Scottish Court of Session Decisions

The Legacy Duty Act 1796 (36 Geo. III., cap. 52), sec. 6, enacts that “the duties hereby imposed shall in all cases in which it is not hereby otherwise provided be accounted for, answered, and paid by the person or persons having or taking the burthen of the execution of the will or other testamentary instrument or the administration of the personal estate of any person deceased … upon delivery, payment, or other satisfaction or discharge whatsoever of any legacy or any part of any legacy, or of the residue of any personal estate or any part of such residue to which any other person or persons shall be entitled.”

The Revenue Act 1845 (8 and 9 Vict. cap. 76), by sec. 4, enacts—“Every gift by any will or testamentary instrument of any person which by virtue of any such will or testamentary instrument is or shall be payable or shall have effect or be satisfied out of the personal or moveable estate or effects of such person or out of any

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personal or moveable estate or effects which such person hath had or shall have had power to dispose of … shall be deemed a legacy within the true intent and meaning of all the several Acts granting or relating to Duties on Legacies in Great Britain and Ireland respectively, and shall be subject and liable to the said duties accordingly.”

On 5th July 1906 the Lord Advocate, on behalf of the Commissioners of Inland Revenue, raised an action against Sir W. C. Copland, C.E., and others, the testamentary trustees of the deceased James Dick, Glasgow, in which he concluded for delivery of “an account of the moneys paid or payable since the death of the said deceased James Dick, in terms of his testamentary deed of arrangement, executed by him on 4th and recorded 11th March 1902, as being 10 per cent. of the free profits of his business of R. & J. Dick, Greenhead, Glasgow, the said account being required in order that the legacy duty due and payable in respect of the said moneys may be ascertained,” and for payment of £1700 in name of such legacy duty.

The defenders pleaded—“(1) The action is irrelevant. (2) The provisions of the said deed of arrangement for payment to the deceased's employees of 10 per cent. of the profits of the business being designed by the deceased and accepted by the employees in the business as remuneration for service rendered to the deceased's estate, and not being of the nature of a bequest, no legacy duty is due to the pursuer, and the defenders should be assoilzied from the conclusions of the summons”

The facts are given in the opinion of the Lord Ordinary (Johnston), who, on December 11, 1906, ordained the defenders to deliver the account called for.

Opinion.—“Under his settlement of 4th March 1902 the late James Dick, sole partner of the firm of R. & J. Dick, gutta-percha shoe and belt manufacturers, Glasgow, who died on 7th March 1902, conveyed his estate to trustees. Of even date with his trust settlement Mr Dick executed a relative deed of arrangement with regard to his manufacturing business, and accordingly in the second head of his settlement he specially directed and instructed his trustees to give effect to the said deed of arrangement. After leaving very considerable legacies, Mr Dick, by the last purpose of his settlement directed his trustees to realise the whole residue of his estate ‘at such time or times and from time to time as they may think proper, and always having special regard to the arrangements for carrying on the business of R. & J. Dick’ in conformity with the said separate deed of arrangement, and to distribute the proceeds among charitable institutions in Scotland. All legacies were to be paid free of legacy duty.

“In the present action we are more specially concerned with the deed of arrangement regarding the business, executed with reference to the settlement. This deed proceeds on the preamble that Mr Dick considered it desirable to make arrangements, to take effect after his decease, regarding his said business, and that the best method which had suggested itself to him ‘of continuing the business is by giving the heads of the various departments and others in my employment a prospective interest in the profits, and power to acquire the business after my decease.’ Accordingly he made the following arrangements:—

First,—He nominated fifteen of his employees and directed that they should, in certain shares from and after his death, have each ‘a prospective interest in the profits of the business and in the business itself, if acquired by them in proportion to the shares allotted to them respectively.’ He further specially provided and declared ‘that the provisions under these presents in favour of the employees shall not become vested interests until the whole of my capital and interest has been paid out as after mentioned.’ And he debarred his said employees from disposing of their interest ‘in the profits or in the business itself under these presents,’ and declared any act done in contravention of this stipulation to be null and void. And he then declared that ‘in the event of any of said persons ceasing to be an employee or leaving the business, the share of the profits of the business allotted to him and his interest therein shall, unless I otherwise direct, from and after the date of his so ceasing or leaving accresce to and be divided amongst the remaining employees in proportion to their said shares.’

Second.—He directed the books of the business to be brought to a balance at the date of his death, and his capital in the business to be ascertained, and from the date of his death interest at 3 per cent. per annum to be paid to his trustees in cash to the 31st of December in each year on the amount of his capital in the books of the business or on so much thereof as might remain unpaid at the annual balances which were to take place at that date in each year, and he then directed, with regard to the whole profits of the business after allowing for these payments, and for provision for depreciation, that they should be divided amongst the surviving employees in proportion to the shares allotted to them or to which they might acquire right under these presents, ‘and 10 per centum of such profits shall be paid over to them in cash, and the remaining profits shall not be drawn by the employees but credited to their respective accounts in the books of business until the whole of my capital or interest in the said business is paid out, and the said remaining profits allotted to the employees as aforesaid shall be accumulated without adding interest, and form a fund available for the paying out of my capital in the said business.’ In the event of loss arising in any year, such loss was to be carried forward until wiped out by future profits.

