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Perpetuities and Accumulations Bill [HL]

Volume 710: debated on Tuesday 28 April 2009

Second Reading Committee

Moved By

That the Second Reading Committee do consider the Perpetuities and Accumulations Bill [HL].

Every Bill that comes before your Lordships’ House is in some way special, but the Perpetuities and Accumulations Bill is particularly so for three reasons. First, it will reform the long-standing rule of English and Welsh trust and property law known as the rule against perpetuities and the rule against excessive accumulations. Secondly, it is a Law Commission Bill, and there have been all too few such Bills in Parliament in recent years. Thirdly, it is the first Bill in the trial of the new procedure for Law Commission Bills approved by the House last year. We hope that this Bill will be the first of many to use the procedure. This may very well be the first time that a Second Reading of any Bill has been heard in the Moses Room. No doubt inquiries will be made to see whether that statement is accurate. Perhaps we are making history in a small way this afternoon.

Before I consider those three themes in greater detail, I thank those who have been particularly instrumental in developing the new procedure. My noble friend Lady Ashton, as one of my predecessors at the Ministry of Justice, and as Leader of the House, worked closely with the noble Lords, Lord Kingsland and Lord Goodhart, and the noble and learned Lord, Lord Lloyd of Berwick, to develop an acceptable new procedure for Law Commission Bills. The noble Lord, Lord Brabazon of Tara, and members of the Procedure Committee recommended that the procedure be given a two-Bill trial, which is worthy of thanks. I am grateful to them all.

In thanking those who have contributed to the development of the new procedure, I should not omit to mention Sir Terence Etherton, the chairman of the Law Commission, without whose vigorous prompting we may not have been here today.

The development of the new procedure was only possible because of the co-operation between all parts of your Lordships’ House—the Government, the opposition parties and the Cross Benches—and I hope that we will carry this spirit through our debate, because a new procedure is founded on the principle of consensus.

Few, if any, bodies outside Parliament can claim to have had such an influence on our laws as the Law Commission. It has established an international reputation for excellence of legal research and analysis. However, all too often and for all too long, potential Law Commission Bills have languished unimplemented because parliamentary time could not be found for them. The new procedure is intended to address part of this problem. It is not intended for every Law Commission Bill. However, it will be suitable for what might be described as unspectacular but worthy law reform; work that will not command headlines on the front page, but without which our laws will become out of date and dislocated from the real world. It is work that this House, if I may say so, seems to me to be especially suited to scrutinise and carry forward.

I turn now, not without some trepidation, to describe the content of what can only be described as a very technical Bill. The overall aim, which is based on the result of extensive consultation, is to modernise, simplify and streamline the rule against perpetuities and the rule against excessive accumulations. Clauses 1 to 12 deal with the reforms to the operation of the rule against perpetuities, and Clauses 13 and 14 deal with the reform of the rule against excessive accumulations. The remaining clauses are ancillary to these substantive reforms. As the rules are largely independent of one another, I shall deal with each in turn.

The rule against perpetuities is an old common law rule that originally developed in the context of family trusts. The first question facing a prospective settlor, or more likely his or her lawyer, is whether the rule applies. This is defined by common law and not by statute. Over time, the scope of the rule has been extended from family trust-type situations to include commercial transactions such as options, rights of pre-emption and future easements. The rule therefore now reaches into areas well beyond its original justification.

Clauses 1 and 2 define precisely when the rule is to apply and when it is not to apply. It will apply only in three sets of circumstances: successive interests in trusts or executory bequests, non-successive interests subject to conditions precedent, and rights exercisable on breach of conditions subsequent. If it transpires that the rule still applies where it ought not to do so, Clause 3 provides an order-making power for the Lord Chancellor to specify exceptions. This is subject to the affirmative resolution procedure. Where the rule applies, Clause 2 preserves the present exception for gifts over from one charity to another and extends the current exception for pension schemes to all personal occupational and public service schemes. By necessary implication from Clause 1, the rule will no longer apply in other cases. Options, rights of pre-emption and future easements currently subject to this rule will cease to be so. This major reform responds to the concerns of the consultees that the rule was unnecessarily complicating commercial transactions.

Having defined when the rule is to apply, the Bill defines the perpetuity period. At present, that period is the length of a “life or lives in being” designated by the creator of a trust, plus an additional 21 years, or a fixed period of up to 80 years. Subject to one exception, Clause 5 provides that where the Bill applies, the perpetuity period will be 125 years. This is broadly the maximum likely to be achieved under the present law and present life expectancies. The exception is that where an existing special power of appointment is exercised, the period will be the same as that which applies to the trust from which the power derives. This broadly preserves the effect of the present law.

Clause 6 defines when the period will start. The general rule is that it will begin when the instrument creating the relevant interests takes effect. But for special powers of appointment, as under the present law, the period will start at the date the instrument creating the power took effect.

The Bill is in general only prospective and will not, subject to one beneficial exception, affect the terms of existing trusts or wills. The exception is that where the trustees of a pre-commencement trust believe that it is difficult or not reasonably practicable to calculate whether a perpetuity period defined by reference to “lives in being” has ended, they can opt in to a fixed period under the Bill of 100 years.

The remaining clauses applying to perpetuities broadly replicate instruments to which the Bill applies the effect of the “wait and see” and class-closing reforms effected by the Perpetuities and Accumulations Act 1964, an Act that, if I may mention in passing, was built upon the work of the Law Reform Committee in 1956. It was work in which the father of the noble Lord, Lord Goodhart, played a prominent part. I am sure that he would be delighted to see his son continuing in the family tradition today.

