Commissioners of Inland Revenue v Wesleyan and General Assurance Society

JurisdictionEngland & Wales
CourtHouse of Lords
Date1943

NO. 1396-HIGH COURT OF JUSTICE (KING'S BENCH DIVISION)-

COURT OF APPEAL-

HOUSE OF LORDS-

(1) COMMISSIONERS OF INLAND REVENUE
and
WESLEYAN AND GENERAL ASSURANCE SOCIETY

Income Tax - Annuity - Monthly loans free of interest and recoverable only by set-off against sum due at death - Income Tax Act, 1918 (8 & 9 Geo. V, c. 40), General Rules, Rule 21; Finance Act, 1927 (17 & 18 Geo. V, c. 10), Section 26.

By an agreement dated 25th May, 1944, the Society, in consideration of the payment of £500, agreed to pay H during his life an annuity of £7 11s. per annum and on his death a sum equal to the aggregate of £4 14s. 8d. for each completed month between 25th May, 1944, and the date of his death. The agreement also provided that H should have the option of borrowing such sums as he might request but not exceeding the amount that would have been payable by the Society if he had died on that date. Such sums were to be free of interest and recoverable only at H's death by set-off against the lump sum payment due under the bond. H informed the Society that he wished to exercise the option to the maximum extent and at the earliest date permitted by the agreement. Accordingly in the eight months following 25th May, 1944, the Society paid to him monthly sums of 12s. 7d. as annuity and £4 14s. 8d. as loan. Income Tax was deducted by the Society from the former but not from the latter.

The Society was assessed to Income Tax for the year 1944-45 under Rule 21 of the General Rules of the Income Tax Act, 1918, as amended, in the sum of £42 18s., representing the total payments made under the agreement during that year. The Society appealed against the inclusion in the assessment of the sums described as loans on the ground that they were not income payments. The Special Commissioners allowed the appeal.

Held, that the decision of the Special Commissioners was correct.

CASE

Stated under the Income Tax Act, 1918, Section 149, by the Commissioners for the Special Purposes of the Income Tax Acts for the opinion of the King's Bench Division of the High Court of Justice.

1. At a meeting of the Commissioners for the Special Purposes of the Income Tax Acts held on 15th May, 1945, the Wesleyan and General Assurance Society (hereinafter called "the Respondent Society") appealed

against an assessment to Income Tax in the sum of £42 18s. made upon it for the year ended 5th April, 1945, under the provisions of Rule 21 of the General Rules applicable to Schedules A, B, C, D and E of the Income Tax Act, 1918, as amended by Section 26 of the Finance Act, 1927.

2. The question raised by this appeal is whether certain sums paid by the Respondent Society to Mr. C. Hart constitute the payment of an annuity or of money loaned to him by the Respondent Society by reason of the matters hereinafter set out.

3. On 24th May, 1944, Mr. C. Hart signed a proposal form for an annuity and life assurance with optional interest-free loans with the Respondent Society. The said proposal form states that, in consideration of a payment of £500 by Mr. C. Hart, the Respondent Society agreed to pay him (1) an annuity of £7 11s. by monthly instalments of 12s. 7d. and (2) a lump sum payment at death equal to the aggregate of £4 14s. 8d. for each completed period of one month between the date of receipt of the purchase money by the Respondent Society and the date of his death. In addition Mr. C. Hart had the option of borrowing on the bond to be entered into, sums not exceeding what would be payable by way of lump sum as aforesaid if he had died on the date the loan was granted. The loans were to be free of interest, and were repayable at death by set-off against the lump sum payment due under the bond.

4. Mr. C. Hart elected to borrow from the Respondent Society to the maximum extent permitted by the bond, and an endorsement was made on the bond that loans had been requested and would be granted under the bond. On 25th June, 1944, and monthly thereafter, Mr. C. Hart gave the Respondent Society a receipt for the amount of the annuity less tax, and for the amount received as loan free of interest. In making this payment the Respondent Society deducted Income Tax from the annuity, but not from the loan.

5. Eight monthly payments were the subject-matter of the assessment appealed against, which was computed as follows:-

£

s.

d.

Gross annuity 12s. 7d.× 8

5

0

8

Interest-free loans £4 14s. 8d.× 8

37

17

4

£42

18

0

The Respondent Society admitted that the payments were made otherwise than from profits or gains brought into charge to tax, and that the said assessment was correct in respect of the said annuity payments. The inclusion of the amount of £37 17s. 4d. in the said assessment advanced by way of loan was disputed.

6. The following documents are annexed hereto and form part of this Case(1):-

  1. (2) Copy of the said proposal form, marked "A".