Third.—He provided that on the death or bankruptcy of any employee his interest in the profits of the business and in the business itself should cease, and that his

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representatives should only be entitled to be paid the amount standing at his credit in the books at the previous balance, but postponed to the paying out of Mr Dick's own capital with interest as before provided, and that his remaining employees should be entitled to the interest and prospective share of profits which would have fallen to the deceasing or bankrupt employee, pro rata, according to their own prospective shares.

Fourth.—He provided for the carrying on of his business in such manner as left his trustees with the ultimate control, and with power to remove from the business any of the employees, though nominated in the will to a share in the business and profits, while at the same time for the business being carried on by the employees as it was carried on by him at the date of his death. It has already been decided, Walker v. Reith, 1906, 8 Fr. 381, that the employees remain servants of Mr Dick's testamentary trustees.

Fifth.—He provided that, out of the amount of profits standing at the credit of his employees in the books of the business, his trustees should be entitled to take payment, pro tanto, of the sums standing to their credit on capital account, until the whole of his capital with interest should have been fully paid to his trustees; that they should then pay out of the accumulated profits the amount appearing in the books as due to the representatives of deceased or bankrupt employees, or to retired employees, or arrange for such payment being made by the surviving employees in such manner as to them should seem fit; and that his trustees should thereupon convey to the employees who might be surviving at that date the whole business, including the stock-in-trade and other assets, and goodwill thereof, according to the shares allotted to them respectively, or to which they might have right, as appearing from the books of the business,

Sixth.—He provided that, notwithstanding the arrangements above written, his employees should be entitled to purchase, and that the trustees were empowered to sell at any time, his business, for the capital sum standing at the credit of his estate at the time of such purchase.

The business of R. & J. Dick, which has been carried on under the aforesaid deed of arrangement since Mr Dick's death on 7th March 1902, has been eminently successful. The profits have averaged more than £40,000 a-year, and the deceased's capital in the business, which amounted to £350,000, is in process of being paid out in terms of the deed of arrangement. At the same time the 10 per cent. of the profits directed to be distributed among the employees has amounted to a substantial sum in each year.

The Crown now claim legacy-duty upon these shares of annual profit paid to the employees remaining in the business from the trustees of Mr Dick's settlement, as responsible for settling the death-duties on his estate. The question thus raised depends upon the sixth section of The Legacy-Duty Act 1796, in conjunction with the fourth section of The Stamp Act 1845. For the purposes of the sixth section of the Legacy-Duty Act, which imposes the duty, the term ‘legacy’ is practically defined by the fourth section of the Stamp Act, as ‘a gift by will or’ testamentary instrument of any person, which, by ‘virtue of any such will or testamentary’ instrument, is or shall ‘be payable or shall have effect or be satisfied out of the personal or moveable estate or effects of such person,’ &c.

First, then, is the 10 per cent. of the profits of the business of R. & J. Dick, provided by Mr Dick by his deed of arrangement, to be paid to certain of his employees, to have effect or be satisfied out of his personal or moveable estate? I think that it is. Mr Dick's business, including under that term not merely the capital at his credit in its books and the premises and plant, but also the goodwill, was certainly his. And that it remains an asset of his estate as long as profits continue to be divided among certain of his employees, by virtue of his settlement, has already been practically determined by the decision in Walker v. Reith, supra. It was open to him to direct that his business should continue to be carried on for the benefit of his estate, just as he might have directed that shares in an industrial company, constituted under the Companies Acts, should be retained and the dividends applied in some particular way for a series of years. So long as the business was carried on by his trustees the profits formed part of his estate, and it was open to him to direct, by his testamentary instructions, what was to be done with them.