The second of the rules to be reformed is the rule against excessive accumulations. Broadly speaking, accumulation is the rolling up of trust income into capital. This rule, originating in a statute enacted at the turn of the 19th century in respect of the Thellusson case of 1799, limits how long income can be added to capital, rather than being distributed to beneficiaries. Currently, six alternative statutory periods can apply. The rule applies to trusts created by natural persons, but not trusts set up by corporations.

The Law Commission found that for most cases the rationale for the rule had disappeared and recommended that the current rule be abolished for all but charitable trusts. Charitable trustees are under a duty to distribute funds to provide for the charitable purposes for which the trust was established. The Bill therefore repeals the present rules but retains a statutory accumulation period of 21 years for property held on trust for charitable purposes. This period will however not apply where the court or the Charity Commission under their existing powers have made specific provision for a charity.

As in the case of the reforms to the rule against perpetuities, these reforms will apply only to instruments taking effect after the Bill comes into force unless the instrument is a will made before that date and taking effect after it. In that case, the present law will apply.

Having completed this brief and, I fear, far from expert summary of the principal provisions of the Bill, perhaps I may mention one final general point. The Bill is not intended to affect income from taxation. However, with a Bill of this complexity, dealing with matters over such a long time period, it is difficult to be absolutely certain that the Bill would not have any effect on revenue. If, however, any unintended effect on revenue becomes apparent, the Government will act swiftly to remove any unintended Exchequer consequences in the unlikely event that they arise.

I failed to notify the Committee that if there were to be a Division the Committee would adjourn for 10 minutes to allow Members to vote.

Sitting suspended for a Division in the House.

I think that all Members of the Committee have returned, so I think that we should return in the interests of using time well.

I remind the Grand Committee that we are today taking part in the first Second Reading Committee debate in this Room in the long history of the House. The reforms that we propose in the Bill are based on consultation with experts—of course their comments have been taken into account. Some may have wished for more radical reform, but that was not the consensus. I hope that this modest but important Bill will be the first of many to use the new procedure. I beg to move.

I thank the Minister very much for explaining a complex, technical Bill and for the new procedure under which we are to operate, in which we are, in racing terms, the first out of the traps. I begin by declaring interests—charitable interests which are on the Register. Perhaps in the light of the subject matter that we are discussing, I should draw the Committee’s attention to the fact that I am president of the National Council of Voluntary Organisations, which of course has some interest in our proceedings. That having been said, I am not a lawyer, and I shall leave the legal aspects to my noble friend Lord Kingsland, who has already forgotten more law than I will ever know, and focus instead on one or two practical implications that could be tweaked in the Bill and which may represent an improvement.

As I said, I welcome this new approach, because speeding up the modernisation of legislation is very important. I had a bit of a baptism of fire on this when dealing with what was originally the Company Law Reform Bill—on which I had the honour of representing the party on the Front Bench—which became the Companies Act 2006. As one dug into that, one saw how the 2006 Bill was going to amend the 2004 Act, which amended the 1989 Act, the 1985 Act and, in a few cases, as far back as the 1929 Act. The archaeological layers meant, as the Minister said in his opening remarks, that often provisions have become entirely dislocated from the real world and completely incomprehensible other than to the specialist. We were able, thanks to the Government’s good offices, including the Minister’s colleague, the noble Lord, Lord Sainsbury, to expand the Bill to bring everything into one place in a much bigger Bill—a 1,300-clause Bill. There were a couple of exceptions, including community interest companies, which we shall of course touch on later in our debates. In so far as this is part of the same process, I welcome it.

The Minister was unduly modest when he explained the history of the Bill. I understand that the initial consultation on this Bill took place in 1993. It was the subject of a Law Commission report in 1998, a constitutional affairs department report in 2002, more consultation in 2008 and now, 16 years on, we have the Bill. That shows that there is a need to speed up the procedure.

I turn to the Bill itself. My first point concerns the issue of perpetuities. Obviously, I find perpetuity a complex issue, given concepts such as “lives in being”. I ask for one clarification. I hope that the Bill team will forgive me when I say that when I read the Explanatory Notes trying to unravel the matter, I got to paragraph 6 on page 2. The fourth sentence says:

“The perpetuity period will be the life of A plus 21 years, measured from the date of X’s death”.

Should it not read,

“at the date of X’s death”

rather than,

“from the date of X’s death”?

“From” indicates a continuum; “at” represents a point in time. This is a single point of measurement. I would be grateful if the Minister could confirm that. If I am wrong, it merely shows that perpetuities are even more complicated than I thought they were.

Specifically, I welcome the extension of the fixed perpetuity period to 125 years from 80 years in Clause 5. Clearly, we want as little complexity as possible. The more time that is offered in terms of the period, the greater time there is to sort out any difficulties that may arise. Therefore, the principle of Clause 5 is greatly to be welcomed. However, there is a problem with Clause 2 on exceptions to the rule’s application. This concerns successive gifts to a charity. For example, charity A receives a gift but is unable, does not wish to or cannot fulfil the conditions of the gift, and so the gift goes to charity B and so on. Paragraph 39 of the Explanatory Notes lays this out very clearly. The exception for successive charitable gifts arises because any gift to a charity, whether to a named charity such as the lifeboats or to an exclusively charitable purpose, fulfils what I understand is the legal requirement for certainty. Therefore, it does not matter if the charitable purpose alters, because it remains a charitable purpose.

