Stephenson v Barclays Bank Trust Co Ltd [1975] 1 WLR 882

Facts

• Barclays Bank Trust Co Ltd acted as trustee for a trust containing shares in a company.
• The beneficiaries were absolutely entitled to the trust assets, being of full age and capacity.
• The beneficiaries sought to terminate the trust under the rule in Saunders v Vautier, requesting transfer of the trust shares to themselves.
• The Inspector of Taxes argued that this transfer constituted a disposal for capital gains tax (CGT) purposes, triggering a chargeable gain under the Finance Act 1965.
• The beneficiaries contended that they were already absolutely entitled, so no disposal had occurred.

Issues

1. Whether the act of beneficiaries terminating a trust under the rule in Saunders v Vautier and taking transfer of trust assets constitutes a disposal for CGT purposes under the Finance Act 1965.
2. Whether such a transfer results in a chargeable gain and associated tax liability for the beneficiaries.

Decision

• The court held that the termination of the trust by the beneficiaries did not constitute a disposal for CGT purposes.
• It was reasoned that the transfer of the trust assets was merely a formal recognition of the beneficiaries' existing equitable rights, not a transfer of ownership.
• No chargeable gain arose from the termination of the trust in these circumstances.

Legal Principles

• The rule in Saunders v Vautier allows beneficiaries who are absolutely entitled and of full age and capacity to require trustees to terminate the trust and transfer the assets.
• For CGT purposes, no disposal occurs on trust termination where beneficiaries are already absolutely entitled to the assets.
• Tax legislation should be interpreted consistently with fundamental trust law principles to prevent undue tax liabilities when beneficiaries exercise their rights.
• The mere formalization of beneficiaries’ equitable holdings does not amount to a "disposal" for capital gains tax.

Conclusion

The court clarified that terminating a trust under the rule in Saunders v Vautier does not trigger a disposal for capital gains tax where beneficiaries are absolutely entitled, ensuring certainty for trustees and beneficiaries regarding the tax treatment of such trust terminations.