Scottish Court of Session Decisions

The Finance Act 1894 (57 and 58 Vict. cap. 30) enacts—Section 1—“In the case of every person dying after the commencement of this Act there shall … be levied and paid upon the principal value ascertained, as hereinafter provided, of all property, real and personal, settled or not settled, which passes on the death of such person, a duty called estate duty.…”

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Section 2—“(1) Property passing on the death of the deceased shall be deemed to include the following property, that is to say—… ( d) Any annuity or other interest purchased or provided by the deceased, either by himself alone or in concert or by arrangement with any other person, to the extent of the beneficial interest accruing or arising by survivorship or otherwise on the death of the deceased.”

The Lord Advocate, on behalf of the Commissioners of Inland Revenue, pursuer, brought an action against Alexander Scott and others, the trustees of the deceased Alexander Whitson Scott, nominated and acting under a trust-disposition and assignation dated 4th February, and recorded in the Division of the General Register of Sasines applicable to the county of Forfar 5th April 1899, defenders, concluding for decree upon the defenders to deliver a full and true account (1) of all the sums recovered by them as trustees on the death of Alexander Whitson Scott under and in virtue of the certificates or policies of insurance conveyed to them under the trust-disposition and assignation referred to, including all profits, bonuses, and other additions thereto, and (2) of such portion of the trust estate held by them as was required to produce an annual income equal to the amount of the annual premiums payable in respect of the certificates or policies of insurance, so that the estate duty payable in respect of the sums recovered under the certificates or policies and of the portion of the trust estate referred to might be ascertained, and for decree for £1400.

The trust-disposition and assignation of Alexander Whitson Scott, after narrating consideration of a duty upon the truster to provide for his daughters, without prejudice to any testamentary or other provisions which the truster might make in favour of his daughters, conveyed to the defenders—“( Primo)…[ Certain heritable subjects] … ( Secundo)—(First) a certificate or policy of assurance granted by the Globe Insurance Company, dated sixth August Eighteen hundred and sixty-two, and numbered 12710, on my own life, for the sum of three hundred pounds sterling, in which certificate or policy I am designed as of number twenty-one Constitution Road, Dundee, in the county of Forfar, manufacturer; (second) a certificate or policy of insurance granted by the Reliance Mutual Life Assurance Society, dated twentieth January Eighteen hundred and sixty-three, and numbered 5006, on my own life, for the sum of three hundred pounds sterling, in which certificate or policy I am designed as of twenty-one Constitution Road, Dundee, linen cloth manufacturer; (third) a certificate or policy of assurance granted by the Scottish Widows' Fund and Life Assurance Society, dated second May Eighteen hundred and seventy-seven, and numbered 46634 Class A 1, a, on my own life, for the sum of three thousand pounds sterling, in which certificate or policy I am designed as of Riversdale, Perth Road, Dundee, manufacturer; and (fourth) a certificate or policy of assurance granted by the said the Scottish Widows' Fund and Life Assurance Society, dated twenty-seventh September Eighteen hundred and eighty, and numbered 52840 Class A 1, a, on my own life, for the sum of three thousand pounds sterling: Together with the said respective sums of three hundred pounds, three hundred pounds, three thousand pounds, and three thousand pounds in said certificates or policies, and all profits, bonuses, and additions which have accrued or may accrue on said certificates or policies, together with all my right, title, and interest in or to said certificates or policies of assurance and sums payable there under; but always subject to the whole conditions and others contained or referred to in said certificates or policies, which I have herewith delivered up to my said assignees to be used by them and their foresaids as their own proper writs and evidents; with full power to them to sell, assign, or surrender the said certificates or policies at pleasure, to uplift and recover the proceeds thereof, and to grant discharges therefor, and generally to do everything in relation thereto which I could have done myself before granting hereof ( Tertio)…. [ Here followed particulars of investments of a nominal capital value of £7505.]…” It declared “that these presents are granted in trust always and for the purpose of fulfilling my directions following, videlicet:—( First) I direct my said trustees to pay (1) the expenses of executing their office; (2) the whole premiums of assurance, and other sums necessary to be paid for the purpose of keeping in force the life assurance policies hereinbefore assigned; and (3) all usual and necessary outgoings and expenditure in connection with the whole trust subjects. ( Second) I direct my said trustees, subject to payment as above mentioned, to hold the whole subjects hereby conveyed, and to pay the net annual proceeds thereof to my daughters.”