Clause 2 does not refer to the second of these gifts for charitable purposes, only to gifts to a charity in subsections (2) and (3). The definitions on page 17 of the Explanatory Notes state that a charity is:

“An organisation established for charitable purposes only”.

The 1964 Act allowed gifts for charitable purposes to be excluded from perpetuities. Therefore, when we consider the Bill in more detail, I hope that the Government will think again about this because it represents a narrowing of the way in which perpetuities operate. In this highly technical area there may be an answer to this question, but a simple amendment to the relevant subsections of Clause 2 would enable us to address this apparent narrowing.

My second point concerns accumulations. Although we welcome making the accumulations rule much more straightforward and comprehensible, the charitable sector is concerned about the default provision of 21 years for charitable trusts. The Minister made clear in his opening remarks that there is an opportunity in Clause 14(2) for this to be set aside by a court or the Charity Commission. I accept that. It is also true that charitable trusts will probably be used less frequently in the future because we now have community interest companies and charitable incorporated organisations under the Charities Act 2006. Therefore, the trust structure may be used less in the future. Nevertheless, some people may wish to use trusts. I also accept that it will apply only going forward, not going back, although paragraph 25 at the top of page 6 of the Explanatory Notes states:

“Accordingly existing trust instruments and wills, that is, those taking effect before commencement, will generally not be affected by the Bill”.

As I say, I am not a lawyer, but when I see words such as “generally” I begin to wonder what they mean in reality. I think that we should be doing everything that we can to encourage philanthropic endeavour, and this 21-year rule is an unduly heavy and inflexible sledgehammer.

I will illuminate the argument with three brief examples. Trusts may have what are known as wasting assets. The wasting assets could be in two particular forms. There will be leaseholds, where the trust’s only asset is the lease of a property with an expiry date. When the lease comes to an end, the property reverts to the original owner; the trust no longer has any asset or any income and therefore will have to cease its operations. In such circumstances, it surely would be appropriate for the trust to be converting income to capital in the latter years of those leases in order to provide for endowment to enable it to carry on its original purposes. Many of these leases will run for longer than 21 years; they may be 99 years.

This comes to its sharpest point on things such as copyright. I think it was Westminster School that benefited enormously from the endowment of AA Milne’s copyright on the Winnie the Pooh books. While Westminster School had a sufficiently large endowment to be able to avoid converting income to capital, because it had other capital endowment of its own, a charity with a single asset which was a valuable copyright would find, as the copyright began to run out, that it had to either cease operation or convert income to capital to provide a sum of money to enable it to continue operations. My Oxford college, being a poor college of relatively modern foundation, had at one time great hopes of getting the Reverend W Awdry’s Thomas the Tank Engine books as he was a member of the college, but unfortunately it was unrequited in the end.

Wasting assets is one thing. Secondly, there is building up the sum endowed. The Minister and I in our different ways might decide that we wish to set up a charitable trust for a purpose that we feel is very worthwhile, and we get proper charitable permission but, being men of modest means, we can put only a smallish sum of capital in. We decide that during the rest of our lives, to have a decent sum of money for its future operation of our trust, we will roll up all the income and keep it in the capital so that there is a bigger pot for the trustees to work on after our death. The Minister and I—I think I am a few years ahead of the Minister—have a reasonable hope of passing 21 years, and therefore we would find that the rule as presently drafted would impact on us. That is a mistake because anything that encourages people to set up trusts and to accumulate income and build up the sum during a lifetime seems to me to be entirely sensible. Under the present rules you can do that, because the life of a settlor is the limit on accumulations at present.

Lastly, and perhaps most importantly, there is what I call the “total return” approach to investment management. Historically, people have considered the return on their investment as being two parts—a flow of capital gain and a flow of income. The income comes from dividends and interest on bonds, and the capital gain comes from the increase in asset values. In recent years, those two streams have become increasingly co-mingled. They have become co-mingled because tax rates for private individuals have become much the same and therefore whether you took it as income or capital gains does not really matter, and because of the emergence of the new asset classes, such as private equity, where there is no income, only capital gains. Therefore, the total return concept of investment management has emerged. If you are looking for a 10 per cent return, you do not really mind whether it is 10 per cent capital gain or 10 per cent income, or some mixture of the two. I am concerned that in the way that we are currently looking at the Bill, with a 21-year life, some charitable trusts will find that the total return concept actually begins to work against the efficient operation of their investment management.

I have already accepted that Clause 14(2) provides a let-out. We are trying to work to a situation where we have certainty and where a philanthropist knows what he or she can do. It may be that you can hope that the court or the Charity Commission will deal with you kindly, but we could try to increase that certainty by providing something a little less inflexible than the present approach. It is bureaucratic. I also think that it brings the Charity Commission into an invidious position of having to make value judgments about the readiness and appropriateness of rolling up income and converting it to capital.

I conclude by welcoming the Bill’s general approach. I have raised a couple of points which I hope the Government will consider and reflect on as we work through the Bill. The Charity Commission’s strategic plan for 2008-11 gives it six tasks, two of which are to be innovative and responsive. I hope that the Government can be innovative and responsive as regards these questions.

As my noble friend Lord Bach and the noble Lord, Lord Hodgson, reminded us, today we are makers of history for various reasons which they elicited, but, most particularly, because we are participating in the new procedure to expedite Law Commission Bills. If that is not the sole topic of conversation in the village where I live, at least we will have something to relate on future winter evenings. For much too long, the excellent work of the Law Commission has gathered dust on remote shelves because the business managers of successive Governments have found more pressing work for the two Chambers. The report on which this Bill is based was dated 1998.

