Sothern-Smith v Clancy (Inspector of Taxes)

JurisdictionEngland & Wales
CourtCourt of Appeal
Judgment Date13 Dec 1940

No. 1180-HIGH COURT OF JUSTICE (KING'S BENCH DIVISION)-

COURT OF APPEAL-

(1) SOTHERN-SMITH
and
CLANCY (H.M. INSPECTOR OF TAXES)

Income Tax, Schedule D - Life annuity purchased for lump sum - Contract, if payments during life less than purchase consideration, to continue annual payments to named person until, in aggregate, payments equal purchase price - Whether payments to named person income or instalments of capital.

In December, 1928, S entered into a contract with an assurance society under which, in consideration of a single premium of $65,243.22 (in the contract called the "capital invested"), the society agreed to pay him an annuity of $6,510 during his lifetime and guaranteed, if he died before the annuities paid equalled the capital invested, to continue payment of the annuity to a specified beneficiary or to the personal representatives of the last survivor of the annuitant and beneficiary until the total payments made equalled the capital invested. S died in 1933, and thereafter the annuity was paid to his sister, the Appellant.

On appeal to the Special Commissioners against certain assessments under Schedule D, the Appellant contended that the payments were annual instalments of a fixed capital sum of $39,203.22 due to her by the society and were not income assessable to Income Tax. The Special Commissioners decided that the contract secured payment to the annuitant, or at his direction, of an annuity which was income in the hands of the recipient, the character of the payments not being altered by the fact that the aggregate of the payments would, in the events that had happened, be limited to the amount of the capital invested.

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 10th November, 1938, Mrs. E.M. Sothern-Smith (hereinafter called "the Appellant") appealed against assessments to Income Tax made under Schedule D of the Income Tax Acts for the years 1935-36, 1936-37 and 1937-38, in the sums of £1,793, £1,763 and £1,750 respectively.

2. Included in the amounts of the said assessments were certain sums in respect of payments made to the Appellant by the Equitable Life Assurance Society of the United States (hereinafter called "the Society"), in pursuance of a contract dated 24th December, 1928, made between the Society and a Mr. E.H.S. Sothern (hereinafter called "the Annuitant").

  1. (a) By that contract (a copy of which, marked "A", is annexed to and forms part of this Case(2) ), the Society in consideration of the payment by the Annuitant of $65,243.22 (called in the contract "capital invested") agreed to pay to him an annual sum of $6,510 during his lifetime.

  2. (b) As a term of the contract the Society guaranteed that, while the aggregate amount of such annual payments to be made might amount to more, it should not in any event amount to less than the amount of the "capital invested", unless the contract were determined by surrender. Such aggregate amount might exceed the "capital invested" if the Annuitant himself were to live long enough to draw more by way of annuity than the $65,243.22.

  3. (c) The first of the Society's obligations under the contract was to pay the Annuitant an annual sum of $6,510 during his life. If, on his death, the sum of the payments already made equalled or exceeded the amount of the "capital invested", the contract was at an end.

  4. (d) In the event, however, of the death of the Annuitant before the annual sums paid equalled the amount of the "capital invested" the Society undertook to continue payments of the annuity to the Annuitant's sister, Eva Mary Smith (i.e., the Appellant), if living, but if not living then to the Annuitant's wife (with the right on the part of the Annuitant to change the beneficiary) until the total amount of the payments made under the contract should equal the amount of the "capital invested". If the Annuitant and beneficiary should both die before the sum of the payments made by the Society equalled the amount of the "capital invested", subsequent payments as they fell due were to be made to the personal representatives of the last survivor of the Annuitant and beneficiary.

  5. (e) After the contract had been in force for two years and the sum of the annuity payments had not equalled the "capital invested", it might be surrendered by the Annuitant for its cash surrender value which should be the commuted value (discounted at 4 per cent. compound interest) of the remaining annuity payments necessary to complete the capital invested.

4. The Annuitant died on 28th December, 1933, i.e., before the sum of the annual payments received by him had amounted to the "capital "invested". The aggregate amount which had been paid to the Annuitant prior to his death was $26,040.

