Vestey v Commissioners of Inland Revenue
| Jurisdiction | England & Wales |
| Judgment Date | 23 October 1961 |
| Date | 23 October 1961 |
| Court | Chancery Division |
HIGH COURT OF JUSTICE (CHANCERY DIVISION)-
Surtax - Capital or income - Periodical payments in consideration of sale of securities.
By an agreement dated 9th May, 1956, the Appellant sold to the trustees of a family settlement shares then valued at £2,000,000 for the sum of £5,500,000 expressed to be payable without interest by 125 yearly instalments of £44,000. A default clause provided that in the relevant events the unpaid instalments should become immediately payable with interest at 4 per cent. per annum until payment. The sum of £5,500,000 payable as aforesaid was approximately equivalent on an actuarial basis to a present value of £2,000,000 assuming a net interest rate of 2 per cent. The first two instalments were duly paid on 1st June, 1956, and 1st June, 1957.
The Appellant was assessed to Surtax for the years 1956-57 and 1957-58 on the footing that his total income included the payments receivable in those years. On appeal, the Appellant contended that the payments were capital sums, being instalments of the price payable for the shares. For the Crown it was contended that the whole of each payment should be included in the Appellant's total income, since the agreement provided for an annuity of £44,000; alternatively, that the payments should be dissected into principal and interest and that so much as on actuarial principles constituted interest on a purchase price of £2,000,000 fell to be included in his total income. On the alternative basis liability was not claimed in respect of the first payment. The Special Commissioners held that the payments should be dissected into capital and interest and that each of them, other than the first, contained an interest element to be calculated on the method laid down in Scoble v. Secretary of State for India, 4 T.C. 478 and 618.
Held, that the Commissioners' decision was correct.
Stated under the Income Tax Act, 1952, Sections 229(4) and 64, by the Commissioners for the Special Purposes of the Income Tax Acts for the opinion of the High Court of Justice.
1. At a meeting of the Commissioners for the Special Purposes of the Income Tax Acts held on 2nd, 3rd and 4th November, 1959, Edmund H. Vestey (hereinafter called "the Appellant") appealed against assessments to Surtax made upon him for the years 1956-57 and 1957-58 in the respective sums of £9,000 and £56,000. The question for our decision was whether any, and if so what, sum was to be included in the computation of the Appellant's total income in respect of sums received by him under an agreement dated 9th May, 1956.
2. The following facts were admitted:
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(a) On 9th May, 1956, the Appellant entered into an agreement by which he sold to Western United Investment Co., Ltd., certain shares in Frederick Leyland & Co., Ltd., for the consideration therein stated. The said agreement is in the following terms:
1. The Vendor shall sell and the Company shall purchase for the sum of Five million five hundred thousand pounds (£5,500,000) 29,800 Ordinary shares of £10 each and 35,058 5 per cent. Cumulative Second Preference shares of £10 each (all fully paid up) in the capital of Frederick Leyland & Company Limited the said Ordinary shares being numbered 1 to 1000; 1489 to 1688; 1889 to 1913; 2051 to 2850; 3851 to 4650; 6551 to 9500; 11151 to 12150; 12401 to 12470; 13221 to 14938; 15019 to 15175; 16213 to 16242; 17081 to 18080; 48579 to 48738; 49621 to 50340; 50431 to 69450 and 119701 to 119850 all inclusive and the said Preference shares being numbered 1 to 500; 1001 to 1500; 2001 to 2467; 2488 to 2520; 3850 to 4349; 4850 to 7229; 7240 to 9894; 9898 to 10106; 10110 to 10563; 10574 to 10663; 16775 to 35262; 64249 to 71875 and 139191 to 140345 all inclusive.
2. The purchase money shall be paid without interest by 125 yearly instalments namely an instalment of Forty four thousand pounds (£44,000) on the First day of June next and 124 equal instalments of Forty four thousand pounds (£44,000) on the same day in each of the 124 years next following.
3. If the Company shall make default in payment of any of the said instalments or any part thereof for 90 days after the same shall become due the whole of the unpaid instalments shall become immediately payable and shall carry interest at £4 per cent. per annum from the expiration of such 90 days until payment.
4. Upon payment of the first of the said instalments the Vendor shall execute and the Company shall accept a transfer of all the said shares And the Vendor shall not be entitled to any charge or lien on the said shares or any of them for securing the unpaid instalments or any part thereof.