I do not presume to match the expertise of the noble Lord, Lord Hodgson, nor of the noble Lord, Lord Goodhart. I intervene simply because, long ago, a distinguished predecessor of Sir Terence, Lord Scarman, and I plotted to introduce a more expeditious procedure for Law Commission Bills. But our efforts never came to fruition. I suspect that somewhere out there, he is now looking down on us with that enigmatic smile on his face. I regret that I was unable to attend the Second Reading last week of the Law Commission Bill, but I hope that the Government will accept my belated congratulations.

I must confess that so far as I recollect, the last time I had occasion to discuss perpetuities and accumulations was while attempting a question in my law finals. I have grasped that sometimes the mysteries of the law really do engage with the real world. This Bill is not just an exercise in esoteric logic, nor even simply concerned with preserving intact vast estates. It is an attempt to enable ordinary people to make reasonable dispositions of their property without tripping over archaic tangles which, no doubt, once related to genuine practical problems. This is the Law Commission doing what I believe Lord Gardiner originally intended that it should; namely, building bridges between the law and the real world. It deserves to succeed.

This is a once-in-a-generation opportunity. There has been no legislation on this since 1964, so I welcome the consensus that appears to lie behind the Bill. It is important to listen to the Chancery Bar, because it will be dealing with this. It is also a happy occasion to see a new procedure for Law Commission Bills. My very first job on graduation was with the commission under the late Lord Scarman, to whom we owe so much.

It would therefore be churlish for anyone to oppose the Bill, but I want to place a few points on record that I hope will be helpful. For example, Clause 1(1) is misleading. One starts by reading the Bill, and this clause suggests that the Bill contains the entire law of perpetuities. Only when they get to Clause 15 does the reader realise that the provisions apply prospectively, although including wills already made where the death occurs after commencement. The net effect of this prospective element is that the Law of Property Act 1925 and the Perpetuities and Accumulations Act 1964 will still be needed for about 100 years to come. This law, complicated as it is, is having yet another layer added to it, possibly needlessly, and it should be made plain at the outset that this is what is happening. Were there to be a draftsman skilled enough, some consolidation might be a good idea, but I yield to no one in my admiration of the skilled drafting of the Bill.

Imagine oneself a lawyer dealing with instruments and settlements affected by perpetuities. You would start, depending on the will or the instrument, by looking at the common law as it was before 1964. If the gift failed under common law, you would then move on to the 1964 Act and see if that helped by the application of “wait and see”. Then, prospectively, there will be this new Bill or something very much like it. Imagine the ignorance among high street solicitors; I have mentioned the Chancery Bar but not them.

My one claim to fame is that I used to lecture on this—I did so for 20 years at Oxford. In a course of eight one-hour lectures we did no more than merely scrape the surface of the subject, and at the end of those eight hours I used to forget it until the following year came around. My second claim to fame was that when I first had the privilege of meeting the Prime Minister before last, Tony Blair, he told me that he remembered me from my lectures.

As soon as I left Oxford, your Lordships will be interested to know that perpetuities were removed as a compulsory part of the syllabus. There is now only one tutor, and he is retiring in three months’ time, who gives it two hours a year in tutorials. It is taught at University College, London, and to Cambridge graduates. There is an essay available for purchase online for baffled students who are prepared to download an essay if they need to hand one in. I doubt whether this subject is widely taught or known, and I suspect—indeed, this has been said quite authoritatively in other common-law jurisdictions—that wills are drawn up by lawyers in complete ignorance and carried out in the same state. There is an American film called “Body Heat”, starring Kathleen Turner, where the entire plot turns on the failure to notice the application of the rule against perpetuities in a will, although I suspect that I was the only person in the audience to have been overcome with excitement at that point.

Even where the rule is known by a skilled lawyer, the application of “wait and see”—I will not go on for too long about this—may often mean that the money is spent on the wrong person, because while one is waiting and seeing for maybe 125 years, or 80 years under current law, the trustees have the right to spend the money that is the subject of the trust on the prospective beneficiary, even though it may turn out in 50 years’ time that he or she was the wrong recipient.

“Wait and see”, which continues under this law, tempts the testator to reach out. If you know the law and that you have a period of 125 years, you might just as well try to apply conditions for as far ahead in the future as you possibly can on the chance that you might get what you want. That is because if the period of wait and see passes and the law then applies to exclude members of a class, you may very well achieve most of your objectives.

Moreover, some of the retained law is extremely controversial. Who are the lives in being for the purposes of wait and see under common law and under the 1964 law? Learned articles still rage on this point and there are different schools of thought. There have been no decided cases that I can find directly on point of the 1964 Act since it was passed. We will be enacting this Bill without even knowing the result of the earlier attempt to reform it in 1964 and, of course, we will not know until probably the middle of this century, when I venture to suggest that many of us will not be around. That is because if people have started to wait and see under a will which came into effect in 1965, it could be some 80 years from then until we find out what happened.

It is therefore welcome that under Clause 12, a trustee who really does not know whether the lives have come to an end may choose to opt in to the new provisions. But the clause serves to demonstrate that the law could be retrospective, and there is no reason why it should not be. However, there will be problems: this involves not only who are the lives—the lives specified in the gift—but also the 1964 Act, which supplies a separate list. It is a question not only of who they are, but also whether they are still alive. It is therefore good that a fixed period of 125 years is provided, although it is probably too long and, of course, it is prospective. The much shorter period of 80 years was regarded as the proper length of time in the 1964 Act. As I have said, 125 years effectively removes any constraint on a testator when coupled with “wait and see”. Frankly, anything can be tried.

