What is being consulted on?
The Law Commission's proposals on the abolition of statutory restrictions on the accumulation of income arising from property held under trusts.
Why are these changes needed?
The law in this area has its roots early 19th century and its suitability to modern dealings in property is open to question. It has become needlessly complicated and technical, and it is liable to frustrate the wishes of the person setting up the trust. Policy arguments in relation to charitable trusts argue for them to be treated differently.
Who will these proposals affect?
It is anticipated that these proposals will impact primarily upon people and corporations setting up trusts or making donations to charities with the intention of directing the use of income in the future. It also affects their legal advisers, the trustees and the beneficiaries under those trusts.
What will be the financial impact of the changes?
The ability of trusts to accumulate income will be broadened, resulting in larger conversions of income to capital and more effective financial settlements. Where charities are concerned, the proposals will allow sufficient accumulation in the ordinary case of affairs, with ample scope for them to accumulate income beyond the normal permitted period where contingencies make this expedient in the interests of the charity. A simpler process of drafting and setting up trusts as a result of the proposals will lead to lower legal and other professional costs.
How will these proposals be taken forward, and when will they be implemented?
We intend that the proposed changes to legislation will be implemented by a Regulatory Reform Order made under the Regulatory Reform Act 2001. Subject to the outcome of consultation, we propose that the changes be implemented during 2003.
Consultation
This consultation is being made in accordance with the requirements of the Regulatory Reform Act 2001 (summary at Annex A) and the terms of the Government's Code of Practice on Written Consultations (Annex E).
All responses should be received by 29 November 2002.
This consultation paper sets out proposals for reforming the legislation governing the accumulation of income arising from property held on trust.
Changes are required to simplify the unnecessarily complicated and inconsistent rules governing excessive accumulations. The proposals will make the law in this area simpler and easier to understand for all those involved.
These proposals would implement in part the recommendations of the Law Commission's report no. 251, The Rules Against Perpetuities and Excessive Accumulations, which was published in March 1998. The full Report is available on the Law Commission's website, at www.lawcom.gov.uk/library/lc251/ lc251ind.htm. The Government's acceptance of the recommendations in that Report was announced in answer to a Parliamentary Question on 6 March 2001.
The only area in which the proposed changes differ from these recommendations is in relation to charitable trusts, where we propose that the Charity Commission should have the additional power to authorise class derogations from the general position to supplement its existing charity-by-charity derogation power.
The reforms will principally affect those people setting up trusts with a view to accumulating income for a purpose some time in the future. In addition, the workload on the legal profession and the courts should be reduced, together with the costs for all those involved.
We propose to introduce the reform by means of a Regulatory Reform Order under the Regulatory Reform Act 2001. This consultation is being conducted in accordance with the provisions of section 5 of the Act. Views are invited on all aspects of the consultation paper, and a number of specific questions are set out at the end of the document.
Copies of the consultation paper are being sent to the following professional organisations and representative bodies, among others:
PROFESSIONAL BODIES
Association of British Insurers
Association of Charity Officers
Association of Chartered Certified Accountants
Association of Consulting Actuaries
Association of Independent Financial Advisors
Association of Lawyers & Legal Advisors
Association of Pensions Lawyers
Chancery Bar Association
Charity Law Association
Chartered Institute of Bankers
General Council of the Bar
Insolvency Practitioners Association
Institute of Chartered Accountants in England & Wales
Institute of Legal Executives
Law Society
Society of Trust and Estate Practitioners
Willwriters Association
GOVERNMENT BODIES
Charity Commission
Department for Education and Skills
HM Land Registry
National Assembly for Wales
NHS Executive
Scottish Executive
REPRESENTATIVE BODIES
Association of Charitable Foundations
Association of Corporate Trustees
Association of Investment Trust Companies
Association of Pensioneer Trustees
British Bankers' Association
British Chambers of Commerce
British Property Federation
Building Societies Association
Charities Property Association
Confederation of British Industry
Consumers Association
Council of Mortgage Lenders
Country Landowners Association
Federation of Small Businesses
Forum of Private Business
Independent Schools Council
Institute of Directors
National Association of Citizen's Advice Bureaux
National Association of Pension Funds
National Consumers Council
National Trust
Pensions Management Institute
Society of Pension Consultants
Trade Union Congress
UK Association of Preservation Trusts
Westminster Property Owners Association
RELIGIOUS BODIES
Church of England
Church Commissioners
Roman Catholic Church
A full list of consultees, which numbers about 150, can be obtained from:
Responses are also welcome from others, who have not received a copy of the consultation paper directly from the Lord Chancellor's Department.
A questionnaire relating to this consultation paper is at Annex D. Please send your response by 29 November 2002 to:
Mark Farrow
Lord Chancellor's Department
Civil Law Development Division
Room 3.05
Southside
105 Victoria Street
London SW1E 6QT
Tel: 020-7210 1202
Fax: 020-7210 1269
Email:Mark Farrow
Representative groups are asked to provide a summary of the people and organisations they represent when they respond.
