 1993 there was no majority for any particular period, and they varied from 80 years right up to 125, but we thought it appropriate to follow the principle of the common law, which is to take, effectively, one generation plus more or less a minority. That is the basis of the common law principle: that a settlor should be able to tie up the property for the future, preventing any successor from dealing with it as though it was their own for no longer than one generation plus a minority. The minority has changed from 21 to 18 but that was the principle on which we arrived at 125 years, with a nod to those who thought that the whole thing should be abolished. It was a generous allowance. You could say, following your point, that if we knew people were going to live to 200, we might increase it even further, but I think it is clear, both from the commentators on Second Reading and generally, that there would be no general consensus at all in favour of 125 years, and the criticism that has been made is that it is too long, not that it is too short. So I think extending it further would make it very controversial, at this stage. I do not know if that is an adequate answer.

Q8 Lord Kingsland: Perhaps I should also declare an interest: I am a practising Member of the Bar and occasionally sit as a Crown Court Recorder and Deputy High Court Judge. Nobody has ever instructed me in a perpetuity and accumulation matter ----

Lord Bach: There is plenty of time for that to happen!

Q9 Lord Kingsland: I have a short but not necessarily simple question. It arises out of the powerful speech made by the noble Baroness, Lady Deech, at Second Reading, and concerns the issue of retrospectivity. As Sir Terence has been well aware, Lady Deech lamented the fact that the Bill does not have retrospective effect. This must have been a matter that you thought about hard and long in the interests of simplifying the legislation. I wonder if you would be kind enough to indicate to the Committee, at this stage, in broad terms, what were the factors that persuaded you to make the measures that are in front of us solely prospective?

Lord Justice Etherton: Yes. I will mention, in a moment, that they are, in fact, retrospective in at least a couple of respects (one quite important one), but, broadly speaking, they are prospective. It goes, really, back to my opening remarks, which is that if one is trying to get through legislation on this sort of matter it has to be done on a consensual basis. Interfering retrospectively with dispositions of people's property is not, of itself, an uncontroversial matter, not simply in relation to people's feelings on the subject but matters of law in terms of, for example, the Human Rights Act (Article 1 Protocol 1) people's rights to interest in property and taking them away from due process. In this particular case, generations of estates and settlors have made their arrangements on advice as to the perpetuity period. That, equally, applies, of course (as they are called at the moment), to commercial arrangements. If we were to abolish retrospectively, affecting not only private but commercial interests, this could have all kinds of untold effects, and I am afraid it simply would not be an uncontroversial reform; it would be highly controversial to many people. So one is balancing the questions of simplicity against the controversial nature of any kind of retrospective legislation that affects vested interests. That is the point. The second point I would make is that it is not entirely retrospective. What we have recognised is that there are some trusts where because of the nature of common law perpetuity rule - lives in being plus 21 years - there is a genuine difficulty (particularly by reference to the so-called Royal lives clauses) in knowing when the period has come to an end. It recognised that, so we have made specific provision, as you will aware, in the Bill, in those circumstances, for trustees to opt into the scheme but provide for a 100-year period rather than 125. I will say immediately why it is 100 rather than 125: it is Her Majesty's Revenue and Customs. They did not like 125 years because they thought that people who might opt in for a longer period than might otherwise exist might be able to defer tax. So that was a compromise. There is another aspect that that raises, which is what are the tax implications of a retrospective change in the perpetuity period thereby affecting vested or non-vested interests? This is a massively complex subject. We have had representations on it, there was no consensus about it, but, as I have said, I think the proof of the pudding is that in the latest consultation all of those major interest groups we have consulted are fully behind the existing proposals. So that is the best answer I can give. One must recall that the noble Baroness's order of priority will be, first of all, total abolition, secondly, it was retrospective reform and thirdly the period is too long - and I think then she said that we might live with the rest of it. The critical point is: how does it affect existing interests? They are very complex; all manner of trusts, commercial interests, and so on and so forth. We could not get it through as an uncontroversial Bill.