Now, the deed of arrangement was not only of a testamentary nature in itself, but is adopted by reference by Mr Dick in his settlement as part of his testamentary writings. Are, then, the shares in the profits of the business to be taken by his employees as gifts, and therefore legacies by virtue of the deed of arrangement, or on some other footing? It was contended by Mr Clyde for the trustees that Mr Dick's deed of arrangement was an offer to sell his business to his employees at a price fixed by the amount of capital at his credit in the books, with facilities of a most generous nature to enable them to provide the price. But I cannot so regard what he has done. It is difficult to decide this question without committing oneself to some extent on the further questions, viz., whether the remaining 90 per cent. of the profits, and whether, ultimately, the power to acquire the goodwill of the business, are not also of the nature of legacies. But assuming that Mr Dick, at the point of time at which his capital has been paid out, and the accumulated profits credited to deceased, bankrupt and retired employees has been provided for, either makes a gift of his business to his surviving employees, or offers it to them for sale with such facilities that he has already provided them with the price, I am quite clear that he does not do either the one or the other as at

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his death. And it seems to me that every dividend of profits, either paid to or credited to his employees, is a pure gift, which vests in them respectively at the date of the division. For I do not think that the clause regulating vesting can be taken literally. It is true that these shares of profits are in addition to the salaries of his employees earned in the business, and in a sense are an inducement to them to continue their services, so that his capital may be worked out of the business gradually and applied to other purposes, but they are not salaries, and though subject to a condition are none the less gifts. I cannot distinguish the case from in re Thorley, L.R. (1891), 2 Ch. 613, in which judgment I should have entirely concurred.

Accordingly, I think that the 10 per cent. of profits which is annually to be paid in cash to the surviving employees, being a gift, is a legacy, and liable to legacy-duty.

I am not impressed by the consideration that as it is not possible to distinguish between the 10 per cent. to be paid in cash and the 90 per cent. to be credited in the books, and as the proceeds of the 90 per cent. are to go back to the estate to be distributed as residue, the same sum will apparently pay legacy-duty twice over. I think this is only apparent. The asset of the testator's estate is the business and all that that covers. Mr Dick might have directed annuities to be paid out of the profits for a certain number of years, and they would have been legacies and dutiable. Instead, he directs the whole profits to be divided among the objects of his bounty for an indefinite but terminable period. The sums so divided are as much legacies as the annuities would have been. By means of the 90 per cent. of the divisible profits bequeathed to them as a gift, and therefore dutiable, the objects of his bounty are put in funds at a future date to acquire the business, and when they have done so the business is realised and the proceeds become realised residue, to be applied in payment of his residuary bequests, and such realised residue also will then be properly liable in legacy or its equivalent residue duty. Whether at the date of such realisation there is any further gift to the objects of Mr Dick's bounty in respect of the good will of the business is a matter which I am not called to decide. It is a question which may still fall to be raised.

I shall therefore direct an account as craved, and find the defenders liable in expenses.”

The defenders reclaimed, and argued—The deed of arrangement was a scheme for getting the testator's capital paid out of the business by granting certain facilities to the employees to earn money for its purchase. They got a right to buy the business and, so to speak, help by a loan of money for the purchase at less than the market rate, or, put in another way, a lease on a hire-purchase agreement. These facilities might be dutiable, but their value could not be ascertained in this action, and the onus was on the pursuer to prove their worth. The business was carried on by the employees, not by the trustees. The 10 per cent. share of profits to the employees was remuneratory and was a safeguard to the trust against depreciation of the business. It was increased salary and an inducement to the employees to remain on in the service where their responsibility had been increased by the present arrangement and where their supervision was of great value if not indispensable. The benefit really accrued to the testator's capital in the hands of his trustees. The deed of arrangement was not a gift but an executry contract of sale, the price being what the testator deemed a fair equivalent for the business, and the property did not pass till conditions of sale had been fulfilled. Thus the case was distinguished from in re Thorley, [1891] 2 Ch 613, where the question was of a gift with a condition adjected, that to the trustees being gratuitous since they were bound to discharge the office without reward, and was also distinguished from The Attorney-General v. Sharpe, 7 T.L.R. 165, for the same reason. The 10 per cent. share of profits here was remuneration springing from a contractual relation in the sense of Willis v. Kibble, 1 Beavan 559, and no gift. The Lord Ordinary's interlocutor should be recalled.

Argued for the pursuer and respondent—The questions here were—(1) Was this a gift by will? (2) Did it fall to be satisfied out of the testator's moveable estate? The 10 per cent. share of profits paid to the employees was not remuneration but a gift, being a conditional legacy of future profits with one condition, viz., that the employees should remain in the service. The employees were the servants of the trustees, who owned the business, and dismissable at pleasure— Walker v. Reith, January 12, 1906, 8 F. 381, 43 S.L.R. 245. As such their services were amply compensated by their salaries, which were calculated and regulated on a basis independent of the ten per cent. share of profits. The 10 per cent. and the 90 per cent. were both gifts, differing only in this, that the former had attached one condition and the latter two, viz., the same condition as to remaining in the service, and a second that the fund should be used to purchase the business. It was immaterial that the estate was benefitted as well as the employees. This was a bequest of future profits which but for this provision would have been merely prospective. That a more immediate benefit was given did not change its character. This case was a fortiori of in re Thorley, ut supra, which ruled it, as did Sweeting v. Sweeting, 1 Drew. Ch. Cas. 331. The interlocutor of the Lord Ordinary should be sustained.

At advising—