Having got this far in—that the testator can probably almost do what he likes—the whole rule becomes rather incredible and lacking in any sound base. It was based on a system of settlements when the age of majority was 21 and settled property was passed from generation to generation. That is simply not the case any more. We have held on to it because of our belief that you need some constraint on a testator or settlor to stop them reaching out too far in the future. Indeed, some extraordinary things in which I have had dealings in another job have now come to pass. We all take it for granted, as explained in paragraph 6 of the Explanatory Notes, that A cannot produce more children once dead. However, I need hardly remind at least the younger Members of the Committee that because of advances in fertility law, even it if it is not common, it is perfectly possible to produce children once you are dead. Perhaps I may remind noble Lords of the famous Diane Blood case. It happens quite often in the United States when soldiers freeze their sperm before going off to fight. The statement in paragraph 6 of the Explanatory Notes used to be perfectly valid and understandable, but is no longer so. Further, there is the much-laughed-at clause, or so my students told me, from the Perpetuities and Accumulations Act 1964, that a woman cannot conceive over the age of 55. Noble Lords will know that virtually every day in the red-top press we have yet another story of a woman of 60 or 65 who, with the benefits of modern science, gives birth to what is always termed “my miracle baby”. The law simply does not make sense any more. For aficionados of the topic, Barton Leach’s famous dictum that the child “en ventre sa frigidaire” or the impossibility of the fertile octogenarian have indeed come to pass.

So we come down to the rationale of why we are keeping this rule. We are taking a leap into the dark because no economic analysis of it has been made, as admitted by the Law Commission. We simply do not know what the economic effect of the law was or will be. One Harvard article suggested that states in the US that abolish the rule have more investments coming their way. The rule does not exist in Scotland to any extent, or indeed in several jurisdictions, with no ill-effects reported. No research has been made into whether life plus 21 years or 125 years is what testators either use or desire. The only justification for the rule is the so-called “dead hand rationale”, in other words: stop the dead hand of the long-since dead testator reaching out into the future. That rationale is several hundred years old with, as I have said, no research behind it. After all, ever since 1925, property legislation has freed up settled properties for sale. Taxation on settlements are penal, and it is taxation that will affect their status. The Trusts of Land and Appointments of Trustees Act 1996 gives extremely wide powers of investment. It is now impossible to create strict settlements.

However, the settlor, if he knows the law, can still exclude the power of the trustees to sell. The dead hand rationale has been undermined by tax law and by a testator’s perception of the need to shed conditions and rearrange gifts every now and then when new tax laws are passed. Who, in 1900, could have said what the needs of today’s beneficiaries might be, or the requirements of complying with or avoiding tax today, 109 years later? Yet that is the sort of situation that will arise 100 years from now. If anything, it could be argued that there is too little freedom of testation. The Inheritance Tax Act 1984 takes away great chunks of property on death, while the Inheritance (Provision for Family and Dependants) Act 1975 ensures that family members receive property even where the testator did not want them to. Divorce settlements and the results of divorce will send property off in directions not foreseen.

One might say that it is time the settlor had a bit more liberty by abolishing the rule. The Bill, in effect, keeps a troublesome law while at the same time effectively removing its constraints because 125 years is such a long time. One might worry that, by making it easier to create future interests, we are encouraging donors and testators to suspend future ownership. Is making a gift, as this Bill will allow, to my descendants living in 125 years’ time, really a benefit to the public, and will it be welcomed by the family? A famous case called Green where a mother did not accept that her son had been lost in a wartime plane crash left her property,

“to my son if he reappears within the next 80 years”.

Such cases will be cured by the power in this Bill for the trustees. Where the extent of the life is uncertain, trustees will be able to opt in to the fixed-length provision here. But that will take the property out of commerce for even longer. The common law had a lot to be said for it because if a gift was bad, you knew it right away. The conditions were lost and the property was freed up. “Wait and see” has actually made the situation worse. By helping gifts of vest, as this Bill will do, one helps one member of the family at the expense of another.

What is welcomed widely is that perpetuity will no longer apply to commercial interests, pensions and accumulations, and I think that that is right. There is concern in some quarters about removing the constraints on accumulation. It started with a case called Thellusson, which was a trust for prolonged accumulation, and it was feared at the time, almost 200 years ago, that the entire economy might have been sucked into this trust. In our present financial crisis, it is conceivable that a hedge fund might accumulate and suck up whatever is left of the entire economy. But it would be interesting to know whether economists think there is a real danger in removing this because we simply do not know; we have seen no economic analysis.

To conclude, I welcome the way in which the Bill positively applies perpetuities and takes them away from some other elements, I welcome the application of a fixed period of years, albeit I think it is rather long, and I welcome the drafting. My own preferences, though, would have been, first, abolition and, secondly, to leave it alone; however, if neither of those is on the cards, some consolidation of the three sets of law would be valuable.

I crave the indulgence of the Committee to say a few words in the gap. I did not put my name down to speak at Second Reading for the good reason that, as the prospective chairman of the committee that will be hearing evidence in due course, it seemed better that I should not express any view at all on the substance of the Bill. However, I did not want my silence today to be taken in any way as meaning that I had any doubts about the new procedure that we are adopting today for the first time; indeed, I warmly welcome it. The Minister said at the end of his introduction that he hoped that this would be the first of many Bills to adopt this course, and I entirely agree.

