On the question of the rights of unitholders in the underlying assets of the trust fund, there are two strands of authorities that may be relevant to our understanding. In the first place, as the vast body of trust law is derived from trusts used in family dispositions, the line of cases after Baker v. Archer-Shee will be relevant. Indeed, Baker has been applied in commercial trusts and none of the decisions finds it necessary to distinguish the commercial from the family situations. Deed of settlement companies can be regarded as the origin of modern unit trusts, both in form and substance. The approaches of cases on such companies will illuminate our analysis.

A. Baker v. Archer-Shee in Private Trusts

For almost a century, there has been a debate on the nature of the rights of a beneficiary in a trust. One view is that a beneficiary’s remedy is in the form of an action against the trustee and this is a right in personam. Another view regards beneficial interests in trusts as equitable proprietary interests and accordingly a beneficiary has a right in rem.

FundsWith the decision of Baker v. Archer-Shee, which has been applied in common law countries such as Australia, Canada, and New Zealand, modern text writers have almost abandoned this in rem-in personam debate—by classifying beneficiaries’ interests as ‘hybrids’ or `sui generis’ or by suggesting that a beneficiary has both real and personal rights and the question whether it is in rem or in personam depends on the context. That abandonment still leaves unanswered what is the ratio decidendi of Baker and the extent of its application. In the subsequent history of Baker, taxation principles and private international law issues have periodic prominence. Within this complex, courts have struggled to determine the reach of Baker.

Two issues seem to have received particular concern. The first is the meaning of Baker: does it represent the elimination of the trustee, and if not what does Baker mean? The second is the relevance of the number of beneficiaries in applying Baker.

In Baker, the father left the residue of his estate by his will upon trust to apply ‘the whole of the . . . income and profits . . . to the use of [his] daughter . . . during her life‘. The trust was situate in New York and the trustee was a New York trust company appointed by the daughter pursuant to the power in the will. The trust property consisted entirely of non- British securities. The trustee had never remitted to the daughter in England the trust income, but had paid the income, less any sums required for American income tax and the trustee’s fees and expenses, to her bank account in New York. The husband of the daughter was assessed for income tax on the net amount of the income. Under the relevant income tax legislation, ‘tax in respect of income arising from securities, stocks, shares or rents in any place out of the United Kingdom‘ should be computed on the full amount, but ‘tax in respect of income arising from possessions out of the United Kingdom other than stocks, shares or rents‘ was only on the actual sums annually received in the United Kingdom. The House of Lords, by a majority of three to two, held that the daughter was specifically entitled under the will during her life to the interest and dividends of the securities, stocks, and shares comprised in the trust fund and that her husband was assessable to income tax whether such interest and dividends were remitted to the United Kingdom or not. In the course of judgment, Lord Carson, one of the majority, reserved his view if the life tenant in question was not the sole beneficiary. He said: `. . . had the residue still undetermined or had the share to which [the beneficiary] was entitled been a proportion only of the income or profits of the residue other questions would, no doubt, arise’.

The majority was in effect saying that the trust beneficiary’s interest was more than a right in personam for due administration of the trust against the trustee and that she had an interest in the trust assets. This runs against the traditional view that a beneficiary’s right is to claim the assistance of a court of equity to enforce the trust and to compel the trustee to discharge it.The academic response then was that Baker was a menace to equitable principles.

Putting aside the question of doctrinal purity, it is unclear if Baker is suggesting the elimination of the trustee for tax purposes, let alone for any other matter. If that is the position, Baker can be a sword against the tax authority where the trustee is the taxpayer. This was what happened two years later in Reid’s Trustees v. CIR. In this case, the testator died leaving certain War Loan with interest accrued but unpaid at the time of death. For estate duty payment, the valuation included the accrued interest. When interest was subsequently received, the trustees treated it as capital for the purpose of accounting between the life and subsequent interest.

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