The Department may wish to publish responses to this consultation document in due course. Please ensure your response is marked clearly if you wish your response or name to be kept confidential. Confidential responses will be included in any statistical summary of numbers of comments received and views expressed.
Respondents should also note the disclosure provisions under the Regulatory Reform Act summarised in paragraphs 8-10 of Annex A and paragraphs 17-20 of Annex B.
Further copies of this consultation paper can be obtained from the Lord Chancellor's Department website, www.lcd.gov.uk, or from Mark Farrow at the above address.
This consultation paper sets out proposals for reforming the legislation governing the prohibition of excessive accumulations of income arising from property. It adopts in part the recommendations contained in Law Commission Report, The Rules Against Perpetuities and Excessive Accumulations.
Before the Report was published, the Law Commission consulted a wide range of legal, academic and business interests. There was very clear support from respondents for legislative reform in this area. Almost all the responses received favoured either the reform of the rule against excessive accumulations or its complete abolition. The latter option was strongly supported by a number of large composite groups of practitioners whereas the option to reform was supported by a majority of the individual responses.
In view of the extensive consultation and consideration already carried out by the Law Commission, this Consultation Paper does not include a detailed analysis of the existing law or the arguments for and against the options for reform. Instead, it concentrates on taking forward the Government's preferred option by way of a Regulatory Reform Order and the extent to which that proposal meets the statutory tests set out in the 2001 Act. If you have views on the acceptability of the preferred option or want to suggest alternative approaches to it, we would welcome them. You should nevertheless feel free to comment on any particular aspect of the proposals.
The proposed reforms will apply to England and Wales only. It would not remove or modify any of the legal functions of the National Assembly for Wales as transferred to it under the Government of Wales Act 1998 or any other subsequent legislation. Their views are being sought as statutory consultees given that the proposal extends to Wales.
Terms marked with an asterisk (*) are defined in the Glossary.
Introduction
There are two main Acts of Parliament affected by the proposed reforms:
the Law of Property Act 1925
the Perpetuities and Accumulations Act 1964.
When reference is made to one of these Acts, it will be by year only.
The rule against perpetuities * and the rule against excessive accumulations * are restrictions on how a person settles his or her property upon another person, for example by making a will or setting up a trust or making a donation to charity, when that person wishes to direct how that property is used in the future.
The purpose of the rules is to strike a fair balance between the interests of the present generation wishing to dispose of its property as it sees fit, and the interests of future generations seeking to make best use of property in contemporary circumstances. Some accumulation is desirable as it allows settlors to determine how their income is distributed in the future, but a limit is necessary as it prevents this income being withheld for an excessively long period of time.
Perpetuities
The rule against perpetuities is, in effect, an overall time limit within which any direction by the settlor must take effect. The present perpetuity period * is defined as 'one or more lives in being * plus a period of 21 years' or 'a specified period of up to 80 years', so will vary from case to case. The Law Commission proposes a standard period of 125 years. The rule derives from common law and therefore cannot be amended by Regulatory Reform Order. The Government intends to implement these proposals in relation to perpetuities by primary legislation when Parliamentary time allows.
Excessive Accumulations
The rule against excessive accumulations is a further restriction, imposed by statute. It limits the extent to which an individual settlor can direct that income from a property should be added to capital, rather than used as income. A direction to accumulate is invalid to the extent that it exceeds the relevant statutory period.
The first rule against excessive accumulations was contained in the Accumulations Act 1800. It followed the case of Thellusson v Woodford in which a direction in a trust document to accumulate for what was then the full perpetuity period was upheld as lawful. The reasons for this legislation were essentially political, driven by a fear that accumulated funds would become so large as to 'compromise the national state power'.
At present the law on accumulations is set out in section 164 of the 1925 Act and section 13 of the 1964 Act. Their combined effect is twofold, namely:
subject to certain exceptions, any direction that income should be accumulated beyond one of the six periods allowed by the two sections is void to the extent that it exceeds the chosen period; and
any surplus income * arising from an invalid direction to accumulate passes to the person who would have been entitled to it if there had been no such direction.
A direction to accumulate that exceeds the relevant accumulation period and also contravenes the rule against perpetuities is wholly void.
Under section 164(1) of the 1925 Act the permissible periods are:
the life of the grantor or settlor;
a term of 21 years from the death of the grantor, settlor or testator;
the duration of the minority or respective minorities of any person or persons living or en ventre sa mere * at the death of the grantor, settlor or testator; or
the duration of the minority or respective minorities only of any person or persons who under the limitations of the instrument directing the accumulations would, for the time being, if of full age, be entitled to the income directed to be accumulated.
Section 13(1) of the 1964 Act added two more permissible accumulation periods:
term of 21 years from the date of the making of the disposition; and
the duration of the minority or respective minorities of any person or persons in being at that date.