The pursuer pleaded—“2. The said sums and portion of the trust estate having passed on the death of the deceased, within the meaning of the Finance Act 1894, the defenders are liable in estate duty in respect thereof, with interest as concluded for, in terms of the conclusions of the summons.” The defenders pleaded—“The pursuer's averments so far as material being unfounded in law and in fact, the defenders are entitled to be assoilzied.”

On 25th March 1918 the Lord Ordinary ( Cullen) pronounced this interlocutor—“Repels the defences: Finds that estate duty is payable by the defenders in respect of (1) the sums received by them on the policies of insurance referred to on record; and (2) the portion of the trust estate required to yield an annual income to meet the premiums on said policies, as property passing on the death of Alexander Whitson Scott within the meaning of the Finance Act 1894; and decerns and ordains the defenders to deliver accounts accordingly, as concluded for in the summons.”

Opinion, from which the facts of the case appear—“The deceased A. W. Scott, by the trust-assignation and disposition of 1899 mentioned on record, made over to trustees,

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inter vivos, various assets belonging to him, including four policies of insurance on his life, to which the present case relates. The premiums on these policies had been paid by him prior to the granting of the said deed.

By the said deed the deceased directed the trust estate to be held for his six daughters in liferent and for their surviving issue in fee, with power to each daughter to dispose by will of the share of capital effeiring to her in the event of her leaving no issue.

The first purpose of the deed of 1899 was for payment of the expenses of the trust. The second was that the trustees should, out of the income of the trust estate, pay the premiums necessary to keep the said policies in force. Further on in the deed the deceased conferred powers on the trustees in their discretion to sell, assign, or surrender the policies.

The trustees acted on the authorisation given them to keep up the policies, and paid out of the income of the trust estate year by year the necessary premiums until the death of the deceased, which occurred in 1914. After his death they received the proceeds of the policies.

The Crown now claims estate duty on these proceeds, founding on section 2 (1) ( d) of the Finance Act of 1894.

The defenders do not dispute that policies of life insurance on the life of a deceased are a species of ‘interest’ falling within the scope of section 2 (1) ( d). They say, however, that the policies in question were not provided by the deceased himself within the meaning of that enactment. Their view is that from and after the granting of the deed of 1899 the premiums of insurance were provided not by the deceased but out of estate which had ceased to belong to him, and that without any ‘concert’ or ‘arrangement’ with him. The Crown does not say that this is a case of concert or arrangement, but maintains that the proceeds of the policies were provided wholly by the deceased himself.

I am of opinion that the contention for the Crown is right. After the granting of the deed of 1899 the premiums on the policies were de facto paid out of money provided by the deceased for the purpose. They were so paid on his mandate, given to the trustees in the second purpose of the deed. They were not paid on the mandate of the beneficiaries. The position of the beneficial interests under the deed did not permit of the beneficiaries having any control in the matter. It is true that the trustees were given power to deal with the policies otherwise by way of sale, assignation, or surrender. If they had exercised that power, the fund which has accrued to them, and which gives rise to the present action, would never have come into existence. In point of fact they did not exercise that power, but exercised the alternative power given to them by the deceased of keeping up the policies out of the first of the free income of the trust estate. As they did so, it seems to me that the premiums, after the date of the deed of 1899, were provided by the deceased just as much as the premiums paid prior thereto. The deceased put a fund into the hands of the trustees for the purpose of paying the premiums after the date of the said deed; and de facto the trustees applied that fund in paying the premiums acting on the mandate of the deceased, and not on any mandate from the beneficiaries.