The noble and learned Lord, Lord Archer, said that he foresaw something of this kind many years ago when he was negotiating with Lord Scarman, the first chairman of the Law Commission. I just hope that the progress that the Bill takes through the House will fulfil some of his early hopes at that stage.

I agree with the Minister that the proceedings we have started today are important, and I say that for the same reasons that he did. This is the first Bill dealt with under the new procedure for Law Commission Bills. It is a pilot scheme, a trial to see whether the new procedure works. If it does, that will reduce the amount of time spent by Law Commission Bills on the Floor of the House, which is likely to make it possible to get more non-controversial Law Commission Bills enacted, and to get them enacted more swiftly than they are now. That would be very desirable.

This Bill, which is technical and, I believe, non-controversial, is based on the Law Commission’s report that was published 11 years ago, in 1998. Proceedings should have been possible that meant it could have been enacted within a matter of two or three years of the publication of the report. Of course controversial or important Bills, even though based on Law Commission reports, will continue to go through the usual procedure, as they should. That will deal with Bills on such recent Law Commission reports as its report on murder or that on the law of corruption.

I turn to the Bill itself. Perpetuities and accumulations are a subject that I am familiar with; indeed, I am prepared to say that looking at it now makes me quite nostalgic. Trusts were a substantial part of my practice as a member of the Chancery Bar, and trusts require knowledge of the rule against perpetuities and the rule against accumulations. The rule against perpetuities limits the time for which money or other property can be held in a trust, and the rule against accumulations limits the time for which income yielded by assets held in those trusts can be added to trust capital instead of being distributed to beneficiaries as income. However, while those principles are in fact both quite simple, the mechanism by which they have been applied is immensely complicated. I will not add to what the Minister has said about how those rules operate, but they are plainly complicated and anachronistic and need to be simplified.

I have some doubts about the detail of two of the Law Commission’s proposals that are proposed to be enacted in the Bill. My first doubt, which I share with the noble Baroness, Lady Deech, concerns whether the perpetuity period of 125 years is too long. I think that it plainly is because if such a rule had been in force in the past, it would mean that a trust set up in 1885 could still be in effect for a few more months. That seems to me pretty absurd. I therefore agree with the noble Baroness that this is a longer period than is needed. However, I do not agree with her that no perpetuity period should be imposed. I think it is desirable that there should be a limit on the time during which any owner of property can direct what happens to that property through creating a trust. If somebody wishes to set up a trust for a young, seriously disabled child who will never be able to manage his or her own affairs, and who might have a long life, that might suggest a maximum period of something like 100 years, given that a large number of people now live into their 90s. However, we can look at that point in detail later.

I also have doubts about the complete abolition of the rule against accumulations. The origin of that rule was the decision of a wealthy banker, Mr Thellusson, to leave a large part of his estate on trust to accumulate the income for the whole period of the trust, which was until the death of his last male descendant living at Mr Thellusson’s death. In theory, the effect of compound interest could have produced a gigantic sum of money by the end of the trust period. That is not so much a danger nowadays given the costs of running a trust, but I think it is still plainly undesirable that property should be locked up so that it cannot be applied for the benefit of anybody over a long period. While Mr Thellusson’s will was, to say the least, an eccentric action, under this Bill as it now stands there would be no way of preventing a new Thellusson creating a similar trust, which I do not think is desirable. My own preference is to allow the accumulation of income throughout a trust period but only as a power for the trustees to implement, not as an obligation imposed on them by the settlor or the testator. From time to time it may be in the interests of the beneficiaries that the income be accumulated rather than distributed, but that should never be unavoidable.

I noted with interest what the noble Lord, Lord Hodgson, said. That is a matter of detail to be dealt with by the Special Public Bill Committee when that is set up, as it shortly will be, and it will need considering. I hope that he will give evidence on that matter to that committee when it is formed. The noble Baroness, Lady Deech, made an important point concerning what to do with the existing trusts, which may go on for many years. I do not think there is an absolute solution to that, but in some circumstances at any rate it may be possible for trustees to opt into the new law and get out of the more complicated old one. Those are the sort of technical issues that ought to be left to the Special Public Bill Committee, not debated on the Floor of your Lordships' House. Subject, therefore, to the points that I have just mentioned, I am strongly in favour of the Bill and in principle I am completely in favour of it. My concerns rest only on relatively subsidiary points. I hope that the Bill will now be formally sent on its way in a day or two’s time to the Special Public Bill Committee. I look forward to the works of that committee.

If we needed any reminder about the historic nature of this Second Reading, it could not have been brought home to us more forcefully than the intervention of the noble and learned Lord, Lord Archer. It is difficult to convince oneself that it is now more than 35 years since he became Her Majesty’s Solicitor-General, an office which he adorned for many years. I know, because he has told me on a previous occasion, how much he admired Lord Scarman; and his story about their conspiracy does not surprise me in the least. The fact that the noble and learned Lord, Lord Archer, not only took the trouble to come this afternoon but also contributed has enriched the whole occasion.

The initial stage of this new procedure involves the three political parties agreeing that this Bill is uncontroversial. I was perfectly happy to do that and continued in this sublime state of ignorance until I heard the intervention of the noble Baroness, Lady Deech, whose intermittently excoriating remarks about the Government’s draft led me to believe that we are going to have a much more exciting Committee stage than I thought we would. We are extremely lucky that the noble Baroness has taken an interest in this matter. She reminded your Lordships that she lectured on this subject at Oxford University for 20 years. But she modestly failed also to say that she plays a prominent part in the footnotes of the Law Commission’s Bill, particularly in respect of an article entitled, “Lives in Being Revived”, which appeared in the greatest legal periodical that we publish in this country, the Law Quarterly Review. I look forward greatly to later stages of this Bill when I know that the noble Baroness will play a prominent part.