The person setting up the trust may select any one of the six statutory periods of accumulation but cannot specify more than one of them. If no period is selected, the court must decide which to use bearing in mind the facts of the case and the presumed intention of the settlor.
The desired effect of the reforms overall will be to simplify this needlessly complicated area of law and to allow the wishes of settlors to be taken more into account when they direct the accumulation of trust income. In relation to charities, the proposals will strike a balance between preventing indefinite accumulation of income and providing the opportunity for them to build up reserves for some proper object.
Proposal A: Repeal of statutory restrictions on excessive accumulations.
It is proposed that sections 164, 165 and 166 of the 1925 Act and section 13 of the 1964 Act be repealed so that the statutory restrictions on accumulations are abolished (subject to the provisions of Proposal B below).
The Law Commission could identify no coherent reason for limiting accumulations to some shorter period than the perpetuity period, and also noted that the rule may frustrate the reasonable wishes of the settlor. So the proposed reform would simplify the law, and ensure that settlors could dispose of their assets as they wished.
The effect would be that the full perpetuity period would also be the upper limit for accumulations, as was the case under the common law before 1800. We would welcome views on whether any difficulties would arise in practice if the restrictions on accumulations were removed before the introduction of a standard 125-year perpetuity period.
Effect on existing trusts
The reform would be prospective, and subject to one exception would not affect existing trusts. The rule against excessive accumulations would cease to apply only to trusts taking effect after any legislation is brought into force. Applying the reforms retrospectively would have the effect of validating trusts that had been treated as void under the present rules, and could also interfere with commercial bargains made under the current law. However, in accordance with the rules governing the variation of trusts, existing trusts will be able to benefit from the proposals if it is expedient in their interests, by making an application to the court under section 57 of the Trustee Act 1925.
The exception to prospective application relates to a 'special power of appointment'. This is a power exercisable by a trustee (or any other person) to appoint to another some or all of the trust property, subject to the fact that it must be exercised in favour only of one of a number of designated persons or classes of persons. In such cases, even if the instrument conferring the power were set up before the proposed Order came into effect, the exercise of the power would thereafter be subject to the proposed reform. This exception makes the law in relation to special powers clearer and simpler: there will be one rule in relation to all special powers exercised after the proposed legislation comes into force, regardless of when they were created. It may also make it easier for the objects of the special power to plan their affairs better.
Burdens, necessary protections, rights and freedoms
The Regulatory Reform Act 2001 (RRA) requires all proposals to satisfy certain legal tests - specifically, that the proposal does not remove any necessary protection, and that it does not prevent anyone from continuing to exercise any right or freedom which they might reasonably expect to enjoy (see Annex A). Additionally, any proposal to impose or re-impose a burden must satisfy tests of proportionality, fair balance and desirability.
This proposal falls within the power conferred under section 1(1)(a) of the RRA (the removal or reduction of burdens). We believe that it does not remove any necessary protections, or remove any rights or freedoms.
Removal of burdens: It would remove the restriction on a settlor, wishing to make a direction of an accumulation of income, of having to choose one of the six statutory periods (and the burden on the court of deciding which period to apply if one is not chosen). It would also increase flexibility in dealings with property and in drafting trusts; make the law easier to understand for those who have to apply it and significantly reduce the scope for errors (easily made, given the complexity of the present law); simplify and shorten the drafting of legal documents; and reduce legal and perhaps other professional costs, for example with regard to surveyors and accountants. Any quantitative information which consultees can provide on this would be welcome.
Necessary protections: As outlined in paragraph 6, the original rules against excessive accumulations were essentially political, driven by a fear that accumulated funds could become so large as to pose a threat to the state. Due to the facts that capital has now become global and that states wield far more economic power than previously, the accumulation of income by trusts poses a much less significant threat to the state than it did in the 19th century. Accordingly, a relaxation of the rules as proposed here removes no necessary protection.
The existing accumulation periods could be said to provide protection to future generations against settlors tying up trust property for excessive lengths of time. However, we agree with the Law Commission that the accumulation period does not need to be as short as the existing periods in order to give that protection. Essentially, it is the perpetuity period which provides this protection; that is not affected by these proposals.
Rights and freedoms: this proposal does not prevent any person from continuing to exercise any right or freedom they might reasonably expect to enjoy. It is deregulatory in nature and essentially increases the freedom of settlors to dispose of their property as they wish.
Proposal B: Restriction on accumulation for charitable trusts
It is proposed that in the case of charitable trusts the accumulation of income be restricted to a period of 21 years, subject to derogations at the discretion of the Charity Commission under the proposed Order and under section 26 of the Charities Act 1993.
The Law Commission concluded that there should remain some form of control on the accumulation of income by charitable trusts, without preventing them from building up reserves for a proper reason.
At present charities are subject to the same rules as all other trusts in that they are only permitted to accumulate income for one of the six periods prescribed by statute. However, they are able to retain income administratively* (that is, without converting it to capital) for a 'reasonable period'. What is 'reasonable' will depend on the circumstances of the particular charity.
