Home Information Cases Dalriada Trustees Ltd v David Alexander Faulds (2011)

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Dalriada Trustees Ltd v David Alexander Faulds (2011)

Summary

A Pension Reciprocation Plan incorporating a Maximising Pension Value Arrangement, whereby two pension schemes made reciprocal loans of funds to specific members of each other's schemes in order to facilitate access to pension capital prior to retirement, was invalid by virtue of the Finance Act 2004 s.173. The court explained the application of s.173 and defined some of its terms.

Facts

(1) The loans were unauthorised member payments as defined by s.160(2)of the Act. Section 164, looked at alone, supported Z's case: the initial loan from one scheme to a member of another scheme was made neither "to" nor "in respect of" any member of the scheme making payment. The payment was made in the sure and certain hope that a reciprocal payment would be made. However, for the purposes of s.173, the return payment back to the member of the first scheme was "used to provide" a benefit to that member. Upon receiving that benefit, in the form of the loan, that member was to be treated as having received an unauthorised payment. The phrase "is used to provide" in s.173, rather than "provides", clearly indicated that indirect causation was sufficient. The individual members of the respective schemes were motivated to make transfers so as to enjoy an equivalent reciprocal sum; the plan had been established precisely for purposes of reciprocation and the lack of a precise matching between the two payments was immaterial to the outcome (see paras 46-48, 57 of judgment). There was no scope for limiting the word "benefit" in s.173 to benefits in kind. The words in brackets in s.173(1) "other than a payment" meant "other than a payment from the scheme", DCC Holdings (UK) Ltd v Revenue and Customs Commissioners (2010) UKSC 58, (2011) 1 WLR 44applied (para.52). (2) Although unsecured personal loans were capable of constituting an "investment", the instant loans were outside of the schemes' powers of investment because they had not been made for the purpose of obtaining a return for the lender but rather for the purpose of procuring a reciprocal long-term loan to individual members, Dominica Social Security Board v Nature Island Investment Co Ltd (2008) UKPC 19and Khoo Tek Keong v Ch'ng Joo Tuan Neoh (1934) AC 529 PC (Shanghai) considered and Peczenik's Settlement Trusts, Re (1964) 1 WLR 720 Ch D applied (paras 58-64). (3) Even if the court was wrong in its construction of s.173 and on the meaning of "investments", the loans were a fraud on the power of investment as conceptualised in Vatcher v Paull (1915) AC 372 PC (Jer) because they had been made for an ulterior purpose, Vatcher considered (paras 66-72).

Judgment for claimant

Held

In a case concerning six occupational pension schemes, the court was required to determine whether a loan arrangement known as "Pensions Reciprocation Plan" was a valid exercise of the schemes' powers of investment. The plan had been conceived as a way of allowing members access to their pension capital prior to retirement without breaching tax rules. Its basis was in a structure called a "Maximising Pension Value Arrangement" whereby two pension schemes would make reciprocal loans of funds to specific members of each other's schemes. The claimant pension trustee company (D) sought to establish that such loans were not valid. The defendants (Z), who were either scheme members or former scheme trustees who had made such loans, argued to the contrary. D submitted that a loan was a "payment" within the meaning of the Finance Act 2004 s.161(2), both on ordinary principles of interpretation and by reference to s.175 and s.179. It maintained that any payment, including a loan which was not within the list in s.164(1) was an unauthorised member payment for the purposes of s.173 of the Act and that it was immaterial that members of the reciprocal schemes were not necessarily paired. Z contended that the loan arrangements were on an arm's length commercial basis. They argued that, for the purposes of s.164 and s.173, a loan arrangement was never made with a member of the same scheme from which the loan was ultimately paid, and therefore the money was never paid "to a person who is or has been a member of the scheme from which it is paid".

Chancery Division
Bean J
Judgment date
15 December 2011
References

​LTL 20/12/2011 : [2011] EWHC 3391 (Ch)

Practice areas

trusts-and-settlements,Trusts & Settlements