Howe v Earl of Dartmouth

The law assumes that wasting, hazardous or unauthorised investments produce income which exceeds what a life tenant ought reasonably to receive, and that it does so at the expense of the security of the capital. Accordingly, the apportionment is made that:

• the life tenant receives an income which represents the current yield on authorised investments,[10] and
• the excess is added to the capital,

but, subject to the proviso that:

• if the interest received is less than 4 per cent., the balance should be made up out of subsequently accruing income, or from the proceeds of the unauthorised investments when sold.[11]

The law assumes that future property is of no benefit to the life tenant, and thus must be sold to obtain income producing investments. The proceeds of sale are apportioned between the life tenant and the remainderman by using the formulae set out in Re Earl of Chesterfield's Trusts (1883) 24 Ch D 643. This provides that the sum which is reserved for the remainderman is the sum "which, put out at 4 per cent. per annum ... and accumulating at compound interest at that rate with yearly rests,[12] and deducting income tax at the standard rate, would, with accumulation of interest, have produced, at the respective dates of receipt, the amounts actually received; and that the aggregate of the sums so ascertained ought to be treated as principal and be applied accordingly, and the residue should be treated as income." Or, put another way, the principal (which goes to capital for the remainderman) is the sum which, if invested at 4 per cent. at the date of the testator's death, would have produced the sum now received, and the income is assumed to be everything else (which goes to the life tenant).

All the rules above are subject to any contrary intention being expressed by the testator. The onus is upon the person asserting that the equitable rules are excluded to establish that this is so.[13]

In the United Kingdom the Law Reform Committee recommended replacing the rule (together with other highly technical common law rules, such as the rule in Re Atkinson and the rule in Allhusen v Whittell) with a general statutory duty to hold a fair balance between the tenant for life and the remainderman, with an express power to convert income into capital and vice versa, and a duty to convert and apportion to the extent necessary to maintain an even hand and in a manner consistent with the whole investment policy of the reversionary trust fund.

These recommendations were implemented in the Trust (Capital and Income) Act 2013,[16] which came into force on 1 October 2013. However, the Act only has effect for those trusts arising on or after that date;[17] the points outlined above continue to be relevant to trusts created prior to that date, unless the trust instrument specifically excludes them.

Most other common law jurisdictions have considered reform of one or both of the limbs of the rule in Howe v Earl of Dartmouth but in practice most have not done so.