Scottish Court of Session Decisions

David Stewart and others, the testamentary trustees of John Smith, merchant, Dundee, first parties, Mrs Leonora Hean Smith or Gaydon, niece of the testator, second party, Harold Wallace Gaydon, husband of the second party, as tutor and administrator-inlaw of her pupil children, third party, and the Corporation of the Dundee Royal Infirmary and others, fourth parties, brought a Special Case to determine questions as to the incidence of income tax upon a bequest by John Smith in favour of the second party.

The trust-disposition and settlement of John Smith, after conveying his whole estates, heritable and moveable, to the first parties for a variety of purposes, provided—“( Fifth) With regard to the residue of my estates I direct my trustees to divide the same into two equal parts or shares, and to hold one of said parts or shares and deal with the same as follows, viz.—I direct them to pay out of the net annual proceeds thereof the sum of £750 sterling yearly to my niece Mrs Leonora Hean Smith or Gaydon, and that for her liferent alimentary use allenarly, which provision in her favour shall not be assignable by her, and shall be exclusive of her debts and deeds and the diligence of her creditors, and shall be payable at two terms in the year, Whitsunday and Martinmas, by equal portions, and I direct them to add the balance of said net annual proceeds to the capital of said part or share; and on the death of my said niece should she survive me, or on my own death should she predecease me, I direct my trustees to convert said part or share of residue, with all accumulations of income, if any, into cash, and to divide the proceeds thereof equally amongst such of her children as shall then be alive, jointly with the issue per stirpes of any of her children who may have predeceased leaving issue …; and with regard to the other part or share of said residue, I direct my trustees to hold same and deal with it as follows, viz.—I direct them to pay the whole net annual proceeds thereof to my said nephew John Alexander Hay Smith for his liferent alimentary use allenarly, which provision in his favour shall not be assignable by him, and shall be exclusive of his debts and deeds and the diligence of his creditors, and shall be payable at two terms in the year, Whitsunday and Martinmas, by equal portions; declaring that should my said nephew be under twenty-five years of age at the time of my death my trustees shall, until he attains that age, pay or apply only such part of the said net annual proceeds in such way and manner and at such time or times as they shall think proper to or for his behoof; declaring, however, that in no case shall the part of the net annual proceeds so to be paid or applied exceed in any one year the sum of £750 sterling; and declaring further, that should my said nephew be under twenty-five years of age at the time of my death, and thus entitled to the liferent of the heritable and moveable subjects specified in the fourth purpose hereof, my trustees shall, in addition to the said sum of not exceeding £750, pay out of said net annual proceeds, and that until my said nephew attains the age of twenty-five years, all public and parochial burdens, feu-duties, repairs, and uphold generally rates, taxes (both proprietors' and occupiers'), and insurance of the whole subjects, heritable and moveable, liferented by him under said fourth purpose; and my trustees shall also pay out of said net annual proceeds the wages of such a number of outdoor servants as my trustees in their absolute discretion shall think reasonably necessary for the upkeep of the liferented subjects; and I declare that said net annual proceeds, so far as not so paid or applied, shall be accumulated and added to and form part of the capital of said part or share; and on the death of my said nephew, should he survive me, or on my own death should he predecease me, I direct my trustees to convert said part or share of residue, with all accumulations of income, if any, into cash, and to divide the proceeds thereof equally among such of his children as shall then be alive jointly with the issue per stirpes of any of his children who may have predeceased leaving issue.”

The trust-disposition and settlement further provided that in the event (which happened) of his nephew dying without leaving issue who should survive to take, his share should be converted into cash and divided in certain proportions between the Dundee Royal Infirmary and the Royal Victoria Hospital for Incurables, Dundee, the fourth parties.

The questions of law were—“1. Is the second party entitled to payment of the sum of £750 yearly, without deduction in respect of income tax? or 2. Is the second party entitled only to payment yearly of the amount remaining after deduction from the said sum of £750 of the income tax payable in respect thereof?”

Argued for the second party—Upon the terms of the testator's trust-disposition and settlement it was clear that he intended the second party to get the £750 in full, the income tax being deducted not from the bequest to her but from the general revenue of the trust. The corresponding bequest to Alexander Hay Smith was certainly to be paid in full. The case was ruled by Murdoch's Trustees v. Murdoch, 1918, 55 S.L.R. 664.

Page: 93↓

Argued for the third party—“Net annual proceeds” did not mean the proceeds after payment of income tax. Further, income tax was not a “burden” upon the trust. The trustees merely acted as collectors of income tax, and deducted from the amounts payable to the beneficiaries a tax which was really due by them. Murdoch's case ( cit.) was special, and turned on the relation of the terms of the codicil to the will. Kinloch's Trustees v. Kinloch, 1880, 7 R. 596, 17 S.L.R. 444, and Mackie's Trustees v. Mackie, 1875, 2 R. 312, 12 S.L.R. 222, were referred to.