Scottish Court of Session Decisions

The Finance Act 1894 (57 and 58 Vict. c. 30) enacts—sec. 2 (1)—“Property passing on the death of the deceased shall be deemed to include … ( 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.” … Section 7 (7)—“The value of the benefit accruing or arising from the cesser of an interest ceasing on the death of the deceased shall … ( 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.”

This was an action at the instance of the Lord Advocate on behalf of the Inland Revenue Commissioners, pursuer, against William Boyd Anderson, writer, Glasgow, and others, the trustees acting under the trust-disposition and settlement of the late James Henderson, timber merchant, Partick, dated 17th November 1881, and registered 17th January 1882, defenders, inter alia, to ordain them to lodge a corrective account of the property which passed, or was deemed to have passed on the death of Mrs Margaret Anderson or Henderson, the testator's widow, for the purpose of ascertaining the estate-duty chargeable in respect of the value of the benefit accruing from the cessor of an annuity of £750 payable to her out of heritable property of the trust estate. Mr Henderson died on 3rd January 1882, and his widow, the said Mrs Margaret Anderson or Henderson, on 8th March 1903.

By his trust-disposition and settlement Mr Henderson directed his trustees to pay to his widow an annuity of £800, and to allow her during her viduity the liferent use of his furnished residence of Broomhall, Partick, or in lieu of that an annual payment of £150, which annual payment Mrs Henderson elected to receive. By the seventh purpose it was directed that the net annual income from the heritable properties of the trust, and also the net income of the other means or estate, should be applied, in the first place, in payment of the said annuity.

In December 1883 the trustees lodged a residue account for payment of legacy-duty, the equivalent of the succession-duty chargeable on the testator's death in respect of his heritable property, and in that account it was arranged to treat the said annuity as payable to the extent of one-fourth, i.e., £200, out of the personalty, and to the extent of three-fourths, i.e., £600, out of the heritage. There was therefore deducted in the said account from the value of the heritage the sum of £15,000 as being required to meet the said annuity, and the sum of £3750 as being required to meet the additional payment of £150 in lieu of the use of Broomhall.

In October 1903 an estate-duty account had been lodged on behalf of the defenders for assessment of the duty due in respect of the cesser of the annuity of £750, treated as payable out of heritage. The value of the benefit accruing or arising from the cesser was set forth therein as £4717, 4s. 6d., and upon that sum estate-duty assessed at 3½ per cent., and amounting to £165, 2s. 1d., was paid. According to the account the gross principal value of the heritable properties was estimated to be £120,630, 1s. 1d., and deducting bonds, said to amount to £80,173, 11s. 4d., a net principal value was brought out of £40,456, 9s. 9d. By schedules lodged with the account the gross annual value of the heritable subjects was shown to be £11,686, and after deducting a sum of £3070, 11s. 2½d. in name of feu-duties, ground-annuals, police rates, and other public burdens, and a further sum of £2181, 15s. as interest on bonds amounting to £62,950, there was shown a net rental of £6433, 13s. 9½d. It was understood that the difference between these bonds for £62,950 and those for £80,173, 11s. 4d., viz., £17,223, 11s. 4d., represented liquidation of bonds out of the testator's moveable estate.

The pursuer now stated—“(Cond. 8) On an examination of the said estate-duty account it appears that the value upon which duty was paid was materially underestimated.

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The sum of £4717, 4s. 6d. did not represent even approximately the true principal value corresponding to the annuity of £750. Such an annuity meant a life interest in so much capital as was required to yield that amount of income. The sum of £18,750, which the defenders themselves deducted in the residue account and set against the annuity, so far as that was regarded as chargeable against heritage, would at 4 per cent. have yielded an income of £750. The defenders also, in valuing the whole heritable properties belonging to the trust, proceeded on the basis of a fourteen years' purchase of the net rental, after meeting feu-duties and such necessary outgoings, and on the same ratio an annual sum of £750 would mean a capital value of £10,500. It is accordingly claimed that the estate-duty payable in respect of the cesser of the widow's annuity should be assessed on the footing that the principal value proportionate to the annuity amounts to at least £10,500.” …

