Trustees of The Will of Florence Cunard v Inland Revenue Commissioners

Trustees of The Will of Florence Cunard v Inland Revenue Commissioners 

Ella McPheeters v Inland Revenue Commissioners

TAXATION; Income Tax: SUCCESSION; Wills

COURT OF APPEAL

LORD GREENE MR, MACKINNON AND MORTON LJJ

17, 18, 19, 20 DECEMBER 1945

Income Tax – Annual payments – Capital or income – Direction in will to make up deficiency of income out of capital – Payments made prior to

ascertainment of residue – “Residuary estate” – Payments “in respect of income” – Irrelevant that payments made out of capital – Recurrent payments –

“Annual payment” – Whether payments “in respect of” a limited interest in residue – Income Tax Act, 1918 (c 40), Sched D, Case III, r 1 (a), rule 21, All

Schedules Rules – Finance Act, 1938 (c 46), ss 30(2), 35(3).

By her will, the testatrix devised a freehold house called The Grove to her trustees on trust to allow her sister, Miss M, to live there rent free. The testatrix also

gave certain annuities and directed that, pending appropriation, they were to be charged on her “residuary estate.” Cl 9 of the will contained the usual

directions for sale, with power to postpone conversion, and it also provided that the net income arising from the unconverted property should “as from my

death be applicable as income of my residuary estate.” After providing for payment out of the proceeds of sale of her debts, etc, and the annuities given by

her, and directing her trustees to invest the residue at their discretion, the testatrix further directed them to “stand possessed of the proceeds of the sale calling

in and conversion of my said real and personal estate and any money belonging to me at my death and any part or parts of my said real and personal estate for

the time being unconverted as well as the said investments (hereinafter called my residuary estate”) on trust during Miss M’s lifetime to pay all outgoings in

respect of The Grove out of the income of her residuary estate and, subject thereto 􀂭 159􀀉 and to certain income payments, to pay the remainder of the income

to Miss M during her life. If in any year the income of the residuary estate should not be sufficient to enable Miss M to live at The Grove in her customary

degree of comfort, the trustees were empowered, by cl 10(b) of the will, “to apply such portion of the capital of my residuary estate by way of addition to the

income as they in their absolute and uncontrolled discretion may think fit, moreover any capital so applied shall not be replaced out of the income ofa

subsequent year but shall be treated as an additional bequest to my sister.” The testatrix died on 24 January 1935, and the residue of the estate was ascertained

on 9 February 1940. Payments out of capital had been made to Miss M under cl 10(b) during each of the income tax years ending 1939, 1940. The Crown

claimed to recover tax from the trustees in regard to these payments under the Income Tax Act, 1918, All Schedule Rules, r 21 (as amended by the Finance

Act, 1927, s 26), and to include the payments for sur-tax purposes in the total income of Miss M. The Crown further claimed that the payments were taxable

income of Miss M under the Finance Act, 1938, s 30. It was contended by the trustees and Miss M that payments made under cl 10(b) prior to 7 February

1940, were not the taxable income of Miss M because (i) they had been made out of the gross estate before the residue had been ascertained and, therefore,

they had been made by the trustees without authority; (ii) they were made out of capital and were not, therefore, “income”; (iii) they were not an “annual

payment” within the meaning of Sched D, Case III, r 1(a), under which they had been classed; (iv) they were discretionary and, therefore, voluntary, payments

and Sched D Case III, r 1(a) did not extend to voluntary payments. It was further contended that the Finance Act, 1938, s 30, did not apply to the payments in

question:—

Held – (i) Upon the true construction of the testatrix’s will, the words “my residuary estate” did not mean “the net residue of my estate ascertained in due

course of administration,” but meant the gross estate before all debts and other liabilities had been paid. Therefore, the payments in question had not been

made by the trustees without authority, because they were made in strict accordance with the power given by the will. They came to Miss M under the express

terms of the will, and not as a “quasi-interest” enjoyed by a legatee pending the completion of administration.

Corbett v Inland Revenue Comrs distinguished.

(ii) the payments in question were income in the hands of Miss M, and were liable to tax. The fact that they were made out of capital was irrelevant.

Brodie’s Trustees v Inland Revenue Comrs applied.