Q10 Lord Kingsland: I am most grateful to the noble Lord, the Lord Chairman, for allowing me to follow this point up, not on the substance of the issue (I think it would be better now to wait for the other evidence which will come in before following this matter up) but I wanted to probe you a little bit on the concept of the consensus that you have been advancing. Of course, from the point of view of the Parliamentarians here, the only reason why this Bill is falling within the category of a Special Bill Committee is because it has been designated by the three parties as being politically non-controversial. So, in a sense, you could say that there is a different sort of consensus from the one you are talking about; there is a consensus between the political parties. However, I was slightly surprised to hear you say that the Law Commission was not prepared to move on this matter had there been no consensus between all those interests that were likely to be affected by it. There will be many law reforms which have been pressed quite strongly by, I should say, previous charities (because I do not want to implicate those who may disagree entirely with the thrust of what I am saying) but there have been, in my experience, a number of Law Commission reports which have really been rather controversial but, nevertheless, have been pressed by the Law Commission on Parliament to be converted into law. What is so different about perpetuity and accumulations that the Law Commission in this case thinks it is only appropriate if there is consensus between all those who are affected by the matters? That suggests to me that we might be moving towards legislation which is the lowest common denominator.

Lord Justice Etherton: I must apologise if I gave the impression we would only move on the subject if there was consensus, I would put the contrary point there was no consensus, which is not the same thing. The reason that is important is because in this particular case, and I have to say I personally today totally approve of this policy, is that it is one thing to talk about consensus or absence of it when you are talking about the future, but when you are disturbing existing interests you have to be very, very careful indeed. Just envisage who they all are and they are varied and disparate. The Law Commission consulted on this issue, it consulted on the issue of retrospectivity, and there was not anything like an overwhelming, even if not unanimous, there was nothing even approaching an overwhelming cry for retrospectivity. There were some voices for it but when one is disturbing existing property interests which have been created on the basis of the existing law and advice given, then for the sake of the legislation as a whole my view would be the correct decision was reached in this case. Indeed, if I may say so, if one was going to make it retrospective, it would be highly dangerous to do so without very detailed and further consultation on that point, because there are all manner of interests one might be affecting of which one is unaware.

Q11 Lord Hart of Chilton: I would register an interest in that I am a solicitor and my wife is a solicitor, although I have never practised in this area although I am an executor. Do we have any idea of how many trusts there are in existence?

Lord Justice Etherton: That is a question I have asked myself and I am afraid the best we have been able to get is that the Her Majesty's Revenue and Customs are aware of just over 200,000 tax-paying trusts. What is interesting to me, I have to say, is that register has declined from a figure slightly higher than that in 1991, and this raises a wider issue. First of all, that is likely to be the tip of the iceberg because I am quite clear there are many trusts which will not be paying tax at all - charitable trusts or very small trusts - but what it may well indicate is that the trust industry is very concerned - and this is UK plc - that we are falling substantially behind those other jurisdictions in the world which are offering more flexible, more modern trust arrangements, and for whose corporate business we are competing. That is why you will find organisations like STEP and the Trust Law Committee are so delighted that this Bill is being passed through Parliament to modernise our law on perpetuities. I am sorry that does not answer your question but that is the best information we have got.

Q12 Lord Hart of Chilton: That leads me to a leading question which is to do with retrospection. If we are talking about that number, or in the order of that number - and I think you are right in thinking it is the tip of the iceberg - then to make anything retrospective means that all of those touched and concerned about that would mean they would have to take fresh advice. That in turn would carry with it a cost of some considerable nature.

Lord Justice Etherton: Absolutely.

Q13 Lord Hart of Chilton: So from the point of view of the consumer, that would be, would it not, an added reason for not wanting to go into a retrospective area?

Lord Justice Etherton: I totally agree and accept that. I mentioned the commercial interests, one of the objectives of this Bill is to take perpetuities out of the commercial arena. You will find in a huge number of cases, particularly for example leases, that rights over other people land - perhaps rights to walk over them, rights to join up to drainage - are limited to 80 years. That is a very simple case but in commercial terms you are going to have to work out what is the effect of abolition - was it intended or was it not, what arrangements have been made on the basis of that - and options to purchase are subject to a 21 year perpetuity period at the moment. Now if one started to say that that no longer applies, what are the implications for all those cases where there are options to purchase in a commercial context; what plans are being made. If I may say so, I think the idea of retrospectivity is from an academic perspective perhaps rather nice, but from a practitioner's and practical prospect it will be a complete nightmare, I am afraid. I cannot put it higher than that, though that is very high, but it would.