In their answer the defenders explained—“That the sum of £4717, 4s. 6d. represented the capital value of the annuity of £750 in terms of the Finance Act 1894, sec. 7 (7) ( b), that capital sum bearing the same proportion to the total capital of the trust that the annuity of £750 bore to the income of the trust. The deduction of £18,750 which the defenders made in the residue account and set against the annuity, was made before the passing of the Finance Act 1894, and in terms of the statutes then in force. The deduction then made had the effect of merely deferring payment of duty in respect of that sum, and not of freeing the fund from duty altogether. Legacy-duty at 1 per cent. is still claimed upon this sum under deduction of whatever sum is found to be liable in estate-duty.” …

The pursuer pleaded, inter alia—“(2) The value of the heritable estate being taken at so many years' purchase, the principal value of an addition to it should be determined on the same basis.”

The defenders pleaded, inter alia—“(4) In respect that the benefit arising on the cesser of the deceased's annuity ought to be valued on the basis of taking into account, inter alia, the burdens affecting the heritable estate, the defenders should be assoilzied.”

On 18th May 1905 the Lord Ordinary ( Stormonth Darling) pronounced this interlocutor—“Finds that in estimating, for the purposes of estate-duty, the value of the benefit arising from the cesser of the late Mrs Henderson's liferent annuity of £750, payable out of the heritable property forming part of the trust estate, the principal value of an addition to the said property equal to the said annuity must, under section 7 (7) ( b) of the Finance Act 1894, bear the same proportion to the market value of the said property at Mrs Henderson's death, after deducting the burdens thereon allowed by section 7 (1) of the said Act, as the amount of the said annuity bore to the whole free income of the said property at the same date.”

Opinion.—“The only question which was here argued relates to the mode of valuing a liferent annuity of £750 which terminated on the death of Mrs Henderson on 6th March 1903. The annuity was created by the will of her husband, who died on 3rd January 1882, leaving both heritable and moveable estate. The value of the annuity, as provided by the will, was £800, plus a right to the occupation of his furnished residence, or (in lieu of that) an annual payment of £150; and the testator directed that the net annual income from both the heritable and moveable parts of his estate should be applied in the first place in payment of the annuity. The reason why the amount of the annuity for the purposes of estate-duty comes to be reckoned at only £750 is this—In settling for the duties payable at the death of the testator, both parties treated the annuity of £800 as payable out of moveables and heritage respectively in the proportion of one to three, i.e., £200 as payable out of moveables and £600 out of heritage. Accordingly, when £150 a-year, as representing the value of the life-rent of the house, is added to this estimated sum of £600 a-year, you have an annuity of £750 allocated to heritage, and nobody proposes to disturb that division. It is only in so far as payable out of heritage that the annuity has to be reckoned for purposes of estate-duty, because the moveable part of the estate is admittedly exempt from estate-duty, as having already borne inventory-duty.

“Now, the value of the benefit accruing or arising by the cesser of an interest in property is regulated by the Finance Act 1894, sections 2 (1) ( b) and 7 (7), and the question here raised turns chiefly on the construction of the latter section, which relates to the manner of estimating the benefit. The section first deals with the case where the interest extends to the whole income of the property, and provides that in that case the value of the benefit arising from the cesser of the interest shall be the principal value of the property. A previous sub-section, viz., 7 (5), provides that ‘the principal value of any property shall be estimated to be the price which, in the opinion of the Commissioners, such property would fetch if sold in the open market at the time of the death of the deceased.’ When, therefore, an annuity consists of the whole income arising from a particular heritable subject the matter is plain enough, for the property is to be taken at its market value at the date when the annuity terminates by the death of the annuitant. Where, however, the interest ceasing at the death of the annuitant extends to less than the whole income of the property, the matter is not so plain, and the rule of valuation laid down by section 7 (7) ( b) cannot be said to be a model of clearness. Indeed, if the words were taken literally they would work out rather a nonsensical result, for the declaration that the value of the benefit is to be ‘the principal value of an addition to the property equal to the income to which the interest extended ‘might be read as meaning in the present case an addition

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of only £750. This, however, is so manifestly not the real meaning of the sub-section that the defenders do not contend for it. The parties are agreed that the hypothetical addition to be made to the property is to be something which will be capable of yielding the income to which the interest extended, and they differ only as to the mode in which the addition is to be calculated.

