The rules against perpetuities and accumulations are distinct legal rules which relate to similar subject matter in the legal area of wills and trusts.
Both rules relate to the ability of one generation to restrict future generations from using a property as they please.
Rule against perpetuities
The rule against perpetuities sets a time limit within which future dealings with property must occur. This time limit is referred to as the perpetuity period.
A breach of the rule against perpetuities will result in the settlor’s wishes not being properly fulfilled.
The rule against perpetuities was originally framed as a common law rule. Later it was established by the Perpetuities and Accumulations Act 1964 (PPA 1964), which was amended by the Perpetuities and Accumulations Act 2009 (PAA 2009).
Rule against accumulations
The rule against excessive accumulations applies where a disposition carries a duty or a power to accumulate income. This means that income is added to the capital which forms the original funds left in a will, rather than it being distributed.
The rule against accumulations places a time limit on the period during which income can be added to the original capital.
Law Commissions report on the problems with the rules against perpetuities and accumulations
In 1998, the Law Commission issued a report regarding the problems arising from the existing law on perpetuities and accumulations. PPA 2009 was implemented as a consequence of this report.
Rule against perpetuities
The Law Commission identified the following issues with the law on perpetuities:
- The application of the rule against perpetuities had developed over time and had become too wide. The rule applied to many commercial dealings such as future easements, options and rights of pre-emption. These dealings have nothing to do with family settlements which the rule was originally designed to protect.
- The rule against perpetuities developed to apply to certain forms of pensions schemes. Most pension schemes fell outside the rule as originally intended; however, certain pension schemes did not. The Law Commission felt there was no sound basis for pension schemes to be subject to this law.
- Under the previous law, there existed multiple methods for calculating the perpetuity period. This meant the rule against perpetuities was becoming unnecessarily complex.
Rule against excessive accumulations
With regard to the law on excessive accumulations, the Law Commission felt there was no longer a sound policy basis for restricting a settlor’s ability to direct or allow the accumulation of income.
The only situation where there was a sound policy basis for this rule was in relation to charitable trusts as there is a clear public interest in limiting the time for accumulations thereby enabling income to be spent for the public benefit, rather than accumulating for an indefinite period.
PPA 2009 was established to eradicate the problems with the previous law and give effect to the Law Commission’s recommendations. The main changes are:
Law against perpetuities
- PPA 2009 eradicates the previous uncertainty surrounding the perpetuity period by imposing a single mandatory perpetuity period of 125 years. This applies irrespective of what is provided in the original instrument creating the estate or interest.
- The rule applies only to future interests and estates held on trust. This means it no longer applies to commercial interests.
- The rule is confined entirely to the provisions in PPA 2009. This means there is no need to look to previous common law rules as was the case under PPA 1964.
- There is now an exemption in relation to all pension schemes.
Law against excessive accumulations
- The rule against excessive accumulations has been abolished for all non-charitable trusts.
- For all charitable trusts there are two accumulation periods. They are:
- 21 years; or
- the life of the settlor
The accumulation limit will apply regardless of whether the settlor is a corporate settlor or a private individual.