Reid's Trustees v The Commissioners of Inland Revenue
| Jurisdiction | Scotland |
| Judgment Date | 20 March 1929 |
| Date | 20 March 1929 |
| Court | Court of Session (Inner House - First Division) |
NO. 723.-COURT OF SESSION, SCOTLAND (FIRST DIVISION).-
Income Tax, Schedule D, Case III - Untaxed interest received by trustees - Whether trustees assessable.
A will provided for the life-rent of £20,000 each for the testator's wife and daughter, with directions as to subsequent interests, and for a payment of £20,000 to his son absolutely: the residue of the estate to be divided into three equal shares, one for the son absolutely and one each to be held for the wife and daughter on the same conditions as their provisions of £20,000 each.
Shortly after the testator's death the trustees under the will received a dividend (untaxed) on an amount of 5% War Loan held by the testator at the date of his death. The testator had died upon the last day for dealing in the stock upon a cum dividend basis as regards this dividend. The valuation of the stock for Estate Duty purposes included the accrued interest.
An assessment to Income Tax, Schedule D, was made upon the trustees in part in respect of this dividend. Appealing against this assessment the trustees contended that trustees for a beneficiary neither incapacitated nor non-resident were not assessable to tax (Rule 14, General Rules applicable to Schedules A, B, C, D and E, Income Tax Act, 1918, was referred to): that the liability to tax of income received by trustees depended upon the position as regards liability of the beneficiary: that the interest in the present case was necessarily treated by them as capital: that (except perhaps as regards the son) the beneficiaries would never receive the interest as income.
The General Commissioners held that the trustees received the interest as income of the trust: that they were assessable with regard to two-thirds of it (the proportion corresponding to the interests of the wife and daughter) on the view that the trustees received this amount under an implied direction to accumulate it with capital and that the interest was to this extent under their control. As regards the remaining third the Commissioners held that the trustees' sole duty was to pay it to the son as his income and that they were under no liability to pay tax thereon provided they conformed with Section 103, Income Tax Act, 1918. Both parties appealed against this decision.
Held, that the trustees were assessable to tax under Schedule D in respect of the whole of the interest in question, it being clearly income within the scope of the charging provisions of Schedule D and they being the persons "receiving or entitled to the income" within the meaning of Rule 1, Miscellaneous Rules applicable to Schedule D, Income Tax Act, 1918.
1. Reid's Trustees v. The Commissioners of Inland Revenue.
CASE.
At meetings of the Commissioners for the General Purposes of the Income Tax Acts for the Upper Ward of Renfrewshire, held at Paisley on the 26th day of October, 1927, and 7th day of February, 1928, Alexander Reid's trustees (hereinafter referred to as the Appellants) appealed against an assessment for the year 1925-26 made on them under Schedule D of the Income Tax Acts, in respect of War Loan interest amounting to £2,000.
I. The following facts were admitted or proved:-
(2) Alexander Reid of Old Bishopton, Renfrewshire, died on 25th April, 1925. His will provided for a liferent of £20,000 plus one-third of the residue of his estate to each of his wife Mrs. Reid, and his daughter Mrs. Bucher, and an absolute payment of £20,000 plus the remaining one-third of the residue to his son Alexander Reid, junior. A copy of the deceased's will is annexed hereto and forms part of this case.
(3) The deceased held £40,000 5 per cent. War Stock, 1929/47, which with interest accrued due thereon was valued for Estate Duty purposes at the rates ruling on the Glasgow Stock Exchange at the date of his death on 25th April, 1925, at £40,950, and Estate Duty was paid thereon. The date of deceased's death was the last day of dealings in the said War Stock upon a cum dividend basis, and a purchaser at that date secured payment to himself of the whole interest payable on 1st June, thus a purchaser on 26th April would receive no part of the June interest. The value at the date of death, therefore, included the whole interest payable on the next interest date 1st June, 1925.
(4) The deceased had paid all Income Tax due by him on the interest on this holding of 5 per cent. War Stock up to 5th April, 1925.
(5) The interest received by the trustees on this holding on 1st June, 1925, amounting to £1,000, was treated by them as being capital of the estate. An excerpt from the account charge and discharge from 24th April, 1925, to 5th June, 1926, of Alexander Reid's trust is annexed hereto and forms part of this case. The said Mrs. Reid and Mrs. Bucher have not received, and can never receive, any portion of the June interest either as income or capital, but Alexander Reid, junior, will, along with his share of the capital residue of this estate, receive a one-third of said interest.