(iii) the payments were capable of being recurrent and were “annual” payments within the meaning of Sched D, Case III, r 1(a), even though they were

not necessarily recurrent year by year. The fact that they varied in amount was immaterial.

Moss Empires Ltd v Inland Revenue Comrs applied.

(iv) although the trustees had a discretion whether or not to make these payments, they were not voluntary payments.

Lindus and Hortin v Inland Revenue Comrs applied.

(v) the Finance Act, 1938, s 30, did not apply to the payments in question because they were made under a discretionary power and not “in respect of”

Miss M’s “right” to the income.

All England Law Reports 1936 - books on screen™

All ER 1946 Volume 1

Preamble

Decision of MacNaghten J ([1945] 2 All ER 23) reversed, except upon the construction of the Finance Act, 1938, s 30(2).

Notes

The Court of Appeal reverse the decision of MacNaghten J, on the ground that the provision in the will for the payment of outgoings out of “my residuary

estate” does not refer to the net residue ascertained in a due course of administration. Corbett’s case is therefore distinguishable, and the payments being

properly made by the trustees in the exercise of their power to make up deficiency were income in the hands of the annuitant and liable to assessment as such.

This being the ground of the decision, it becomes unnecessary to consider the application of the Finance Act, 1938, s 30, but Lord Greene MR, indicates his

view on the construction of this section, which is in accordance with that taken in the court below. The point of general interest in this case is that sums of

capital of an estate 􀂭 160􀀉 paid to a beneficiary by executors or trustees in exercise of a discretion are income of the recipient, assessable on the payers under

Rule 21 as annual payments: they are not voluntary payments in any relevant sense and the fact that they may not be repeated is immaterial.

As to Deficiency of Income to be Made Up Out of Capital, see Halsbury, Hailsham Edn, Vol 17, pp 248, 249, paras 502, 503; and for Cases, see Digest,

Supp, Income Tax, Nos 349a, 349b.

For the Finance Act, 1938, s 30, see Halsbury’s Statutes, Vol 31, p 340.

Cases referred to in judgments

Corbett v Inland Revenue Comrs [1937] 4 All ER 700, [1938] 1 KB 567, Digest Supp, 107 LJKB 276, 158 LT 98, 21 Tax Cas 449.

Barnardo’s Homes v Income Tax Special Comrs [1921] 2 AC 1, 28 Digest 84, 483, 90 LJKB 545, 125 LT 250, sub nom R v Income Tax Acts Special Purposes

Comrs, Ex p Dr Barnardo’s Homes National Incorporated Assocn, 7 Tax Cas 646.

Brodie v Inland Revenue Comrs (1933), 17 Tax Cas 432, Digest Supp.

Moss Empires Ltd v Inland Revenue Comrs [1937] 3 All ER 381, [1937] AC 785, Digest Supp, 106 LJPC 138, 157 LT 396, 21 Tax Cas 264.

Smith v Smith [1923] P 191, 28 Digest 68, 361, 92 LJP 132, 130 LT 8.

Lindus and Hortin v Inland Revenue Comrs (1933), 17 Tax Cas 442, Digest Supp.

Williamson v Ough [1936] AC 384, Digest Supp, 105 LJKB 193, 154 LT 524, 20 Tax Cas 194.

Appeals

Appeals by the Crown from orders of MacNaghten J dated 16 April 1945, and reported ([1945] 2 All ER 23), where the facts are fully set out.

The Solicitor General (Sir Frank Soskice KC), J H Stamp and Reginald P Hills for the appellants.

Cyril King KC and A C Nesbitt for the respondents.

20 December 1945. The following judgments were delivered.

LORD GREENE MR. I have the authority of Morton LJ, to say that he has read the judgment I am about to deliver and agrees with it.

The question which falls to be decided is the same question in both appeals and relates to the assessability, in the first appeal, to income tax, and, in the

second appeal, to sur-tax, of certain sums paid by the executors and trustees of the will of Mrs Florence Cunard to her sister, Miss McPheeters, under a special

provision in the will of Mrs Cunard. The Special Commissioners decided in favour of the Crown, their decision was reversed by MacNaghten J and the Crown

appeals to this court.