“I cannot say that the actual figures suggested by either party afford an altogether satisfactory basis for solving the question. The Crown suggests an addition of £10,500, which is just the annuity of £750 capitalised at fourteen years' purchase. The defenders, on the other hand, suggestan addition of £4717, 4s. 6d., as bearing the same proportion to the total capital of the trust that the annuity of £750 bears to the income of the trust. This latter suggestion is at first sight a little startling, for it implies that the heritable property on which the annuity is charged yields an annual return of nearly 16 per cent. I think it would have been more satisfactory if there had been a detailed statement of the total value of the heritable subjects on which the annuity was charged after deducting the other burdens thereon allowed by section 7 (1), and of the total income yielded thereby, all as at 6th March 1903. But, in the absence of such actual figures, it is perhaps enough for the decision of the case that I should state the principles on which, in my opinion, the hypothetical addition to the property prescribed by section 7 (7) ( b) ought to be made.

“In the notes to this rather enigmatical sub-section by the editors of the 4th edition of the late Mr Hanson's book, I find a suggestion in which I concur. They say—‘In the case here provided for, the addition must, it is conceived, be of such a sum as will at the average rate of income which the actual property is producing return an income equivalent to the amount of income received in respect of the interest which has ceased.’ Then they go on to figure a case where a property worth £20,000 is producing an actual income of £800, and the benefit which is being valued is the cesser of an annuity of £400, in which case, they say, the principal value upon which duty has to be paid would be just one-half of the value of the property, or £10,000. Now, all this recognises, rightly I think, that regard must be had to the market value of the actual property on which the annuity is charged as at the date of the annuitant's death, and to the actual free income yielded by it as at the same date. Thus it is impossible to settle the question either by taking an arbitrary number of years' purchase of the annuity, or by taking a capital sum which would yield the annuity at any percentage which is merely customary. It is to my mind inconceivable that, where the annuity covers the whole income of a property you should be relegated under section 7 (7) ( a) to market value, of course after deducting burdens, and that where the annuity covers something less than the whole income you should be free under section 7 (7) ( b), to disregard the actual facts altogether. It is of no consequence, in my view, whether the income yielded by the property charged with the annuity be large or small, usual or unusual. What you want to get at is the value of the benefit arising to the actual property by its being relieved of the actual burden. If the income yielded by the property be unusually large, the capital value of its relief from the fixed burden will be proportionally small; and in any case the value must be ascertained as at the death of the annuitant, and can take no note of events affecting value either before or after that event.”

The pursuer reclaimed, and argued—The Lord Ordinary's method of arriving at the principal value of the addition was wrong. The bonds ought not to have been deducted, nor was there any reason for stating a sum in proportion. The bonds had nothing to do with the capitalised value of the annuity. In any event, the formula stated by the Lord Ordinary in his proportion sum was incorrect, viz., as the net rental (£6433) was to the annuity, so was the net principal value (£40,456) to the value of the benefit. The sum of £6433 was a wrong ratio, as it did not correctly represent the rental of the property, but the rental after deducting interest on the bonds. The correct way of stating the formula would have been, as the rental of the heritage (£8615) was to the annuity, so was the principal value of the heritage to the capital value of the annuity. The real question was, what capital sum would in the circumstances here represent an annuity of £750. That was the addition required to be made under the Finance Act— Lord Advocate v. Maclachlan, June 13, 1899, 1 F. 917, 36 S.L.R. 727.

Argued for respondents—The Lord Ordinary was right in taking the bonds into account. They had been imposed by the testator himself, and regard should be had to the state of the property at the time. Property meant the net property after deducting any debt—Finance Act 1804, secs. 1, 6 (2), 7 (7); Earl Cowley v. Inland Revenue Commissioners [1899], A.C. 198, pp. 207, 216, 217, 221.

At advising—