Q14 Lord Clinton-Davis: Is it your view that if this Bill is passed the hegemony which Britain used to have will be secured?

Lord Justice Etherton: I think that will be putting it too high, but I think it will help those who are providing trust services in this country to compete more effectively with those in so many other jurisdictions. I have no doubt about that. One of the main reasons why that is so is not necessarily because of perpetuity, though it is true that other jurisdictions have simplified and improved their perpetuity rules, it is for the accumulation point. The ability of settlors to be able to provide for accumulation of income for more than 21 years on the international scene is very, very attractive, and it is very unattractive here. So that is one of the main issues about the restriction of a settlor's ability to deal with their estates as they would like to do so.

Q15 Lord Hodgson of Astley Abbotts: Sir Terence, after the Second Reading Debate, your colleague, Professor Elizabeth Cooke, was kind enough to get in touch with me about your publication, Capital and Income in Trusts: Classification and Apportionment, which was published on 6 or 7 May. It was for me, at any rate, heavy lifting - 146 pages of heavy lifting - but within it there was a particular recommendation you made at 8.80 about the changes in statutory powers, "to enable all charities dissolved (?) with endowment fund or portion of it to be freed from restrictions in respect of expenditure of capital in order to operate a total return approach." If this became law and your draft Bill became a fact, would this have any effect on what we are discussing today? Should we be pre-judging that and making sure that could be facilitating what we have before us today?

Lord Justice Etherton: The short answer is no. Can I just explain to members of the Committee what total return investment is, because not many people will be familiar with it. The classic way in which trusts are organised is that a distinction is made between capital and income. You may have income beneficiaries or, totally separate, capital beneficiaries. In the case of charities, some of them but not all have permanent endowments, which is capital they cannot spend, but usually charities subject to limitations have to spend their income. The total return investment is an investment technique or principle which seeks to go away from that traditional model by which you invest your assets for a particular amount of income or type of income in which you look for a total return. So when you are looking at an annual return for distribution or otherwise of a trust, whether a charitable trust or a private trust, you look at capital growth, capital returns and income, and you look at it altogether and you provide in your trust for a division of that total return which might be therefore partly income, partly capital. The object of this is that it frees you as an investor from having to worry about producing a particular amount of income to benefit the income beneficiaries and a particular amount of capital to make sure those ultimately entitled to capital are not left out. In the case of charities, again it is a question of making sure whether they are having to invest to make sure they maximise their income for now rather than concentrating on long-term capital. So that is the object of the investment technique. The short answer to your point is as follows: the Charity Commissioners already have a scheme which will allow for total return investment, and it is always open, subject to Charity Commissioners' approval, for individual charities to either use that scheme or adapt their own. More to the point, this only applies where there are charities who have a permanent endowment; the problem only arises there. Even in those cases, both the Charity Commissioners and the courts can authorise accumulation of capital; even if existing trusts do not provide for it, there is always a power for the Charity Commissioners and the courts to authorise accumulation of capital. A final point is that the rule against excessive accumulations is not treated by the Charity Commissioners as applying where what you are doing is accumulating to meet administrative or administrative-like burdens. So, for example, if you are a charity which has property, you are entitled to accumulate in order to pay for replacement lifts, to carry out capital improvements. So the combination of those things, the existing Charity Commissioners' scheme for total return investment, the ability of the courts and the Charity Commissioners to authorise accumulation of income, and the restrictive way in which the Charity Commission view administrative accumulation, means there is no problem in this issue in this Bill.

Q16 Lord Hodgson of Astley Abbotts: Could I come back a little on that. There is a concern amongst some charities that you are rather dependent for your approach on a receptive attitude by the Charity Commissioners, which you may or may not be certain of going forward, that there are cases where you move from repairs to replacement and therefore you are on the edge of what is permissive. A case is where you have a historic care home which no longer meets the space required for each bed under current regulations - the square footage there has to be per bed - and therefore the only alternative is to start again and this requires the charity to have confidence that there will be sympathetic hearings down the road. That is the underlying concern here, that you are dependent on the Charity Commissioners being flexible and taking a positive view which historically as regards permanent endowments has been much more restrictive. Indeed we discussed this at great length during the passage of the 2006 Act.