The noble Lord, Lord Goodhart, made what I believe the noble Lord, Lord Bach, would describe as a characteristically Goodhartian intervention. The noble Lord, Lord Goodhart, is of course on home ground in talking about this subject. I suspect that not only the noble Lord, but also his clerk, is rather nostalgic about the days in practice when he had a succession of perpetuities and accumulation cases. He is an acknowledged master in this field and I know that the Government will listen very carefully to any criticisms he has to make about the Bill.

However, the Opposition have their own well established track record in this sphere. My noble friend Lord Henley is a member of the committee. Indeed, he sits beside me as I speak. His great-great-great-great grandfather was Robert Henley, the Earl of Northington, who, in 1759, sitting in your Lordships’ House as Lord Keeper, handed down a much admired and much cited judgment on perpetuities and entails in the leading case of Marlborough (Duke) v Earl Godolphin. He said, inter alia:

“The common law seemed wisely to consider that the real property of this state ought, to a degree, to be put in commerce, to be left free to answer the exigencies of the possessors and their families, and therefore permitted no perpetuities by way of entails: although it allowed contingent remainders, it afforded them no protection … if the law would permit the confinement of an estate beyond a life in being, and the time for a remainderman’s minority to expire”.

To these great matters, I have no doubt that my noble friend will bring the same clarity and perspicacity as did his illustrious ancestor exactly 250 years ago.

I also observe that we are extremely fortunate to have heard this afternoon from my noble friend Lord Hodgson, whose combined experience of intensive work on charities law when it came before your Lordships' House not long ago, together with his experience in the City, has given us a great deal of matters to think about.

Unlike many of your Lordships who have spoken this afternoon, I have been rather taken by the Bill. I suppose that the reason for that is the way in which I approached it by, first, looking carefully—some might say uncharacteristically carefully—at the Law Commission report, which I find a most impressive document. I start as someone who has no experience in practice of this subject; so I am perhaps impressed in a way that some who are more familiar with it were not.

Very succinctly, graphically and effectively, the commission put the issue right at the beginning of its introduction:

“A property owner is thinking of making a will or creating a trust. How far into the future should the law allow him or her to reach when tying up that property? Can he or she control the devolution of that property indefinitely? For a lifetime? For a fixed period of years? How far should one generation be given the freedom to dispose of property in ways that will restrict the freedom of the next?”.

That is the scope of the investigations that lie before us.

As your Lordships know, since Lord Nottingham's judgment in the Duke of Norfolk case in 1681, there has been a rule against perpetuities, requiring future dispositions of property to vest within a prescribed time limit and making void those dispositions that fall outside it. Despite its name, the rule is concerned with the commencement of interests rather than their duration.

Historically—as, again, I am sure your Lordships are well aware—the rule falls into two phases. For dispositions taking place before 16 July 1964, the date when the Perpetuities and Accumulations Act took effect, the common law rule prevailed. That is to say that a future interest in property will be void from the date that the instrument that seeks to create it takes effect if there is the merest chance that the interest may invest outside the perpetuity period. This period comprises one or more lives in being plus 21 years. After 15 July 1964, the interest will be void only if it is inevitable that it vests outside the perpetuity period. It is therefore necessary to wait and see to determine whether or not the interest will vest within the prescribed common law period. The 1964 Act furnishes an alternative perpetuity period of up to 80 years and 21 years for options.

Your Lordships have heard the trenchant criticisms made by the noble Baroness, Lady Deech, about the deficiencies in the “wait and see” approach. She is quite right in saying that that concept is preserved in the new law. I must confess that I find her observations most illuminating in that regard. I shall find myself in Committee being more inquiring about that matter than I might otherwise have been.

As far as accumulations are concerned, at common law—again, as we have learnt this afternoon—they were permitted for the duration of the perpetuity period. The modern rule—again, as we have learnt this afternoon—has its origin in the Accumulation Act 1800, which followed the notorious case of Thellusson v Woodford, whose judgment was handed down in 1799. In its existing state, the law prescribes no fewer than six periods during which the accumulation of income is permitted. Four are set out in Section 164 of the Law of Property Act 1925, and two more in Section 13 of the 1964 Act.

The legislation before your Lordships today seeks to achieve three objectives. The first is to restrict the application of the rule against perpetuities to successive estates and interests in property. It will no longer apply to rights over property such as options, rights of pre-emption and future easements, and would exclude virtually all pension schemes. Secondly, in future, to those remaining interests to which it still applied, there will be a single perpetuity period of 125 years, and the principle of “wait and see” will apply. Thirdly, the rule against excessive accumulation will be abolished except in relation to charitable trusts. These proposals, moreover, when implemented would have prospective and not retrospective effect, as the noble Baroness, Lady Deech, has again pointed out. In other words, we will at the point of implementation and thereafter have three perpetuity and accumulation regimes. The relevant regime in any particular case will, of course, depend on the date of the instrument seeking to create the future interest.

These legislative proposals, essentially, seek to rectify two major flaws in the operation of the existing rules. First, the existing rules were designed to prevent settlors or testators from tying up property so that it was kept in the family permanently. However, its application has developed, as we have seen, so as to cover a variety of future interests that arise in a commercial context, such as future easements or options to acquire valuable consideration and interest in land. Secondly, there is considerable uncertainty as to its application both to certain types of pension schemes and to nominations and advancements made under pension schemes.