There is a second claim for the Crown arising out of the same circumstances. On the death of the deceased it was no longer necessary for the trustees to take from the income of the trust estate the amount annually required to pay the said premiums. Thus the income falling to the liferenters was thereafter correspondingly increased. The Crown maintains that this augmentation of income is subject to estate duty under said section 2 (1) ( d) of the Act of 1894. Under this head of claim the Crown does not invoke section 2 (1) ( b), but says that the said augmentation of income is an ‘interest’ provided by the deceased within the meaning of section 2 (1) ( d). The word ‘interest’ used in section 2 (1) ( d) is very comprehensive. The deceased provided a liferent right to his daughters by the deed of 1899. If I am right in the view which I have taken of the first question in the case, it follows that the benefit of the liferent right was, under the mandate he gave to the trustees, capable of being pro tanto postponed until his death, and it was in fact so postponed, with the effect that on his death, and in consequence of his death, an interest accrued to the liferenters which they had not previously enjoyed. The net spread by the Act is very wide, and I do not see any good ground of escape from the view of the Crown that the said augmentation of income so accruing to the liferenters on the death of the deceased was an ‘interest’ provided by him within the meaning of said section 2 (1) ( d).

I am accordingly of opinion that the Crown is entitled to succeed under both heads of the claim now presented.”

The defenders reclaimed, and argued—The only interest provided was an interest under an irrevocable inter vivos deed. That was not an interest provided by the deceased accruing or arising on his death in the sense of the Finance Act 1894 (57 and 58 Vict. cap. 30), section 2 (1) ( d). If the deceased had purchased a fully paid-up policy on his own life and handed it to a beneficiary, or if he had put under trust for another policies on the life of a third party, no estate duty would have been payable. Here what was given to the daughters was in the settlor's lifetime put entirely beyond his control; in such a case either there was no provision of an interest by the deceased, or the beneficial interest did not arise upon the settlor's death but on the creation of the trust. Section 2 (1) ( d) was directed against a subtraction from a man's means during his life which was to reappear amongst his means at his death— Lethbridge v. Attorney-General, [1907] AC 19, per Lord Loreburn, L.C., at p. 23. Further, the respondent's case was that the deceased and he alone was the provider of the interest, but the interest was not provided by the deceased; he had parted with all say in the matter.

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The defenders were not bound to keep up the policies; they might have ceased paying the premiums and surrendered the policies; they had no peremptory mandate from the deceased to continue to pay the policies. Either the trustees were the providers, or the trustees and the deceased. The fact that the defenders had chosen to continue paying the premiums was immaterial. To make the deceased the provider it would have been necessary to show that he had bound the defenders under an absolute obligation to continue to pay the premiums, whereas here the defenders had an absolute discretion to do so or not— Attorney-General v. Dobree, [1900] 1 Q.B.442; Attorney-General v. Murray, [1904] 1 KB 165, per Cozens-Hardy, L. J., at p. 172; Attorney-General v. Robinson, [1901] 2 I.R. 67; Richardson v. Attorney-General, [1909] 2 I.R. 597; Attorney-General v. Lethbridge ( cit.), per Lord Macnaghten at p. 19. On the second conclusion of the summons the pursuer could not succeed, for his claim was really one for a double payment of the same duty. The money which up to the death of the assignor had been spent on the premiums had all along been devoted to provide a beneficial interest for the daughters, and when payment of it ceased at death no new interest was created. The Act did not strike at cesser of interest or augmentation of interest; section 7 (7) did not apply.

Argued for the respondent—There could be no question that the policies were an interest. Further, they were an interest provided by the deceased. The defenders had an option to surrender the policies, but they had not done so; they had, following the deceased's directions, paid the premiums out of money provided by him. That was enough to make the section applicable— Robinson's case ( cit.), per Palles, C.B., at p. 89; approved in Murray's case ( cit.). The reasoning in Richardson's case ( cit.) was in favour of the respondent. The truster had a right to see that the defenders did not pocket the money, and if all the beneficiaries failed the truster's right to the funds would have revived. Further, there was no inconsistency between an inter vivos trust and passing of property and accruing of interest at death. On the second conclusion a beneficial interest did arise at death, for the policies were current contracts running up to death, and the premiums were like instalments of the price which was not paid fully until death. Consequently at death a beneficial interest arose, equivalent to the amount of the trust funds necessarily set aside to produce enough to pay the annual premiums. It was quite legitimate to tax the fruit, i.e., the policies, and the tree which produced it, i.e., the premium fund.