  2. (3) Copy of the said bond, marked "B".

  3. (4) Copy of letter dated 26th May, 1944, from Mr. C. Hart to the Respondent Society requesting loans, marked "C".

  4. (5) Copy of receipt for the said annuity and loans to be signed by Mr. C. Hart, marked "D".

  5. (6) Copy of Respondent Society's annual report and statement

    of accounts for the year ended 31st December, 1944, marked "E".

7. Mr. A.W. Joseph gave evidence before us at the hearing, which we accepted, as follows.

He was a Fellow of the Institute of Actuaries and assistant actuary to the Respondent Society. The said annuity of £7 11s. was calculated as follows. The Respondent Society took Mr. C. Hart's expectation of life, at the time he was 751/2, then it estimated the interest it would receive on the purchase money of £500 in the expected period, a sum was deducted to cover expenses and an adjustment made to compensate itself for the option to borrow free of interest. The balance was the annuity of £7 11s. per annum. If Mr. C. Hart had required an annuity only, he would have received £67 18s. per annum. In calculating the capital sum payable at death no interest factor was included. If Mr. Hart should die on the date which, according to the Respondent Society's tables, he might be expected to die, he would get a capital sum of £500. If he lived longer he would get more, if he died earlier he would get less. In the Respondent Society's balance sheet as at 31st December, 1944, the item "Loans on the Society's "Polices within their Surrender Values" included the amount of the aforesaid loans to Mr. C. Hart totalling at that date £33 2s. 8d.

8. It was contended on behalf of the Respondent Society that the sums advanced to Mr. C. Hart as loans under the said bond amounting to £37 17s. 4d. were not payments of income to him and should be excluded in computing the said assessment.

9. On behalf of the Appellants it was contended:-

  1. (2) That the monthly sums of £4 14s. 8d. were payments of an annuity, and that this being their true nature it was immaterial that they were described in the said bond as loans.

  2. (3) That the assessment was correct and should be confirmed.

10. We, the Commissioners, gave our decision as follows:-

Under the bond, the bona fides of which was not challenged, Mr. C. Hart had power to borrow certain sums if he so desired. We held that it was not permissible to go behind the terms of the bond and that the sum in dispute was not an annuity but was money loaned to him by the Respondent Society at his request. We held that the appeal succeeded and reduced the assessment of £5 0s. 8d.

11. The representative of the Appellants immediately after the determination of the appeal declared to us his dissatisfaction therewith as being erroneous in point of law and in due course required us to state a Case for the opinion of the High Court pursuant to Section 26 of the Finance Act, 1927, and the Income Tax Act, 1918, Section 149, which Case we have stated and do sign accordingly.

R. COKE, MARK GRANT-STURGIS, Commissioners for the Special Purposes of the Income Tax Acts.

Turnstile House,

94/99 High Holborn,

London, W.C.1.

30th November, 1945.

The case came before Macnaghten, J., in the King's Bench Division on 26th and 27th June, 1946, and on the latter date judgment was given in favour of the Crown, with costs.

JUDGMENT

Macnaghten, J.-By an instrument in writing described as a bond, dated 25th May, 1944 (a copy whereof is annexed to the Case and marked "B"), the Respondents, the Wesleyan and General Assurance Society, in consideration of the payment of £500 covenanted to pay to Mr. Charles Hart during his life an annuity of £7 11s. 0d. by instalments of 12s. 7d. on the twenty-fifth day of each month, the first payment to be made on 25th June, 1944, and to pay, on the death of Mr. Hart, a sum equal to the aggregate of £4 14s. 8d. for each completed period of one month between 25th May, 1944, and the date of his death. The bond also provided that Mr. Hart should be entitled during his life to borrow from the Society, on the twenty-fifth day of each month of any year, such sum or sums as he might request, not exceeding the amount which would have been payable by the Society if the annuitant had died on that date. Such loans were to be free of interest, and were not to be recoverable by the Society otherwise than on the death of the annuitant and out of the sum then payable under the provisions of the bond. A loan which carries no interest and which neither the borrower nor any other person can ever be under any obligation to repay seems almost too good to be true, and Mr. Hart hastened to take advantage of that provision in the bond. On 26th May, 1944, the day following the delivery of the bond, he addressed the following letter to the Society: "I wish to avail myself of the privilege "of borrowing upon the security of the above Bond. Will you kindly "make loans to me free of interest to the maximum extent and on the "earliest date permitted by the Bond unless and until this request is "cancelled."

Accordingly, during the eight months following 25th May, 1944, the...

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