Clarification with respect to pension schemes appears to have been of particular concern to the Law Commission. Pension schemes are established under trusts. Under them, benefits are made contingent upon beneficiaries attaining a certain pensionable age. Moreover, some benefits may be contingent on the exercise of discretion by trustees. In Lucas v Telegraph Construction and Maintenance Co. Ltd, it was decided that the rule against perpetuities does apply to pension scheme trusts. In that case, Mr Justice Russell held that the period begins to run when the scheme is established. A competing approach is to say that every time an employee forms a scheme, a new settlement is created and he or she is treated as the settlor, so that the perpetuity rule applies to each individual settlement. Under that happier construction, the vesting of any benefits under the pension in favour of the employee’s dependants is almost certain to happen within the perpetuity period. Attractive as the latter analysis is, however, we cannot be sure that it is the law.

Since 1927 there have been statutory exemptions from the rule for certain types of pension scheme. The present position is to be found in Section 163 of the Pension Schemes Act 1993, which states:

“The rules of law relating to perpetuities shall not apply to the trusts of, or any disposition made under or for the purposes of a personal or occupational pension scheme at any time when this section applies to it”.

This section applies whether the trusts are made before or after Section 163 comes into effect. However, the section does not revive, with retrospective effect, any trusts that the perpetuity rules require to be treated as void before Section 163 becomes applicable.

The application of Section 163 is wide, comprising public service pension schemes, contracted-out occupational pension schemes and personal pension schemes. Nevertheless, the section is not all-encompassing—it excludes, for example, unapproved retirement benefit schemes.

It seems obvious that the need to place limits on the extent to which one generation can control the devolution of property for the future has no relevance to pension funds. Moreover, the reasons for exempting pension schemes from the rule apply to approved and unapproved schemes alike. Why should unapproved schemes to which the perpetuities rule currently applies have to be wound up on a date that is entirely arbitrary?

The approach to reform adopted by the Law Commission in its 1998 report is inclusionary. The commissioners defined those interests to which the rule should apply rather than those to which it should not. Your Lordships will be relieved to hear that I do not intend to comment on the Bill clause by clause this afternoon; otherwise what is the point of hearing evidence on it? This exercise is best left to a later stage in the procedure, following the evidential hearings. However, I have already noted the observations that the Charity Law Association made when responding to the Law Commission consultations in September 2008. Generally speaking, we warmly welcome this Bill, which seeks to simplify what the Charity Law Association describes as this,

“complex and somewhat illogical area of law”.

The provisions, with one or two mildly controversial exceptions, appear to have achieved the objective of narrowing the scope for the perpetuities rule by excluding from its grasp pension arrangements and commercial transactions. Moreover, the introduction of an exclusive period for those matters that remain subject to the rule is a welcome simplification; and the extension of time from 80 to 125 years appears unlikely to inhibit the objectives of future settlors, except in the most unusual circumstances.

As far as the law relating to accumulations is concerned, the six options open to settlors until now are to be abolished and replaced by a single period of 21 years, which applies only to charities. If I may respectfully say so to the Government—as yet I have not heard the evidence—this is the one component part of the Bill on which I have hesitations; so I might as well express them now. I wonder whether it would have been wiser to permit, as an alternative to 21 years, the life of the settlor. Given the important role that charitable grants play in our society, I should have thought that we ought to give as much encouragement to settlors as possible.

I thank all noble Lords who have spoken in the debate. I do not expect that this Second Reading Committee will make the headlines tonight or tomorrow—actually, I hope it does not—but perhaps it will help to make the law simpler and help to keep our trust industry competitive with overseas jurisdictions. I hope that House will be pleased to hear that I do not intend to make a long speech in response. The Special Public Bill Committee is the place for many of the matters raised today to be debated, under the chairmanship of the noble and learned Lord, Lord Lloyd of Berwick. I am delighted not only that he was in his place, but that he contributed to the debate today. The whole House will be grateful to him for taking on what may turn out to be a slightly more onerous role than it might have appeared about an hour and a half ago.

I will respond by letter to a number of the issues that have been raised today. I think that is probably a more appropriate way to do it in this case. Listening to the fantastic expertise shown in this debate, I now rather wish I had read law at the university where the noble Baroness, Lady Deech, taught. If I had been to one of her lectures—I am probably too old to have done so—I would feel much more confident about being able to deal with the points that she made.

I would like to say a couple of things about the noble Baroness’s contribution. I very much hope that she will play a part in the Committee stage. It would be a terrific disappointment if she was not able to in one way or another. We must see how that can best be done. Her speech was of great interest and some of her comments obviously hit home as far as some noble Lords were concerned. I hope she will forgive me if I say that I take her to be in broad support of the Bill, but I would hate to be the Minister on a Bill that she was opposed to. I am very grateful for her comments.

My noble and learned friend Lord Archer made a fascinating contribution with historical references and great enthusiasm for the way we are conducting this Bill and, I think, for its contents broadly. I am grateful to him. The noble Lord, Lord Hodgson, showed his expertise in the field of charities and companies in particular. I am grateful to him and he will get answers to some of the more detailed questions that he raised. Of course I am grateful to the noble Lords, Lord Goodhart and Lord Kingsland, for what they had to say.

We hope to meet again not before long in the Special Public Bill Committee to get on with the detail. We have had a good afternoon’s work today. If the House will forgive me, that is where I will end my response to today’s debate.

Motion agreed.