The payments in question were made out of the capital of the estate of the testatrix pursuant to cl 10(b) of her will. They were made before 7 February

1940, the date when, according to the finding of the Special Commissioners, the residue of the estate was ascertained. The testatrix had died on 24 January

1935, and payments out of capital in varying amounts were made to Miss McPheeters during the four income tax years, ending respectively 5 April 1937,

1938, 1939 and 1940. The assessments with which we are concerned are in respect of the payments made in the two last-mentioned years. The main

argument for the taxpayer, shortly stated, was to the effect that the payments in question, having been made out of capital at a time when the residue had not

been ascertained, were not the taxable income of Miss McPheeters and that, accordingly, the Crown’s claim to recover income tax from the trustees under the

Income Tax Act, 1918, All Schedules Rules, r 21, [as amended by the Finance Act, 1927, s 26] and its claim to include the payments in the total income of

Miss McPheeters for sur-tax purposes could not be sustained. In support of this argument reliance was placed on Corbett v Inland Revenue Comrs. It was

argued on behalf of the Crown that the principle of that decision had no application to the present case and that, if, contrary to this view, it would have applied,

the sums in question were to be regarded as taxable income of Miss McPheeters by virtue of the Finance Act, 1938, s 30—a section which admittedly was

passed in order to prevent the operation both of that decision and of the leading decision in R v Special Commissioners of Income Tax, Ex p Dr Barnardo’s

Homes, on which it was based. To the latter argument, reply is made that, on its true construction, sect 30 has no application to such a case as the present.

The argument based on Corbett’s case assumes that, on the true construction of the will and in the events which have happened, the payments in question,

if they are to be regarded as payments of an income nature, were made out 􀂭 161􀀉 of the gross estate of the testatrix before the residue was ascertained, and

are to be regarded in the same light as the income was regarded in Corbett’s case. In addition to the argument based on Corbett’s case, it was argued that the

payments in question could not in any event be assessable to income tax under Sched D, Case III, and, in consequence, could not be regarded for purposes of

sur-tax by reason of the special nature of the provision under which they were made. In order to appreciate the arguments it is necessary to look closely at the

language of the will. By cl 3, the testatrix devised her freehold property known as The Grove to her trustees on trust to allow Miss McPheeters to reside there

rent free. She gave a number of specific and pecuniary legacies, including annuities, and, by cl 9, she devised and bequeathed her real and personal estate not

otherwise disposed of upon trust “that my trustees shall sell call in and convert the same into money” with the usual power to postpone conversion and a

provision that the net income arising from her unconverted property should “as from my death be applicable as income of my residuary estate.” By cl 10, the

testatrix directed that out of the clear moneys to arise from the sale, calling in and conversion, the trustees were to pay her debts, funeral and testamentary

expenses and her legacies and annuities and duties thereon, and at their discretion to invest the residue. Then followed this direction:

‘… and shall stand possessed of the proceeds of the sale calling in and conversion of my said real and personal estate and any money belonging to

me at my death and any part or parts of my said real and personal estate for the time being unconverted as well as the said investments (hereinafter

called “my residuary estate”) upon trust during the lifetime of my sister as follows…’

All England Law Reports 1936 - books on screen™

All ER 1946 Volume 1

Preamble

This provision is inartistically drafted, but it seems to me impossible to construe the words “my residuary estate” as meaning the same thing as “the net residue

of my estate ascertained in due course of administration.” The words “my residuary estate” are here defined as including the proceeds of sale, calling in and

conversion referred to in cl 9. But these proceeds are gross and are not the net residue remaining after payment of debts,legacies, etc. As will presently

appear, this view is confirmed by other provisions in the will.

The testatrix then directed as follows. By cl 10(a) the trustees were to pay all outgoings in respect of The Grove “out of the income of my residuary

estate and subject thereto” and to other income payments, they were to pay “the remainder of the income to or for the benefit of” Miss McPheeters “during her

life.” By cl 10(b):

‘If in any year the income of my residuary estate shall not be sufficient to enable my sister to live at The Grove in the same degree of comfort as she

now lives there with me then I empower my trustees to apply such portion of the capital of my residuary estate by way of addition to the income as they

in their absolute and uncontrolled discretion may think fit moreover any capital so applied shall not be replaced out of the income of a subsequent year

but shall be treated as an additional bequest to my sister.’