The Law Commission's Report reasoned that it would be unsatisfactory if charities had the same powers of accumulation as other trusts. There are compelling policy reasons for this. In the absence of any restriction on the accumulation of income by charities, the only restraint would be provided by the fiduciary obligation of the trustees to exercise the power of accumulation in the best interests of the trust. Subject to this, in theory a charity could accumulate indefinitely. This would be unsatisfactory as a settlor could direct the long-term accumulation of income for some charitable purpose which may not come about for many years. Accordingly, there would be no public benefit during this time, although the charity would still benefit from tax exemptions on the income.
It is proposed that charitable trusts should still be subject to a limit on the extent to which they are able to accumulate income, and that this limit should be a single statutory period of 21 years. The founder of the charity will be able to choose the starting point for this period. It is again intended that this be applicable only to trusts created after the legislation is brought into force.
Powers of Charity Commission
The Law Commission originally recommended that there should be no derogation from this general principle, other than the existing power under section 26 of the Charities Act 1993. This provides the Charity Commission with the power to authorise or direct a specific accumulation without regard to the statutory restrictions, provided this is in the interests of the particular charity. After discussion between the Charity Commission and the Law Commission, it is now proposed that the Charity Commission should have power to make general derogations from the standard period. That would help many charities, for example where funds are required to be accumulated to finance the extraordinary repair of buildings. The main criterion the Charity Commission would use in their application of this power would be whether a derogation would be expedient in the interests of the charity in the furtherance of its objects.
Burdens, necessary protections, rights and freedoms
As explained above at paragraph 17, the RRA requires all proposals to satisfy certain legal tests. This proposal falls within the power conferred under section 1(1)(c) of the RRA (the imposition of a new burden). We believe that it does not remove any necessary protections, or remove any rights or freedoms; and that the new burden meets the tests of proportionality, fair balance and desirability.
Necessary protections: we believe that the proposal does not remove any necessary protections; it merely simplifies the way in which, for the reasons of public policy set out in paragraph 26, the law protects against excessive accumulation of income by charities.
Rights and freedoms: the right or freedom of a donor to stipulate that a charity should accumulate income will remain, subject only to the limits outlined above (given that the 21-year period is not as long as the longest currently available accumulation period). In practice, this freedom is enhanced, as a donor may stipulate any period up to the 21-year limit, rather than one of six set periods, as now.
Burdens: the proposal does create a new burden, to the extent that the donor to a charity may not stipulate an accumulation period of longer than 21 years. As noted in the previous paragraph, some of the currently available accumulations periods do, or may, last longer than that (it can depend on the length of a life).
We believe that this new burden satisfies the tests of proportionality, fair balance and desirability. It is proportionate in that some limit is necessary upon the extent to which charities may accumulate income for policy reasons, but it is important this is balanced with the need for charities to be able to accumulate for contingencies. Fair balance is satisfied in that the small burden upon the settlors and donors outlined above is appropriate given the benefit to society overall of ensuring charities continue to operate in the correct manner. We feel that the proposal, as a whole, is desirable.
The proposed power of the Charity Commission to issue general derogations constitutes a new, burden upon them, in that they will be expected to make orders exempting charities from the statutory restrictions. This additional burden will be very small, and could well be offset by a reduction in the need to make orders in respect of each individual charity in the class. In addition, those trusts making applications under this power will also be subject to a new procedural burden, that of having to apply for an order. It seems likely that the burden would be no greater than that incurred in applying for an order specific to the charity under the existing provisions. In any case, we believe that the burden satisfies the tests of proportionality (the benefit of allowing charities to accumulate income for unseen contingencies outweighs the possible administrative burden upon the Charity Commission and trustees of dealing with and making applications); fair balance (the proposed derogation power will ultimately help the Charity Commission and charities in their work, while the 21-year limit will only impact negatively upon small groups); and desirability (as discussed above).
Proposal C: Settlements and donations by corporations
It is proposed that the rules governing accumulations be extended to cover settlements and donations by corporations, as well as by natural persons.
At present, settlements made by corporations, as opposed to individuals, are not restricted by the rules governing accumulations. This is because of a High Court decision, Re Dodwell's Trust Deed, in which is was held that corporations are not 'persons' for the purposes of section 164 of the 1925 Act. This is anomalous, given the policy reasons for a restriction on the power to direct accumulations. The proposals would bring corporate settlors in line with individuals by standardising the maximum accumulation period as described above.
Burdens, necessary protections, rights and freedoms
As explained above at paragraph 17, the RRA requires all proposals to satisfy certain legal tests. This proposal falls within the power conferred under section 1(1)(c) of the RRA (the imposition of a new burden). It will impose a new burden upon corporate settlors by limiting to the statutory perpetuity period the length of time for which accumulation of income can be directed; and by limiting to 21 years the length of time for which charities can be directed to accumulate income from corporate donors. We believe that it does not remove any necessary protections, or remove any rights or freedoms which corporations might reasonably expect to enjoy; and that the new burden meets the tests of proportionality, fair balance and desirability.