Lord Justice Etherton: I think the answer to the point is two fold. First of all, you have to decide in the case of charities whether there should be a rule against excessive accumulations at all; you have to decide that issue. The overwhelming response of all the consultees was there should be some restriction. The reason for that restriction, the principle underlying the restriction, is that there should be a balance between the ability of the charity to accumulate and two other matters, one, the tax benefit it obtains by virtue of the charitable activities, in other words to distribute income, and second, the interest and expectation of the public who give money to charities that they will be distributing income. So the 21 year period for restriction reflects the policy in which you are weighing up those different considerations. Once you agree there should in principle be a policy of some kind of restriction on charities accumulating for anything excessively, then the only question really is, is that period appropriate - should it be 21 years, should it be something else? The consultation responses we had on this varied. We chose 21 years as the best of many different choices. They vary, I think I am right in saying, from 20 years to 100 years; we chose 21 years. But we did provide for the two exit routes which I mentioned. One is the ability to go to the court to get a more extensive period and the other one is the Charity Commissioners. I think we have to assume both the courts and the Charity Commissioners between them are going to do what is in the best interests of the public, which after all is the beneficiary of charitable gifts.

Q17 Lord Hodgson of Astley Abbotts: But if we are sitting here in a year's time with a Capital Income Trusts Bill, there is nothing in this where we will say, "Oh dear, we should have looked at this when we were doing the Perpetuities and Accumulations Bill"?

Lord Justice Etherton: No.

Lord Bach: My Lord Chairman, could I just say something on this question?

Q18 Chairman: Of course.

Lord Bach: It certainly is not on the technical nature of it, but to say that Government and my Department have just received the Law Commission Report that the noble lord, Lord Hodgson referred to, and will be considering it and responding to it in the usual way. Of course our view is that it is quite separate from the Bill which is before the Committee today and we hope to provide an initial response, our response, to that report within six months.

Chairman: Thank you. I think Lord Goodhart may have a question either on the 125 year period or the 21 year period.

Lord Goodhart: I think we can leave the 21 year period aside for the time being. I raised the question of time for the duration of trusts in what I call the Second Reading, even though strictly speaking it was not a Second Reading, and that is why I want to raise it again, although I understand this point has already been raised from a different attitude from mine. I should apologise for being late; I am afraid I got tied up in a critical moment of the Joint Committee giving pre-legislative scrutiny to the Bribery Bill, as indeed did my noble lord, Lord Thomas ---

Lord Thomas of Gresford: But for longer!

Q19 Lord Goodhart: So far as the duration of the time is concerned, I do not think anyone should be entitled to tie up assets in a trust fund into a really more distant and extremely distant future. If we had had a 125 year rule in the past, then we would find ourselves dealing with trusts created in 1884, and the question is therefore what is the justification for putting it up beyond 100 years? I can see with the increasing longevity of people there is a justification for putting it up from 80 to 100 years, but what is the justification for saying that my assets could be put into a trust and can still be there in the same trust 125 years later?

Lord Justice Etherton: The period of 125 years, as is made clear in the report, is based on the best estimate for the longest period equivalent to a life in being plus 21 years today, which was actually taken back in 1988. Advice was taken on that and that was the period in terms of longevity actual and anticipated in the immediate future, and we thought it right to continue to use the principle of the common law, for want of anything else, a life in being plus 21 years, which I was explaining before is based on the concept of one generation plus more or less a minority, bearing in mind the age of minority has changed. That was the principal approach. There is a strong argument for saying that in fact 80 years, which was the 1964 Act provision, was too little. As I said in my opening statement to my Lord Chairman and the Committee, in this area, on this question, like others, there is not one correct answer. Many people have perfectly legitimate different views and we received them from a large number of people - 62 consultees on our first consultation - and they varied from 80 years or less to 125. That was the basis. I cannot say that 100 years is definitely wrong, I can say that I think 80 years would certainly not be correct, and that was the advice we received on longevity. As I explained, it was also generous to those who thought there should be no period at all, but that was the principle of the matter. I would add, again as I said in my opening remarks, there is not one correct answer but what is significant is that when consultation took place on the Bill in its current form certainly on this point, the latest of the three consultations in 2008, it received total support in its current form from the Chancery Bar Association, the Law Society, the Trust Law Committee and STEP, and I think we ought to at least give some note to the vast number of people who are represented by that group of practitioners.