The payments now in question were made by the trustees under this last provision.

My view that the phrase “my residuary estate” is not used in the sense of what is, strictly speaking, the “net residue” of the estate when ascertained in due

course of administration, is confirmed by several indications. In cl 10(a) the direction to pay the outgoings in respect of The Grove is to pay them out of the

income of “my residuary estate”: but it is quite clear that these payments are to be made as from the death of the testatrix, ie, at a date when the net residue

could not have been ascertained. In cl 7(d) the testatrix directed that, pending appropriation, annuities bequeathed by her were to be charged on her “residuary

estate.” There are other indications in the will to the same effect.

Counsel for the respondents argued that the payments in question, having been made at a time when the net residue had not yet been ascertained in due

course of administration, had been made by the executors without authority and, assuming them to be of an income character, stood in exactly the same

position as the payments in respect of income which were in question in Corbett’s case. I am unable to accept this view. The payments, in my opinion, could

be made by the trustees, in strict accordance with the power given by the will, at any time after the death of the testatrix, irrespective of the fact that, at the

date of any particular payment, the “net residue” had not been ascertained. The payments were to be treated as additional bequests and would 􀂭 162􀀉 attract

legacy duty. Of course, in framing the accounts of the estate, the payments must be debited to the ultimate net residue and these “additional legacies” could

not compete with the other legacies bequeathed if the estate was insufficient to provide for both. But there was no question of this. The payments, therefore,

in my opinion, were properly made and at the moment of payment became income of the recipient, Miss McPheeters. They were in their nature entirely

different from the payments in question in Corbett’s case. Miss McPheeters’ title to the income arose when the trustees exercised their discretion in her favour

and not before. At that moment, a new source of income came into existence. The payments came to Miss McPheeters under the express terms of the will and

not by virtue of what I may call the quasi-interest enjoyed by a residuary legatee pending the completion of administration, as was the case with the payments

in Dr Barnardo’s Homes case and Corbett’s case.

That the payments were “income” in Miss McPheeters’ hands is, in my opinion, beyond dispute, and the fact that they were made out of capital is

irrelevant. The payments were to be made “by way of addition to the income” in order to enable Miss McPheeters to live in the same degree of comfort as

before. The testatrix was in fact providing for a defined standard of life for her sister, that provision being made in part out of income and in part (at the

discretion of the trustees) out of capital. The purpose was an income purpose and nothing else. A similar point was decided by Finlay J in Brodie’s Trustees v

Inland Revenue Comrs, which was, in my opinion, correctly decided. In that case, the trustees were bound to make payments out of capital as required and

had not merely a discretion, as in the present case. But that is immaterial on the question whether the payments ought to be regarded as being of an income

character. It is relevant to the entirely different point (referred to hereafter) as to whether the payments here ought to be regarded as purely voluntary

payments.

Counsel for the respondents argued that those payments were not taxable because, on the true construction of the statutory provisions relating to Sched D,

Case III, under which the case so far has been treated as falling, (i) they were not annual payments and (ii) they were discretionary, and therefore voluntary,

payments which Miss McPheeters could not claim as of right. Under Sched D, Case III, the tax chargeable in respect of “annual profits or gains” is charged:

‘… in respect of profits of an uncertain value and of other income described in the rules applicable to this case.’

Sched D, Case III, r 1, provides:

‘The tax shall extend to (a) any … other annual payment … either as a charge on any property of the person paying the same by virtue of any deed

or will or otherwise, or as a reservation thereout …’

In order to be “annual” within the meaning of the rule, the payment need not necessarily be recurrent year by year. To use the language of Lord Maugham

([1937] 3 AER 381, at p 386), it is sufficient if it has “the quality of being recurrent, or being capable of recurrence”: see Moss Empires Ltd v Inland Revenue

Comrs. It is quite clear that a payment under cl 10(b) of the will is one that is capable of recurrence because, in its very nature, it may be paid in any year

when the income of the estate is insufficient for the purpose contemplated. The payments were in fact recurrent and the circumstance that they varied in

amount does not remove their quality of being capable of recurrence.