Necessary protection, rights and freedoms: any additional protection given by the anomalous position of corporate settlors cannot be regarded as necessary, given that it is not available to private settlors. This proposal removes no rights and freedoms which corporations might reasonably expect to enjoy; the distinction between individuals and corporations here is anomalous, and could be open to abuse by sophisticated settlors by settling assets in a trust through a corporate vehicle.
Burdens: We believe that this new burden will have very little impact in practice, and that it meets the tests of proportionality (the benefits of clarity, the removal of anomalies and the meeting of the policy objectives of limitations on accumulations are proportionate to the small restriction imposed on corporations), fair balance (the interests of the wider public in ensuring that charities fulfil their aims balances the removal of the freedom of corporations to stipulate that charitable donations should be perpetually accumulated) and desirability (in the context of these proposals as a whole, as described above).
Life in being
A life in being is a human being who is alive at the effective date of a disposition. A child who has been conceived but has not yet been born also qualifies as a life in being for this purpose, provided that he or she is in fact born alive.
Perpetuity period
The perpetuity period generally refers to the period actually prescribed by the perpetuity rules within which interests must vest if they are to be valid. The present perpetuity period is defined as 'one or more lives in being *plus a period of 21 years' or 'a specified period of up to 80 years', so will vary from case to case.
The rule against excessive accumulations of income
The rule against excessive accumulations of income is a statutory rule which restricts the time for which income may validly be accumulated under a direction to accumulate. Accumulation is the process by which income is converted into capital under a power or duty to accumulate. Capitalising income with regard to charitable trusts means that the obligation to spend the income for the purposes of the charity is discharged.
The administrative retention of income
The administrative retention of income is a completely separate concept from the accumulation of income. It is the temporary retention of income, usually as an administrative precaution against unseen future deficiencies, and will not be affected by the proposals in this document. Once a permitted period for accumulation has expired, the administrative retention of income will be possible, subject to the obligation to spend that income within a 'reasonable' period following receipt, and, in the case of charities, justification of the retention to the Charity Commission. The income is not converted into capital.
The rule against perpetuities
This common law rule regulates the period of time within which future interests in property must vest.
Surplus income
Where trustees are directed to accumulate income beyond the period allowed by law, the income arising thereafter is known as surplus income.
En ventre sa mere
The phrase en ventre sa mere refers to a child in gestation and means 'an unborn child inside the mother's womb'.
Each proposal for a Regulatory Reform Order must satisfy a number of legal tests. The questions in this document are designed to elicit the information that the Minister will need in order to satisfy the Committees that, among other things, the proposal satisfies these tests. In particular, the Regulatory Reform Act requires information on:
whether any of the proposals could remove any necessary protection;
whether any of the proposals could prevent any person from continuing to exercise any right or freedom which he might reasonably expect to continue to exercise and, if so, how he is to be enabled to continue to exercise that right or freedom;
whether any burdens are being imposed on any person in the carrying out of an activity;
whether any savings or increases in cost are estimated to result from the proposals and, if so,
the reasons why savings or increases in cost should be expected, and
if it is practicable to make an estimate of the amount, that amount and how it is calculated,
any benefits (other than savings in cost) which are expected to flow from the implementation of the proposals.
For this reason, we would particularly welcome your views on how each aspect of the proposed changes in this consultation document meets the following tests:
Necessary protection - the Minister making a Regulatory Reform Order must be of the opinion that it does not remove any necessary protection. This means that no order can be made unless the Minister is of the opinion that it would maintain any protections that the Minster considers to be necessary. Such protection relates to the checks and balances associated with a particular regulatory regime. The protection does not have to be statutory in nature and does not have to be for the purposes originally intended by Parliament. If the Minister considers a particular protection to be no longer necessary, he or she must provide the Parliamentary scrutiny committees with compelling evidence to support this view.
Rights and freedoms - an RRO cannot be made unless the Minister is satisfied that it does not prevent any person from continuing to exercise any right or freedom which they might reasonably expect to enjoy. This test recognises that there are certain rights that it would not be fair to take away from people under these procedures.
Other safeguards
In order to provide for the effective reform of regulatory regimes, RRO's can re-state existing burdens and create new burdens. But where that is the case stringent additional safeguards apply:
proportionality - If a new legal burden is being imposed, or an existing burden retained or increased, then the Minister must ensure that it is proportionate to the benefit it brings. This means, for example, that imposing a burden of several thousand pounds on charities for some negligible benefit would not pass the test.
fair balance - before proposing any RRO that has the effect of imposing legal burdens, the Minister must be of the opinion that a fair balance is being struck between the interests of the person affected by the Order and the interests of the wider public. In this context, fairness does not mean that everyone must benefit. What it does mean is that the benefit to society as a whole must be such as to justify the additional burden on a small group or the individual.
desirability - the Minister making the Regulatory Reform Order must be of the opinion that the extent to which it removes burdens or brings other benefits makes the Order as a whole desirable.
