Summary and Background The rule against excessive accumulations
13.A settlor of a trust may direct trustees to convert income into capital, instead of paying it immediately to an income beneficiary. The effect of such a direction is to build up a larger fund for the ultimate benefit of those beneficiaries whom the settlor directs should be entitled to the capital in the future. For example, A may wish her grandson, B, who is currently 10 years old, to acquire a large fund that will enable him to buy a house as an adult. She may create a trust of £10,000 to vest in him after her death. Instead of designating a beneficiary who will be entitled to the income earned on this capital during her lifetime, or taking that income herself, A may instruct the trustees to accumulate it so that there will be a larger fund for B to draw upon once A dies.
14.Accumulation, however, should be contrasted with the administrative retention of income, which is the retention of income to build up reserves not intended for the benefit of the person entitled to the capital fund.
15.Unlike the rule against perpetuities, which originally developed as a common law rule, the rule against excessive accumulations is a statutory rule. It restricts the period during which income may be accumulated. The rule operates independently of, and in addition to, the rule against perpetuities. It came about as a direct response to the case of Thellusson v Woodford ((1799) 4 Ves 227, 338; 31 ER 117, 171; (1805) 11 Ves 112, 147; 32 ER 1030, 1044). In that case, the settlor’s direction that the income on his substantial estate should be accumulated meant that none of his descendants living at his death could enjoy any benefit from the estate; this prompted much public criticism at the time. In addition, it was feared that the ability to accumulate income indefinitely could result in such a concentration of wealth in private hands that it might compromise the economic independence of the nation or even threaten the power of the Crown.
16.The pre-Act rule against excessive accumulations is set out in section 164 of the Law of Property Act 1925 (“the LPA 1925”) and section 13 of the 1964 Act, which permit a settlor to select one of six specified periods, after which an accumulation of income had to cease. The periods under section 164 of the LPA 1925 are—
	the life of the grantor or settlor;
	a term of 21 years from the death of the grantor, settlor or testator;
	the duration of the minority or respective minorities of any person or persons living or en ventre sa mere (conceived) at the death of the grantor, settlor or testator;
	the minority or respective minorities of any person or persons who under the limitations of the instrument directing the accumulations would, for the time being, if of full age, be entitled to the income directed to be accumulated.
The periods under section 13 of the 1964 Act are—
	a term of 21 years from the date of the disposition;
	the duration of the minority or respective minorities of any person or persons in being at that date.
17.Where a period is chosen by a settlor that is not one of the statutory periods, the closest statutory period is applied. Where the settlor omits to specify a period, the court will apply one of the periods, based on what it considers the settlor would have intended.
18.The effect of the rule is to make any duty or power to accumulate have no effect to the extent that it exceeds the relevant statutory period. In these circumstances where a duty or power ceases to have effect, the income passes to the person who would have been entitled to it if no accumulation had been directed. The rule does not apply to settlements made by a corporate settlor.