The second argument also, in my opinion, fails. Even if it be assumed that the general words are to be read as limited by the phrase “a charge on any

property” as to which, see Smith v Smith—it is not suggested that the phrase means a charge in the strict sense. It was suggested, however, that Sched D, Case

III, r 1(a) does not extend to mere voluntary payments. But the payments here were not voluntary in any relevant sense; they were made in the exercise of a

discretion conferred by the will out of a fund provided for the purpose by the testatrix. It is true that the trustees had an absolute discretion whether to make a

payment or not; but the question whether they should do so was one which they were bound to take into their consideration. They could not refuse to consider

whether the income of the estate was sufficient 􀂭 163􀀉 to give Miss McPheeters the required degree of comfort. The fact that, after examining that matter,

they might come to the conclusion that it was sufficient and, therefore, decline to make a payment out of capital, does not, in my opinion, give to a payment, if

and when made, the character of a voluntary payment in any relevant sense. The money, when received by Miss McPheeters, was received by her through the

joint operation of the will and the exercise of their discretion by the trustees. This very question was considered by Finlay J in Lindus and Hortin v Inland

All England Law Reports 1936 - books on screen™

All ER 1946 Volume 1

Preamble

Revenue Comrs. There, as here, the trustees had a discretion to supplement the income of a tenant for life out of capital. This discretion was absolute and it

was argued there, as here, that the payments were not income because there was a discretion on the part of the trustees, and there was no right in the

beneficiary to claim them. I am in agreement with the decision of Finlay J on this point. The observations of Lord Russell of Killowen ([1936] AC 384, at pp

391, 392), in Williamson v Ough, appear to me to confirm this view. That case, like Lindus’ case and the present case, fell under Sched D, Case III. I may

also refer to the language of Lord Sterndale MR ([1923] P 191, at pp 196, 197), in Smith v Smith, on the general question of the construction of Sched D, Case

III, r 1(a).

The Crown contends that the payments in question are brought into charge as taxable income of Miss McPheeters under the Finance Act, 1938, s 30. It is

unnecessary for the Crown to rely on this argument in view of the opinion which I have formed, since tax would be payable in any event, quite apart from the

provisions of the subsection. But the point was fully argued, and it is right that I should express my views upon it. The section relates to a person having what

is called “a limited interest” in the residue of an estate or part thereof. By subsect (2) any sum paid during “the administration period” (ie, the period between

the death and the completion of the administration of the estate) “in respect of that limited interest” is to be deemed to be income of the person having the

limited interest. The expression “limited interest” is not expressly defined in the Act, but sect 35(3) provides:

‘A person shall be deemed to have a “limited interest“… during any period … where the income of the residue or of that part thereof … for that

period would, if the residue had been ascertained at the commencement of that period, be properly payable to him … ’

In contradistinction to the case of a “limited interest,” sect 31 deals with the case of a person having an “absolute interest,” ie, a person who would be entitled

to the capital of the estate or part thereof if the residue had been ascertained: see sect 35(1).

Here Miss McPheeters was obviously and admittedly a person with a “limited interest” by virtue of her “right” to the income. But the payments in

question were not paid to her in respect of her “right” to the income: they were paid under a discretionary power and were quite different in character. The

words “limited interest” must, in my opinion, be read as meaning an “interest” of the kind described in sect 35(3)—what I have called earlier in this judgment,

a quasi-interest. The language is necessarily involved, dealing as it does with the special position of residuary legatees before the residue is ascertained, ie, at

a time when, as appears in Dr Barnardo’s case, they have, strictly speaking no interest in any property forming part of the unadministered estate. This appears

to me to explain the use of the colourless words “in respect of” in sect 30(2). I cannot construe them as covering the payments here in question.

For convenience I have disregarded the fact that part of the last payment in question is referable to the period between the close of the administration on 7

February 1940, and the end of the financial year on 5 April 1940. As, in the result, the whole of the payment is subject to tax, I need say no more about this.

The appeals are allowed with costs here and below.

MACKINNON LJ. I agree.

Appeals allowed with costs.

Solicitors: Solicitor of Inland Revenue (for the appellants); Markby, Stewart & Wadesons (for the respondents).

F Guttman Esq Barrister.

􀂭 164􀀉

[1946] 1 All ER 165