(6) All three beneficiaries are resident in this country, Mrs. Reid and Mr. Reid at Old Bishopton, and Mrs. Bucher with her husband in Camberley, Surrey.
II. Mr. John MacRobert, Solicitor, Paisley, on behalf of the Appellants contended:-
(2) That trustees acting for a British resident who is not an "incapacitated person" are not "charged to tax" under the Income Tax Acts, either as such trustees or as individuals, and the assessment cannot be upheld against the Appellants.
(3) That the three people interested in the estate are not incapacitated and are resident in the United Kingdom.
(4) That Rule 14 of the General Rules provides that "Any "person who has been charged under this Act in respect of any "incapacitated or non-resident person .... may retain, out of "money coming into his hands on behalf of any such person, so "much thereof .... as is sufficient to pay the tax charged, and "shall be indemnified for all such payments in pursuance of this "Act."
(5) That there is no corresponding Section to indemnify trustees who pay for a resident and non-incapacitated person, which supports the view that trustees representing resident and capable people in the United Kingdom are not chargeable to tax at all.
(6) That the determining factor in ascertaining the liability to tax of income received or receivable by trustees is the taxable position of the beneficiary whom they represent. Williams v. Singer,[1921] 1 A.C. 65; 7 T.C. 387; Baker v. Archer-Shee,[1927] A.C. 844; 11 T.C. 749.
(7) That Section 2 of the Apportionment Act, 1870, directs that, in the case of interest in which there are two parties interested, it is to be apportioned in accordance with the period respectively in which they are each interested.
(8) That the Appellants were bound to allocate the £1,000 interest to the residuary legatees as capital. Macpherson's Trustees v.Macpherson, 1907 S.C., 1067; Oppenheimer, [1907] 1 Ch. 399.
(9) That Income Tax being necessarily a charge upon income it would be abnormal and quite illegal to charge Income Tax for a period subsequent to the death of the testator, i.e., the year 1925-26, against the capital of the estate.
(10) That it would be equally anomalous to charge Income Tax against the liferentrices of the estate upon income which they can never receive.Attorney-General v. London County Council,(1)[1901] A.C. 26, p. 35; National Provident Institution v.Brown, [1921] 2 A.C. 222; 8 T.C. 57.
(11) That there being no income received or receivable by-or in a different view of the case at least two of-the beneficiaries, no assessment can be made on the trustees, because they are non-existent as a separate taxable entity.
(12) That this War Loan interest, as regards Mrs. Reid, has not been paid to her, cannot legally be paid to her, and will never be paid to her, she has no interest in it. As regards Mrs. Bucher the same applies, and as regards Alexander Reid, junior, while he is entitled to one-third of both capital and income, and therefore in some shape or form gets this money, it is not taxable income in his hands, or alternatively, his assessment for 1925-26 is based, not upon his actual receipts in that year, but in accordance with Rule 2 of Case III, Schedule D, 1918 Act.
(13) That all income is not necessarily charged to tax, and that in any event it is not for the Appellants to explain why a particular sum of what is superficially income is untaxed, the legal position being that the Crown must justify the charge upon the Appellants.
(14) That for convenience sake the Appellants would not dispute that portion of the assessment referable to the £1,000 receivable on the 1st December, 1925.
III. H.M. Inspector of Taxes (Mr. J.H. Grey) on behalf of the Crown contended:-
(2) That the person chargeable with tax was neither the trustee nor the beneficiary as such, but the person in actual receipt and control of the income which it was sought to reach. Williams v.Singer, [1921] 1 A.C. 65; 7 T.C. 387, per Viscount Cave at p. 411.
(3) That War Loan interest was assessable on the person entitled to receive it. Inland Revenue v. Forrest, 1924 S.C. 450; 8 T.C. 704. Wigmore v. Summerson, [1926] 1 K.B. 131; 9 T.C. 577.
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(4) That as the Appellants were entitled to receive and did receive the War Loan interest on 1st June, 1925, the assessment was properly made on them.
(5) That neither the valuation of the War Stock for death duty purposes, nor the Apportionment Act had any bearing on the question; and
(6) That as the Appellants received the said interest as income, it was immaterial how that income was applied. Mersey Docks and Harbour Board v. Lucas, (1883) 8 App. Cas. 891; 2 T.C. 25.
IV. The Commissioners, on consideration of the facts and arguments submitted to them, were of opinion that the sum of £1,000 in question was received by the trustees as part of the income...
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