Consultation
The Act requires Departments to consult widely on regulatory reform proposals. It requires us to collect evidence on a number of issues from a wide range of consultees. A selection of the list of consultees, including the devolved administrations, to whom the document has been sent can be found in the Introduction to this document. A full listing is available on the Internet at:
Comments are invited from all interested parties, and not just from those to whom the document has been sent. A response form (with questionnaire) can be found at Annex D.
The Parliamentary Committees who will deal with orders under the Regulatory Reform Act have requested that a note explaining the Parliamentary process for orders to be made under the Act be annexed to all consultation papers so that consultees understand when and to whom they are able to put their views, should they wish to do so. This is set out in Annex B.
This consultation document follows the format recommended by the Cabinet Office for such proposals. The criteria applicable to all UK public consultations under the Cabinet Office Code of Practice on Consultation are set out in Annex E.
Disclosure of responses
Normal practice will be for details of representations received in response to this consultation document to be disclosed, or for respondents to be identified.
Please identify any information which you or any other person involved do not wish to be disclosed. Paragraphs 17-20 of Annex B explain the provisions of the Regulatory Reform Act in this case.
You should note that the Scrutiny Committees will be able to request sight of your representation as originally submitted. We envisage that, in the normal course of events, this provision will only be used rarely and on an exceptional basis.
Introduction
These reform proposals will require changes to primary legislation in order to give effect to them. The Minister could achieve these changes by introducing a Regulatory Reform Order under the Regulatory Reform Act 2001. Regulatory Reform Orders are subject to preliminary consultation and to extended Parliamentary scrutiny (by Committees in each House of Parliament) of any subsequently proposed Order. On that basis, the Minister invites comments on these reform proposals as measures that might be carried forward by a Regulatory Reform Order.
Regulatory reform proposals
This consultation document has been produced because the starting point for regulatory reform proposals is thorough and effective consultation with interested parties. In undertaking this preliminary consultation, the Minister is expected to seek out actively the views of those concerned, including those who may be adversely affected, and then to demonstrate to the Scrutiny Committees that he or she has addressed those concerns.
Following the consultation exercise, when the Minister lays proposals before Parliament under the Regulatory Reform Act, he or she must also lay a report for consideration by the Scrutiny Committees setting out a summary of:
the burden imposed by the existing law;
whether any of those burdens are proposed to be removed or reduced;
how the proposals otherwise further the other objects of the Regulatory Reform Act (re-enacting proportionate burdens, introducing new but proportionate burdens, removing inconsistencies and anomalies);
whether there is 'necessary protection' and how it is to be continued;
how any reasonable expectation of the exercise of rights or freedoms is affected (if at all) and how the exercise can be continued;
how new burdens (if any) are both proportionate and, taking the proposals as a whole, strike a fair balance between the public interest and the interests of the persons affected by the new burdens;
whether an Order that imposes burdens is desirable in terms either of the burdens it removes or the other benefits it brings;
whether any parts of the proposed Order are being designated as 'subordinate provisions', allowing them to be changed by less elaborate Parliamentary procedures in the future;
what cost savings or increases are expected, and why;
what other benefits there will be from the proposals;
details of the consultation process;
any representations received as a result of that consultation; and
the changes made as a result.
On the day the Minister lays the proposals and report, the period for Parliamentary consideration begins. It lasts for 60 days, excluding Parliamentary recesses of more than four days. If you want a copy of the proposals and the Minister's report, you will be able to get them either from the Government department concerned or by visiting the Cabinet Office's website at www.cabinet-office.gov.uk/regulation/act/index.htm.
Parliamentary scrutiny
Both Houses of Parliament scrutinise regulatory reform proposals and draft orders. This is done by the Scrutiny Committees.
Standing Orders in the Commons stipulate that the Committee there considers whether proposals:
appear to make an inappropriate use of delegated legislation;
remove or reduce a burden or the authorisation or requirement of a burden;
continue any necessary protection;
have been the subject of, and take appropriate account of, adequate consultation;
impose a charge on the public revenues or contain provisions requiring payments to be made to the Exchequer or any government department or to any local or public authority in consideration of any licence or consent or of any services to be rendered, or prescribe the amount of any such charge or payment;
purport to have retrospective effect;
give rise to doubts whether they are intra vires;
require elucidation, are not written in plain English, or appear to be defectively drafted; or
appear to be incompatible with any obligation resulting from membership of the European Union;
prevent any person from continuing to exercise any right or freedom which he might reasonably expect to continue to exercise;
satisfy the conditions of proportionality between burdens and benefits set out in sections 1 and 3 of the Act;
satisfy the test of desirability set out in section 3(2)(b) of the Act;
have been the subject of, and take appropriate account of, estimates of increases or reductions in costs or other benefits which may result from their implementation; or
include provisions to be designated in the draft order as subordinate provisions; and in the case of the latter consideration the committee shall report its opinion whether such a designation should be made, and to what parliamentary proceedings any subordinate provisions orders should be subject.