(b) Western United Investment Co., Ltd., the purchasers of the shares, were nominees for the trustees of a settlement, a copy of which is hereto annexed, marked "A"(1), made on 25th March, 1942. The settlors were Sir Edmund Hoyle Vestey and the Rt. Hon. Samuel Baron Vestey, the former being the grandfather of the Appellant and the latter the cousin of the Appellant's father. Under the terms of such settlement Ronald Arthur Vestey (the father of the Appellant) was one of the joint "managers" who controlled the investment by the trustees of the trust funds (clause 8).
(c) The agreement and the transfer therein referred to were sent to the Appellant in Australia, and he in fact executed the transfer (together with the agreement) on 9th May, instead of 1st June, 1956. The first sum of £44,000 payable under the said agreement was duly paid on 1st June, 1956, and a further instalment of £44,000 was paid on 1st June, 1957. A copy of the transfer of the shares is hereto annexed, marked "B"(1).
(d) Following their execution questions arose as to the Stamp Duty with which the agreement and transfer were chargeable; and the decision thereon of Upjohn, J., is reported in [1958] 1 All E.R. 257(2). In accordance with that decision the agreement was duly stamped with ad valorem duty at 5s. per £100 on the total amount of £5,500,000 ultimately payable, which amounted to £13,750, and the transfer with ad valorem duty at 2 per cent. on the total amount of the first 20 instalments of £44,000, which amounted to £17,600.
(e) The value of the shares which were transferred was approximately £2,000,000 at the time of such transfer.
(f) On an actuarial basis the annual sum payable over 125 years equivalent to a present value of £2,000,000 at an interest rate of 2 per cent. is £43,670.
3. Evidence was tendered on behalf of the Crown in the form of a report dated 4th May, 1956, from Messrs. Price Waterhouse & Co. to Mr. R.A. Vestey (who was, as stated above, one of the managers of the settlement). Such report was made in answer to the question put to them: "What would be a fair value to place on the shares in Frederick Leyland & Co., Ltd., owned by Mr. Edmund Hoyle Vestey for the purpose of a sale to the trustees of a settlement on the basis that the purchase money should be payable over a long period, say 125 years?" Objection was taken on behalf of the Appellant to the admissibility of such evidence on the ground that it was res inter alios acta. After hearing argument we held that the report was admissible in evidence without prejudice to any argument as to the weight to be attached to it in deciding the question before us. A copy of such report is hereto attached, marked "C"(1).
4. In assessing the Appellant to Surtax for each of the years under appeal the assessing Commissioners included in his total income a sum of £44,000 payable under the agreement of 9th May, 1956. The Appellant appealed.
5. It was contended on behalf of the Appellant that the said sums of £44,000 per annum were capital sums, being instalments of the price payable for the shares, and that no part of such sums was to be included in computing his total income.
6. It was contended on behalf of the Crown:
(i) that the whole of each annual sum of £44,000 was properly to be included in computing the Appellant's total income, since the agreement of 9th May, 1956, provided for an annuity of £44,000;
(ii) in the alternative, that the annual payments of £44,000 should be dissected into principal and interest, and that such part of each payment as on actuarial principles constituted interest on a purchase price of £2,000,000 properly fell to be included in the computation of such total income. The Crown did not, however, pursue their claim to tax (in this alternative) on any interest content in the first payment.
7. We, the Commissioners who heard the appeal, gave our decision as follows:
We have to determine the true nature of the annual sums of £44,000 payable by the trustees of a settlement to the Appellant under the agreement of 9th May, 1956.
It is first necessary to decide whether we are bound to confine our attention to the words of the agreement and the related transfer of shares, and not have regard to any surrounding circumstances. It appears clear to us on the authorities that we are not only entitled but are bound to consider such of the surrounding circumstances as are proved and admitted in evidence; not in order to vary the legal effect of the agreement and transfer nor to decide the matter by the doctrine (now exploded) of the "substance" of the matter, but in order to ascertain the true nature of the transaction comprised in the agreement. We have to look first at the legal effect of the agreement and then at the surrounding circumstances.
The only legal effect of the agreement (omitting for the moment the default clause) is that the Appellant is to transfer certain shares to trustees and in return for that consideration is to be paid £44,000 per annum over 125 years. The surrounding circumstances are: (1) the shares were worth
£2,000,000 at the time of the transfer; (2) actuarial evidence shows that, if one pays £2,000,000 by annual instalments over 125 years with interest on the unpaid balance at 2 per cent. per...To continue reading
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