Scottish Court of Session Decisions

By antenuptial contract of marriage dated 3rd and 5th June 1823, between Mr Robert Maclachlan of Maclachlan, Argyllshire, and Miss Helen Carruthers, Mr Maclachlan bound himself to pay to his wife, in case she survived him, a free liferent annuity of £800 payable out of the lands of Kilbride and others forming part of the barony of Strathlachlan. He conveyed the said lands to himself and his heirs burdened with the above annuity.

Mr Robert Maclachlan died without issue survived by his wife and succeeded by his brother Mr George Maclachlan.

By bond of annuity dated 21st November 1871 Mr George Maclachlan provided a free yearly annuity of £800 to his widow Mrs Mary Maclachlan, secured by him to her over the said lands, but “providing and declaring always that in case I shall prededease Mrs Helen Carruthers or Maclachlan, widow of my brother the late Robert Maclachlan, Esquire, of Maclachlan, the foresaid annuity of Eight hundred pounds hereby provided to my said spouse shall be restricted to the sum of Four hundred pounds sterling yearly during the lifetime of my sister-in-law the said Mrs Helen Carruthers or Maclachlan.” Of even date with this bond Mr George Maclachlan executed a trust-disposition and settlement dealing chiefly with his moveable estate, by which he directed his trustees to make payment to his widow during Mrs Helen Maclachlan's life of a free yearly annuity of £400, declaring that this annuity was in addition to the one provided by the bond of annuity.

The additional annuity was charged on legacies of £5000 which were left to his younger children.

By a codicil executed on 20th March 1897 Mr George Maclachlan conveyed his estate of Maclachlan, including the said lands of of Kilbride and others, to trustees, who were to pay an annual sum out of the income of the estate to the testator's eldest son William Maclachlan, and on his death without children to the testator's second son John Maclachlan.

Mr George Maclachlan died on 7th August 1877. Sufficient funds were retained from the legatees under the trust-disposition to secure the additional annuity to his widow of £400, and inventory and legacy-duty was paid on those funds.

Mr William Maclachlan having died without issue, Mr John Maclachlan succeeded to the estates of Maclachlan on 1st December 1881.

Mrs Helen Carruthers or Maclachlan died on 18th November 1895. The Commissioners of Inland Revenue made a claim against Mr John Maclachlan for succession-duty in respect of the cesser of the annuity of £800 enjoyed by Mrs Helen Maclachlan, less amount of increased annuity of £400 enuring to Mrs Mary Maclachlan. Payment was made on the cesser of £400 a-year, and was accepted subject to the condition that it should not prejudice the claim of the Revenue for estate-duty.

An action was raised against Mr John Maclachlan by the Commissioners of Inland Revenue craving that the defender should be ordained to deliver to the pursuers “an account of the property which passed on the death of Mrs Helen Maclachlan, for the purpose of ascertaining the estate-duty due and payable in respect of the said property,” and for payment of the sum of £750 as estate-duty in respect of the property.

The pursuers maintained that through the cesser of Mrs Helen Maclachlan's interest, on her death her annuity ceased to be a burden upon the property charged therewith, and that the value of the free yearly annuity of £800, capitalised in terms of section 7 (7) b of the Finance Act of 1894, was chargeable to estate-duty, and that the amount of duty payable was not less than £750.

The pursuers pleaded—“(1) Estate-duty is payable on account of the cesser of Mrs Helen Maclachlan's annuity, and the passing of property on her death. (2) The defender is liable for the duty, in that the property has passed to him for a beneficial interest in possession.”

The defender averred that at Mrs Helen Maclachlan's death, owing to the contemporaneous removal of the restriction upon Mrs Mary Maclachlan's annuity, the property had only passed to the defender “for a beneficial interest in possession” to the extent of an annuity of £400, and that the only benefit accruing in respect of the other £400 of the annuity was to the legatees, whose legacies were burdened with payment of £400 to Mrs Mary Maclachlan.

He pleaded—“(2) In the circumstances condescended on, and upon a sound con-construction of the said Act of 1894, estate-duty is only due by defender upon the capitalised value of an annuity of £400.”

By section 1 of the Finance Act 1894 (57 and 58 Vict. cap. 30) it is provided—In the case of every person dying after 1st August 1894, there shall “be levied and paid upon the principal value ascertained as hereinafter provided of all property, real or personal, settled or not settled, which passes on the death of such person, a duty, called estate-duty,” at the graduated rates mentioned in the said Act. By section 2 (1) b it is provided that “property passing on the death of the deceased shall be deemed to include the property following, that is to say:—( b) property in which the deceased or any other person had an interest ceasing on the death of the deceased, to the extent to which a benefit accrues or arises by the cesser of such interest.”