The Committee in the House of Lords will consider each proposal in terms of similar criteria, although these are not laid down in Standing Orders.
Each Committee might take oral or written evidence to help it decide these matters, and each Committee could then be expected to report:
whether the Minister should proceed to lay a draft order in the same terms as the original proposal, or
whether amendment is necessary, or
whether the order-making power should not be used (for example, because of the significance or sensitivity of the proposal).
Copies of Committee Reports, as Parliamentary papers, can be obtained through HMSO. They are also available on the Parliament website at:
http://www.parliament.uk/commons/selcom/drghome.htm for the Deregulation and Regulatory Reform Committee in the Commons; and
http://www.parliament.the-stationery-office.co.uk/pa/ld/lddereg.htmfor the Delegated Powers and Regulatory Reform Committee in the Lords.
After the 60 days for Parliamentary consideration, the Minister can lay a draft order before both Houses, this time for the approval of Parliament.
Each of the Scrutiny Committees examines the draft order to see how far its views have been taken into account. They report, within 15 sitting days, whether the draft order should be approved or not, and it would then be for the relevant House itself to take its final decision.
The final draft order then has to be approved by both Houses of Parliament before becoming law.
How to make your views known
Responding to this consultation document is your first and main opportunity to make your views known to the relevant department as part of the consultation process. You should send your views to the person named in the consultation document (as described on page 6). When the Minister lays proposals before Parliament you are welcome to put your views before either or both of the Scrutiny Committees.
In the first instance, this should be in writing. The Committees will normally decide on the basis of written submissions whether to take oral evidence.
Your submission should be as concise as possible, and should focus on one or more of the criteria listed in paragraph 6 above.
The Scrutiny Committees appointed to scrutinise Regulatory Reform Orders can be contacted at:
| Delegated Powers and Regulatory Reform Committee House of Lords London SW1A 0PW Tel: 020-7219 3103 Fax: 020-7219 2571 email: DPDC@parliament.uk |
Deregulation and Regulatory Reform Committee House of Commons 7 Millbank London SW1P 3JA Tel: 020-7219 2830/2833/2837 Fax: 020-7219 2509 email: deregcom@parliament.uk |
Non-disclosure of responses
Section 7 of the Act provides what should happen when someone responding to the consultation exercise on a proposed order requests that their response should not be disclosed.
The name of the person who has made representations will always be disclosed to Parliament. If you ask for your representation not to be disclosed, the Minister should not disclose the content of that representation without your express consent and, if the representation relates to a third party, their consent too. Alternatively, the Minister may disclose the content of the representation in such a way as to preserve your anonymity and that of any third party involved.
Information about third parties
If you give information about a third party which the Minister believes may be damaging to the interests of that third party, the Minister does not have to pass on such information to Parliament if he does not believe it is true or he is unable to obtain the consent of the third party to disclosure. This applies whether or not you ask for your representation not to be disclosed.
The Scrutiny Committees may, however, be given access on request to all representations as originally submitted, as a safeguard against improper influence being brought to bear on Ministers in their formulation of regulatory reform orders.
Introduction
The Law Commission's Report no. 251, The Rules Against Perpetuities and Excessive Accumulations, recommended the abolition of the statutory restrictions on the settlor's ability to direct the accumulation of income arising from trust property. This partial Regulatory Impact Assessment considers the likely impact of the proposals contained in the Report on business, charities and the voluntary sector.
The Law of Property Act 1925 and the Perpetuities and Accumulations Act 1964 provide six different periods within which the accumulation of income is permitted. The Law Commission's proposals seek to remove these unnecessary and complicated provisions in favour of having no restriction on accumulations in most cases, other than the overall perpetuity period within which interests in property must be vested. In the case of charitable trusts, there would be a standard accumulation period of 21 years.
Who will be affected?
Those principally affected by the proposals will be the settlors, that is those people making wills and setting up trusts, and who wish to direct that the income from the property be accumulated. For example, if a man set up a trust to provide for his infant grandson, he may wish that income be accumulated until the grandson's majority, at age 18. Businesses will be affected only to the extent of their involvement in the setting up of trusts that direct accumulation. We do not expect that this effect will be significant.
The proposals will also affect trustees; beneficiaries under the trusts; the legal advisers of all of these; the Charity Commission; and the courts.
Options
We consider that there are three options available in this area:
option 1 - Adopt the Law Commission's recommendations as a whole.
option 2 - Adopt the Law Commission's recommendations; and also provide that the Charity Commission has a power to make general derogations from the rule restricting the accumulation of income by charities.
option 3 - Make no change to the law.