Q20 Lord Clinton-Davis: Can I refer to paragraph 20 of the Explanatory Notes? I am a little naïve about this because I have never practised in this field at all but it is said in that paragraph, "The rule under the Bill will not apply to future rights outside these categories, such as future easements, options to purchase, and rights of pre-emption." Why not? The last sentence of paragraph 20 on page 5.

Lord Justice Etherton: Because Clause 1 of the present Bill defines the perpetuity rule as essentially applying to successive interests under trusts and only to a certain number of limited non-trust dispositions. So the definition in Clause 1 of the estates or property to which the rule applies, does not encompass any of these three items. That is the short answer.

Q21 Lord Goodhart: Could I raise one question about accumulations? I think the complication of the present law on accumulations is unacceptable and, having considered it, I now agree with removing the specific limits on them. What does concern me is we might get a Thellusson situation again from time to time, and it may be simply the people who are creating trusts do not realise the problems they are creating when they direct that there should be an accumulation from start to finish of a lengthy trust. Has it been considered there should be some sort of safety valve to this, that it should be possible for trustees perhaps to either have power or at any rate get the authority of the court to allow them to distribute income where that seems to be plainly for the benefit of the people for whom the trust was ultimately designed?

Lord Justice Etherton: We have not consulted specifically on that issue. The consultation over accumulation certainly concerned whether or not the rule should be abolished in whole or in part, and if it was not abolished in whole, what other provisions there should be. I think my answer to you, Lord Goodhart - one with which you will be very familiar yourself - will be that in an appropriate case, of course, the court could order a variation of the trust if it proved to be necessary, but, more to the point, this reflects something which I think we all value: autonomy: the autonomy of the settlor to do what is right within what may be acceptable limits. Of course, the settlor advice can always include trust provision, perhaps for the trustees to do whatever is appropriate in the circumstances. I think the principle behind this was to grant autonomy to settlors in the absence of some very good countervailing reason. The original Thellusson Act which followed the Thellusson case was the result of a misconceived view about the likely implications of the Thellusson will. Those misconceptions were proved to be correct. You will recall that it was thought that if property was tied up for generations under his will it might bankrupt the nation at the end of the day, because so much capital was stifled. In the end, when they had made the distribution in about 1860, there was exactly the same amount distributed as was in there originally because the lawyers had taken the rest! I am afraid that the advice we have received at the time was that in the current state of our national economy it is not conceivable that granting this right on the settlors will in any way affect the national economy. The only other basis for the Thellusson Act, the original Accumulations Act in 1800, was that it was thought to be morally repugnant that a man who left a wife and children should direct that so much of his estate should be accumulated. That is a matter, again, I think we would say nowadays, for different legislation under which they can claim if they are dependants, or, in the case of a wife, her entitlement. My answer to you is to say that it is in accordance with the principle of the Act to grant autonomy in this respect to settlors in the absence of any good evidence that this would cause harm to others.

Q22 Lord Goodhart: I can certainly see circumstances in which the Variation of Trusts Act would have no operation to put things right. I feel slight regret that misguided people can be allowed to put money into a fund which will produce nothing for 125 years to anybody's benefit, but I suppose the answer is that if people are that stupid, while it will not affect them, perhaps their families ... I do not say that their families would deserve it, but ----

Lord Justice Etherton: It seems unlikely that many people will do this. Perhaps I can correct one general misconception, which was, again, I think, a misconception behind the original Act, that if a settlor directs accumulation for a longer period, effectively something is denied to the economy that otherwise would be there; in other words, there is a stultification of the use of money. This is a misconception, because the money has to be invested - you have to buy shares, you have to invest in something - and that money which is invested in whatever it may be is itself forming part of the currency of the economy. Unless it is put in gold bars and diamonds - which may be a good thing to do today - generally speaking, the money is in circulation and is doing something somewhere.

Lord Goodhart: I would entirely accept that, it is just that I was worried about or somewhat unhappy with the idea of an unpleasant settlor being in a position to deprive a family of any benefit for 125 years. But, still, I suppose that is up to them.

Q23 Chairman: That might be an appropriate moment to thank Sir Terence very much for his evidence. It has been extremely valuable, if I may say so. Is there anything else that Lord Bach would like to add?

Lord Bach: I think only to thank Sir Terence.

Chairman: Thank you very much.