It is provided by section 7 (7)—That the value of the benefit accruing or arising from the cesser of an interest ceasing on the death of the deceased, shall ( a) “if the interest extended to the whole income of the property, be the principal value of that

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property”; and ( b) “if the interest extended to less than the whole income of the property, be the principal value of an addition to the property equal to the income to which the interest extended.”

Section 8 (4) provides—“Where property passes on the death of the deceased, and his executor is not accountable for estate-duty in respect of such property, every person to whom any property so passes for any beneficial interest in possession … shall be accountable for the estate-duty on the property,” and shall deliver to the Commissioners and verify an account.

The Lord Ordinary ( Stormonth Darling) on 8th March 1899 sustained the defender's second plea-in-law, continued the cause, and granted leave to reclaim.

Opinion.—“Mrs Helen Maclachlan, widow of a former proprietor of the estate of Maclachlan, was secured by her marriage-contract in a free liferent annuity of £800 payable out of lands which now belong to the defender. She died on 18th November 1895. The next proprietor, Mr George Maclachlan, who died in 1877, provided a free yearly annuity of the same amount, and out of the same lands to his widow, who survives. But this annuity as regards the lands was restricted to £400 a-year during the lifetime of Mrs Helen Maclachlan, the balance being charged during that period on legacies which which he left to his younger children by his trust-disposition and settlement. While both ladies lived the lands were thus burdened with annuities to the extent of £1200 a-year. On the death of either of them the burden was to be reduced to £800 a-year.

The Crown now claims from the defender estate-duty as arising through Mrs Helen Maclachlan's death. It is admitted that a claim arises, and the defenders offer to pay duty on the capitalised value of an annuity of £400 a-year. But the Crown is not content with that, and demands that the duty should be calculated on an annuity of £800 a-year. I am of opinion that this claim is not warranted by anything in the Finance Act of 1894.

Section 1 of the Act levies estate-duty in the case of every person dying after 1st August 1894 on the principal value of all property which passes on the death of such person. But as an annuity could not be said to ‘pass’ on the death of the annuitant, inasmuch as it then ceases altogether, that section by itself would not meet the present case. Accordingly, we find that section 2 enlarges the scope of section 1 by providing that ‘property passing on the death of the deceased shall be deemed to include the property following,’ and then ( b) brings in property in which the deceased or any other person had an interest ceasing on the death of the deceased to the extent to which a benefit accrues or arises by the cesser of such interest.’

Now, what was the extent of the interest which ceased on the death of Mrs Helen Maclachlan? Undoubtedly it was an interest extending to £800 a-year, for that was the sum which was liberated by her death. But then under sec. 2 you must not only have an interest ceasing, you must have a benefit accruing; and you cannot determine what the benefit is without ascertaining to whom the benefit accrues. Pursuing the investigation, therefore, you find that the benefit accrues in two directions. It would all accrue to the proprietor of the estate of Maclachlan were it not that, contemporaneously with, and in consequence of the burden of £800 being taken off the lands, another burden of £100 is laid on by the operation of a deed which is not the deed of the proprietor himself. Where, then, has the remainder of the benefit gone? Plainly to the legatees under Mr George Maclachlan's will, who by and through Mrs Helen Maclachlan's death are relieved of a burden of £400 a-year.

It appears from the Crown's own statement (condescendence 5) that under section 21 of the Finance Act these legatees are exempt from estate-duty in respect of the benefit thus accruing to them only by reason of their legacies having already borne inventory-duty at Mr George Maclachlan's death. In other words, they have paid the equivalent of estate-duty, and if they had not, the Crown would have claimed estate-duty from them now. But if such a claim could have been made it would have presented in naked simplicity the extraordinary result of the Crown benefiting by the cesser of an annuity of £800 a-year to exactly the same extent as if it had been an annuity of £1200 a-year. Any construction of a Taxing Act, which leads to a consequence so absurd as that is, in my opinion, self-condemned.

Section 7 (7) of the Act provides merely for the mode of valuing the benefit accruing or arising from the cesser of an interest, and does not seem to me to advance the Crown's argument, because nobody doubts that the mode of valuing an annuity for Revenue purposes is to capitalise it. Neither does the Crown derive help from section (8) (4), which provides that where (as here) the executor of the deceased is not accountable for estate-duty, every person to whom the property passes ‘for any beneficial interest in possession’ shall be accountable. That would rather seem to suggest that the Crown must seek out the various persons benefited, and charge them for their respective interests, but the argument is that, where one person is found in beneficial possession, he may be charged with the whole duty, and be left as best he may to recover from the others their proper proportions. That would be a very bootless proceeding for the defender in the present case, seeing that the others have by the Crown's own admission a conclusive answer to any such claim.