Benefits
There are three particular groups who will benefit from the proposals:
settlors - will enjoy greater freedom to direct the accumulation of income due to the longer accumulation period proposed. The law in this area will be simpler and easier to understand, so there is less risk that the intentions of the settlor will be frustrated due to misunderstanding of the statutory provisions. This simplification of the law should reduce the cost of drafting trusts slightly. There should be less need for the courts to become involved to determine the intention of a settlor who failed to select one of the statutory accumulation periods.
trustees & beneficiaries - The ability of trusts to accumulate income will be broadened, mainly due to the longer maximum accumulation period, resulting in larger conversions of income to capital and more effective financial settlements.
charities - The present system permits that Charity Commission to authorise derogations from the statutory restrictions in the case of specific charities under section 26 of the Charities Act 1993. In addition, charities may accumulate income through administrative retention provided they justify this to the Charity Commission. The proposals will result in a more flexible system than this. General derogations will deal with circumstances that apply to all or defined groups of charities. This will reduce a burden on individual charities and the Charity Commission. Where a general derogation applies, charities will no longer have to seek a specific derogation or justify administrative retention, and the workload of the Charity Commission will be accordingly reduced.
Costs
These proposals do not create any additional costs. The only identifiable adverse implication of the measures is that the longer accumulation period will mean beneficiaries will lose some of the freedom to do with income as they wish. However, this reflects the policy intention of these new provisions, which is to introduce a better balance between the interests of the present and future generations.
Risk assessment
If the Law Commission's recommendations are not taken forward by Regulatory Reform Order, then the statutory restrictions will remain in force and the problems associated with them will remain. The law will remain unnecessarily complex with the risk that it will frustrate the intentions of those setting up trusts.
Compliance
There are no compliance or implementation costs.
Small business
Small businesses will benefit to the limited extent that they are likely to wish to set up trusts and direct accumulation.
Competition
Neither Option 1 nor Option 2 would have a significant effect upon competition in any of the markets identified. Few firms are likely to wish to set up trust funds and direct accumulation, but where this is the case, the effect should be beneficial, as the legislation relating to this process should become less complex. There is also a possibility that legal costs would be reduced.
Conclusion
The Law Commission's proposals are to all intents wholly beneficial to those affected by this area of law. However, it is impossible to ascertain how many new trusts are likely to take advantage of the greater freedom and to what extent, nor to estimate the extent of any savings in legal costs as a result of the law being simpler (although these are likely to be marginal). Given the nature of these proposals, we do not consider it either practicable or necessary to attempt to quantify the benefits for settlors.
We would welcome any views on whether you believe any costs or savings that arise as a result of these proposals are actually quantifiable - in particular, whether the effect on legal or other professional costs can easily be estimated.
It may be possible to estimate the savings for the Charity Commission and charities arising from the power to make general derogations, and we would welcome views and data about this.
We would welcome your views on whether this assessment accurately identifies all the benefits and costs arising from these proposals, and whether you agree that the degree of their impact makes detailed quantification impractical and unnecessary. If you disagree, we should be grateful for your views on how you would go about it, and for any quantitative information you can provide.
Please respond as set out in the How to Respond section above
| Respondent Details |
| Name: Organisation: Address: Postcode: Telephone: Fax: email: |
| Please return by 29 November 2002 to: |
| Mark Farrow Tel: 020-7210 1202 |
| If you are replying on behalf of a representative group please summarise the people or organisations your group represents: |
| Please indicate if you are requesting non-disclosure of your response. |
| Consultees are invited to give reasons for their answers. |
Questions |
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If you have any complaints or comments about the consultation process, you should contact the Lord Chancellor's Department's consultation co-ordinator, Laurence Fiddler, on 020 7210 2622 or email him at Laurence Fiddler. Alternatively, you may wish to write to the address below:
Laurence Fiddler
Consultation Co-ordinator
5th Floor
Lord Chancellor's Department
Selborne House
54-60 Victoria Street
London SW1E 6QW
The criteria in the Code of Practice on Written Consultation issued by the Cabinet Office is as follows:
Timing of consultation should be built into the planning process for a policy or service from the start, so that it has the best prospect of improving the proposals concerned, and so that sufficient time is left for it at each stage.
It should be clear who is being consulted, about what questions, in what timescale and for what purpose.
A consultation document should be as simple and concise as possible. It should include a summary, in two pages at most, of the main questions it seeks views on. It should make it as easy as possible for readers to respond, make contact or complain.
Documents should be made widely available, with the fullest use of electronic means (though not to the exclusion of others), and effectively drawn to the attention of all interested groups and individuals.
Sufficient time should be allowed for considered responses from all groups with an interest. Twelve weeks should be the standard minimum period for a consultation.
Responses should be carefully and open-mindedly analysed, and the results made widely available, with an account of the views expressed, and reasons for decisions finally taken.
Departments should monitor and evaluate consultations, designating a consultation co-ordinator who will ensure the lessons are disseminated.