Perpetuities and Accumulations
Summary
On 31 March 1998 the Law Commission published a report making recommendations in relation to two long standing legal rules – the rule against perpetuities and the rule against excessive accumulations.
Implementation
The Law Commission’s recommendations were accepted by Government, and in 2009 the Perpetuities and Accumulations Bill was introduced in Parliament. The Bill proceeded through Parliament via a trial procedure for Law Commission Bills and received Royal Assent on 12 November 2009. The Perpetuities and Accumulations Act 2009, which modernises and simplifies the law on leaving property in trust, came fully into force on 6 April 2010 by virtue of a Commencement Order announced in Parliament by Justice Minister Bridget Prentice. The Act is the first of two pieces of primary legislation to enter Parliament under a trial of a proposed House of Lords procedure for legislation implementing Law Commission recommendations.
Background to the rules
The rule against perpetuities and the rule against excessive accumulations are two distinct but related legal rules which are used mostly in relation to trusts and wills. Both rules seek to address the broad question of the extent to which one generation should be able to dictate the future use and ownership of property, and restrict the freedom of later generations of owners to deal with property as they please.
The rule against perpetuities has its origins in the common law. A statutory scheme for the rule was later added to the existing common law system (see the Perpetuities and Accumulations Act 1964). The rule sets a time limit (known as the perpetuity period) within which future dealings with property (such as gifts to a particular child, or a group of people who fulfil a particular condition) must occur. Breaching the rule against perpetuities will result in a settlor’s wishes being ineffective to a greater or lesser extent.
The rule against excessive accumulations was originally enacted in the 1800s, and has always been a statutory rule. It applies where a disposition carries a duty or a power to accumulate income; that is, to add income to capital, instead of the income being distributed. The rule against excessive accumulations places restrictions on the period of time during which income may be accumulated (see section 164 of the Law of Property Act 1925 and section 13 of the Perpetuities and Accumulations Act 1964).
The Law Commission’s consultation process
In 1989 the Law Commission proposed examining both rules as part of its Fourth Programme of Law Reform. The Law Commission published a consultation paper in 1993, identifying potential defects in the current law. The consultation paper suggested four options in relation to the rule against perpetuities: no change in the law; abolishing the rule against perpetuities; replacing the rule against perpetuities with a new rule; or reforming the rule against perpetuities. The consultation paper also proposed three alternative approaches in respect of the rule against excessive accumulations: no change in the law; abolishing the rule; or reforming it.
The consultation paper attracted sixty-two detailed responses from a range of individuals and groups. Consultees included several major representative bodies (such as the Charity Law Association, the Chancery Bar Association, the British Bankers’ Association, and the Society of Trust and Estate Practitioners), members of the legal profession and the judiciary, and distinguished academics.
The Law Commission’s Report
Following this consultation, the Law Commission produced its final Report on "The Rules Against Perpetuities and Excessive Accumulations" in 1998 accompanied by a draft Bill.
As a result of consultees’ comments, the Law Commission identified a number of problems with the existing rule against perpetuities and the rule against excessive accumulations. In particular:
- The application of the rule against perpetuities has developed over time and is now too wide. It applies to many commercial dealings (such as future easements, options and rights of pre-emption) which have nothing to do with the family settlements that the rule was designed to control.
- The application of the rule to pension schemes is not consistent with the policy of the rule. Although there is an exception for most pension schemes from the rule against perpetuities, a small number of pension schemes fell outside of the exemption, and are subject to the rule. The Commission’s view was that there was no sound policy basis for this group of pension schemes being subject to the rule against perpetuities.
- The existence of multiple methods for calculating the perpetuity period (which includes the use of lives in being at common law, as well as periods of up to 80 years under the 1964 Act) is unnecessarily complex and confusing. In addition, the use of lives in being gives rise to practical difficulties. For example, where a "royal lives clause" has been used, it may be impossible for the trustees to identify who the last remaining descendants of a monarch are, or indeed whether they are still alive.
- In relation to the rule against excessive accumulations, the Law Commission found that there was no longer a sound policy basis for restricting settlors’ ability to direct or allow for the accumulation of income, except in the case of charitable trusts (for which there is a public interest in limiting the time for accumulations, so that income is spent for the public benefit, rather than accumulated indefinitely).
The Perpetuities and Accumulations Act 2009
The Perpetuities and Accumulations Act 2009 gives effect to the Law Commission’s 1998 Report. The Act is prospective and (subject to one exception outlined below) only applies to trusts which take effect after commencement, and wills which are executed and take effect after commencement.
The key changes made by the Act in relation to the rule against perpetuities are:
- The Act ends the uncertainty involved in determining the perpetuity period by imposing a single, mandatory perpetuity period, to act as a long-stop for settlors and testators. The perpetuity period applies irrespective of whatever the instrument creating the estate or interest provided. This will eliminate the uncertainty of calculating perpetuity periods based on the duration of lives in being. It will also reduce the difficulties faced by trustees in administering trust property subject to different perpetuity periods.
- The rule only applies to future estates and interests in property that are held on trust. The effect of this is that the rule no longer applies to commercial interests such as future easements, options and rights of pre-emption.
- The application of the rule is confined entirely to the Act, removing the need to have recourse to the common law in determining whether the rule applies to a particular estate or interest.
- There is a clear exemption for all pension schemes.
- The Act is generally prospective. However, where trustees of an existing trust that uses lives in being to determine the perpetuity period are unsure whether the period has ended, they are able to “opt in” to the perpetuities provisions of the Bill.
The key changes in relation to the rule against excessive accumulations are:
- The rule against excessive accumulations is abolished for all non-charitable trusts.
- For charitable trusts, two accumulation periods are available; either 21 years, or the life of the settlor. The accumulation limit applies irrespective of whether the settlor is a corporate settlor or an individual.
For more information regarding the Act, contact the Ministry of Justice. For more information regarding the Law Commission's project, contact the Property, Family and Trust law team.
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