5. In fulfilment of the contract the Society has made each year since the death of the Annuitant annual payments of $6,510 to the Appellant.

6. In each of the said assessments referred to in paragraph 1 hereof there was included the annual sum of $6,510 converted into sterling and the ground of the appeal by the Appellant, who is a British subject ordinarily resident in the United Kingdom, was that those sums were capital and not income and were therefore wrongfully so included.

7. For the Appellant it was contended that on the true construction of the contract the annual payments made to her were not payments of income but were annual instalments of a fixed capital sum of $39,203.22 in respect of which the Society became indebted to her under the contract on the death of the Annuitant.

The Appellant relied, inter alia, on the cases ofPerrin v. Dickson, [1929] 2 K.B. 85, [1930] 1 K.B. 107, 14 T.C. 608, and Dott v. Brown, 154 L.T. 484.

8. For the Respondent it was contended:-

  1. (i) That the contract was one under which the Society undertook to pay an annuity to the Annuitant for his life with a provision that if at his death the totality of the payments then made by the Society did not amount to the consideration paid by the Annuitant for the contract the Society would continue to pay the annuity to a nominated person until the total sums paid by the Society equalled the consideration given;

  2. (ii) That the annual sums received under the contract by the Appellant were income and assessable to Income Tax under Schedule D, and

  3. (iii) That the assessments were correct and should be confirmed.

9. Having considered the evidence and arguments adduced before us, we were of opinion that the contract was made to secure payment of an annuity to or by the direction of the Annuitant; that the annuity was income in the hands of the recipient and that the fact that in the events that happened the aggregate of the periodical payments was limited to the amount of the "capital invested" did not alter the character of the payments so as to make them repayments of capital.

We therefore confirmed the assessments.

10. The Appellant immediately after the determination of the appeal declared to us her 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 the Income Tax Act, 1918, Section 149, which Case we have stated and do sign accordingly.

C.C. GALLAGHER, MARK GRANT-STURGIS, Commissioners for the Special Purposes of the Income Tax Acts.

Turnstile House,

94/99 High Holborn,

London, W.C.1.

8th May, 1939.

The case came before Lawrence, J., in the King's Bench Division on 29th and 30th May, 1940, when judgment was reserved. On 6th June, 1940, judgment was given against the Crown, with costs.

JUDGMENT

Lawrence, J.-The question in this case is whether certain payments made to the Appellant by the Equitable Life Assurance Society of the United States, hereinafter called the Society, under a contract called a "Refund "Annuity" entered into between the Appellant's brother and the Society are annuities within the meaning of the Income Tax Acts and taxable as such. The case was argued before me by agreement on the footing that the Appellant was entitled to sue upon the contract, this having been the basis upon which the case proceeded before the Commissioners. It appears from the authorities cited that annuities or annual payments, whether for life or for terminable periods, may be either of a capital or of a revenue nature (Perrin v.Dickson. 14 T.C. 608, pages 613, 615, 621; andCommissioners of Inland Revenue v. Ramsay, 20 T.C. 79-terminable periods; and Dott v. Brown, [1936] 1 All E.R. 543-life). It is therefore necessary to consider whether the payments in question are of a capital or revenue nature and that can only be discovered from the true construction of the contract.

The substance of this contract was that in consideration of the Appellant's brother paying a single premium of $65,243.22, the Society should pay him an annuity of $6,510 during his life and should guarantee that on his death if the sum then paid was less than the said premium, they would pay the difference in annuities of the same amount to his sister or his widow.

In form the contract is called a "Refund Annuity" with continuation of payments until capital invested has been returned and it guarantees "a "Return, which may be more, but cannot be less, than the amount of the "Capital Invested".

The provisions describe the premium as "Capital Invested" and the guarantee is as follows: "Guarantee. It is hereby expressly agreed that, "upon the death of the Annuitant, while this contract is in force, if the sum "of the payments previously made by the Society is less than the aforesaid "Capital invested, the Society will continue payments under this Annuity to "his sister, Eva Mary Smith, if living; if not living, to his wife Julia...

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