Vandervell v. I.R.C. 2 A.C. 291 (HL)
Facts and issues
Mr Vandervell wished to make a gift to the Royal College of Surgeons in order to endow a Chair of Pharmacology. They needed about £150,000.
He was equitable owner of a substantial number of shares in Vandervell Products Ltd, a private limited liability company which he controlled (which made, among other things, Vanwall racing cars).
The legal interest in Vandervell's shares was held by a bank as nominee.
In order to endow the Chair, he arranged with the bank orally (presumably to avoid stamp duty) to transfer both legal and equitable interests in these shares to the Royal College of Surgeons (RCS), giving a trustee company (Vandervell Trustees Ltd., which he controlled) an option to re-purchase them for £5,000 (well under the value of the shares).
This enabled the RCS to receive dividends of some £266,000 (£157,000 net after tax), but since, as a charity, RCS was not liable to pay income tax, it hoped to claim the tax back. Because of the option to re-purchase, Vandervell did not irrevocably relinquish control of Vandervell Products.
At this stage, therefore, the legal and equitable interest in the shares had been transferred to the RCS. This raises a formalities point.
Vandervell Trustees Ltd had the legal interest in the option. But where was the equitable interest? If it remained in Vandervell himself, he would be liable to surtax, on the basis of s. 415 of the Income Tax Act 1952:
Held(1) Where, during the life of the settlor, income arising under a settlement ... is, under the settlement and in the events that occur, payable to or applicable for the benefit of any person other than the settlor, then, unless, under the settlement and in the said events, the income ... (d) is income from property of which the settlor has divested himself absolutely by way of settlement ... the income shall be treated for the purposes of surtax as the income of the settlor and not as the income of any other person ...
(2) The settlor shall not be deemed for the purposes of this section to have divested himself absolutely of any property if that property or any income therefrom or any property directly or indirectly representing proceeds of, or income from, that property is, or will or may become, payable to him or applicable for his benefit in any circumstances whatsoever.
The House of Lords held (Lords Reid and Donovan dissenting) that the option (the legal title to which was now in the trustee company) was held on resulting trust for Vandervell, along with liability to pay surtax on the dividends.
Vandervell had failed to state where the equitable interest was to go. He had not decided whether the option should be held on trust for his children, or for the employees of his products company. His only concern was that it was not held on trust for him.
Lord Wilberforce noted that the trusts upon which the option was supposed to be held were undefined and in the air. The trustee company itself was clearly not a beneficiary, and an equitable interest cannot remain in the air, and so the only possibility was a resulting trust in favour of the settlor.
The conclusion, on the facts found, is simply that the option was vested in the trustee company as a trustee on trusts, not defined at the time, possibly to be defined later. But the equitable, or beneficial interest, cannot remain in the air: the consequence in law must be that it remains in the settlor. There is no need to consider some of the more refined intellectualities of the doctrine of resulting trust, nor to speculate whether, in possible circumstances, the shares might be applicable for Mr Vandervell's benefit: he had, as the direct result of the option and of the failure to place the beneficial interest in it securely away from him, not divested himself absolutely of the shares which it controlled.