I was referred by Mr Young to the case of Earl Cowley (1898), 1 Q.B.D. 355, and especially to Lord Justice Rigby's review of the Act, from p. 374 to p. 377. I do not know that some passages in that interesting exposition quite square with the opinion of the Lord Chancellor in Attorney-General v. Beech (1899), App. Cas., at p. 56, e.g., where the Lord Justice says—‘The duty is in no sense a duty on succession,’ and the Lord Chancellor says—‘What the statute intended to make liable to pay duty is the

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succession by one person from another upon death.’ But it is not necessary for the defender to demur to one word that was said in Earl Cowley's case. The Court there held, inter alia, that in computing estate-duty on the value of the life estate which passed on the death of the second Earl, no deduction was to be made in respect of the capitalised value of an annuity created by the joint Act of father and son, and enjoyed by the son during his father's life, on the principle that nothing done by the third Earl himself to increase or diminish his enjoyment of the property could affect the value of the property which passed at the second Earl's death. There is nothing of that kind here. It was not the defender but his predecessor who imposed the burden which reduces the value of the benefit accruing to him by the death of Mrs Helen Maclachlan to £400 a-year. I shall therefore sustain his second plea-in-law.”

The pursuers reclaimed, and argued—The scheme of the Act was that section 1 dealt with property which actually passed, while section 2 dealt with property which did not in fact pass. Admittedly here the annuity did not pass, but it was of such a kind as to give Mrs Helen Maclachlan an interest in the estate, and but for the qualifying words in section 2 (1) b, “to the extent to which a benefit accrues or arises by the cessor of such interest,” the whole estate would have been liable to duty. In order to rightly understand that section, it must be read along with section 7 (7) b. The former section was not referring to the person who would be taxed but merely to the subject of taxation, and when it was requisite to see what was the amount of liability, then under 7 (7) b which referred back to the words used in section 2(1) b, it clearly was to be the value of the interest ceasing at Mrs Helen Maclachlan's death. It was not relevant to consider whether anything took place by which that cesser had not full effect. The fact that a new debt had been created, different quoad debtor and creditor, not over the interest enjoyed by Mrs Helen, but over the whole estate, could not be a relevant consideration. It was not competent to put the two deeds together and say that John Maclachlan's apparent benefit from the cesser of the £800 per year in the first deed could be diminished by the £400 in the other deed. Accordingly it was not necessary either that property should pass to the amount of £800 per year, or that it should pass to John Maclachlan— Earl Cowley, L.R. [1898], 1 Q.B.D. 355, at pp. 374–77, L.R. [1899], App. Cas. 198; Attorney-General v. Beech, L.R, [1899], App. Cas. 53. Nor could the £400 per annum accruing to Mrs Mary be deducted as a burden. It did not exist as an incumbrance at all when Mrs Helen died, and it was not a burden upon Mrs Helen's interest but upon the whole estate.

Argued for respondent—In order for the pursuer to succeed under section 2 of the Act he must show 1st that property liable to duty had passed to the extent of £800 a-year, and 2nd that it had passed to the defender. (1) The deeds under which the property passed must be taken together as a whole. If that were done, it was perfectly clear that the defender was only benefited to the extent of £400 a-year. The scheme of the Finance Act as a whole must be considered. The pursuers were looking at the accruing benefit from the point of view of the person deceasing, not of the one who received the benefit. But it was the latter alone which ought to be looked at. It was evident from section 2 that cesser of interest and benefit were not necessarily co-extensive. The provisions of section 7 were executorial, dealing with the valuation of estate passing under sections 1 and 2, whatever that estate might be— Earl Cowley [1899], App. Cas., at p. 205. Accordingly the provisions of sections 1 and 2, which were clearly in favour of the defender's view, could not be defeated by this purely executorial clause. The pursuers admitted that there was only an accruing benefit of £400, but argued that under section 7 (7) this fell to be valued as if it were £800; the answer to this inconsistency must be that section 7 (7) could only be literally applied where the interest ceasing was coextensive with the interest taken by the successor, and that section 2 is the ruling clause. Further, the estate which passed upon Mrs Helen Maclachlan's death did so subject to a burden of £400 payable to Mrs Mary Maclachlan, which under section 7(1) fell to be deducted, with the result that duty is only payable upon £400. (2) In any event the defender was only liable for duty upon the property which had passed to him “for any beneficial interest in possession” [section 8 (4)], that was to say, upon the capital value of an annuity of £400. He was not in the position of an executor who might pay the duty on the whole estate, heritable as well as moveable, and recover from those to which the property had passed. If it were the case that £400 of the £800 had passed to Mrs Mary Maclachlan, the pursuers must recover from her or from the residuary legatees. Admittedly £400 had passed to the residuary legatees, and to argue that £800 had passed to the defender, resulted in the passing of estate worth £1200 upon the death of an annuitant possessed of £800.

At advising—