Scottish Court of Session Decisions

The Finance Act 1894 (57 and 58 Vict. c. 30), sec. 7, enacts—“Value of Property.—(1) In determining the value of an estate for the purpose of estate-duty allowance shall be made for reasonable funeral expenses and for debts and encumbrances, but an allowance shall not be made ( a) for debts incurred by the deceased or encumbrances created by a disposition made by the deceased, unless such debts or encumbrances were incurred or created bona fide for full consideration in money or money's worth wholly for the deceased's own use and benefit,… and any debt or encumbrance for which an allowance is made shall be deducted from the value of the land or other subjects of property liable thereto.”

This was an action by the Lord Advocate for and on behalf of the Commissioners of Inland Revenue against the testamentary trustees and executors of the deceased

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Major-General Sir Claud Alexander of Ballocirmyle, in the county of Ayr, Baronet.

By antenuptial contract of marriage dated 11th February 1863, Sir Claud Alexander, in contemplation of his marriage, and in consideration of a conveyance by his intended wife, then Miss Speirs, afterwards Lady Alexander, bound himself, his heirs and successors, to pay to the trustees under the contract, (1) during the lifetime of his wife, in the event of her surviving him, an annuity of £1500 free of all deductions, and (2) a sum of £2000 in lieu of household furniture, payable the first term after his death should she survive him. He also bound himself to aliment her from the date of his death till the first term of Whitsunday or Martinmas thereafter, suitably to his station in life, and to provide her with mournings.

In security of these obligations he conveyed to the trustees certain portions of the lands of Ballochmyle, it being provided that the sums above mentioned should be held by the trustees and paid by them to Lady Alexander.

On her part Miss Speirs conveyed to the trustees a sum of £11,000 belonging to her, and also her own and her mother's interest in a sum of £6000 under her mother's antenuptial contract, for the following purposes, namely—(1) Payment of the free yearly proceeds to the spouses and the survivor, (2) for division of the capital amongst the children, and (3) in the event of there being no issue for disposal of the capital as she might direct. She further accepted the provisions made in her favour as in full satisfaction of all her legal rights in the event of her survivance.

In the antenuptial contract of marriage entered into between his son Claud Alexander, younger of Ballochmyle, and Lady Diana Montgomerie, daughter of the then Earl of Eglinton, Sir Claud Alexander bound himself to pay to the trustees therein mentioned a capital sum of £30,000 as a provision for the spouses and the child or children of the marriage. The trust purposes were payment of the income to Claud Alexander and of an annuity of £750 out of the income to Lady Diana should she survive her husband. Subject to these provisions the capital and income were to be held for the child or children of the marriage, and failing children for the survivor of Sir Claud and his son. It was further stipulated that the trustees should not be entitled during Sir Claud's lifetime to demand payment of the £30,000 so long as he regularly paid £1000 a-year, the annual income being restricted to that amount.

On the other part Lady Diana conveyed to the trustees the whole estate then belonging to her or that she might acquire stante matrimonio (including £5000 belonging to her, and £12,000 contingently restrictable to £9000, being her share of a provision of £36,000 for younger children under her father's marriage-contract). She also bound herself, in the event of her succeeding to the entailed estate of Montgomerie, to disentail and convey it to the trustees. In addition thereto Lord Eglinton agreed to pay Lady Diana £400 a-year during the joint lives of Sir Claud Alexander and himself. In implement of the obligations undertaken by him in his son's marriage-contract Sir Claud, by bond and disposition in security dated 6th December 1889, and recorded 13th February 1890, bound himself and his heirs, executors, and representatives whomsoever to pay to the trustees acting under his son's marriage contract the sum of £30,000, and in security thereof conveyed to them the lands and estate of Ballochmyle.

Sir Claud Alexander died on 23rd May 1899 survived by Lady Alexander and his son the said Claud Alexander, who was an only child.

By his trust-disposition and settlement, dated 29th February 1888, and, with three codicils thereto, recorded in the Books of Council and Session 5th June 1899, he conveyed to certain trustees, who were also his executors, his whole estate, and directed them to convey to his son Claud Alexander the estate of Ballochmyle and other heritable property in Ayrshire, and also the residue of his whole means and estate after implementing the prior purposes of the trust.

By the last of the three codicils, on the narrative that his son had entered into a second marriage, he recalled the bequest of the lands of Ballochmyle and others, and of the residue, and directed his trustees to hold them in trust for his son in liferent, and for his grandson Wilfred Archibald Alexander and the heirs of his body in fee, whom failing, other substitute heirs; declaring that his son should have power to call upon the trustees (1) to hand over to him for his own disposal a sum not exceeding £20,000, and (2) to settle a suitable jointure on his widow.

Upon the deceased's death his trustees and executors gave up an inventory of his personal and moveable estate, which was duly recorded, and in appropriate accounts annexed to it they specified other property, in respect of which estate duty was payable on his death. The gross value of his personal and moveable estate in the United Kingdom was stated in the inventory at £91,104, 16s. 11d.; and the value of such estate abroad, £9116, 0s. 6d., amounting together to £100,220 17s. 5d. From this a deduction was made on account of (1) debts as per schedule £8014, 3s. 4d., and (2) funeral expenses £190, 7s, 9d.—£8204, 11s. 1d.—leaving a net personal and moveable estate of £92,016, 6s. 4d. The value of the heritable estate to be summed up with the value of the personal estate was stated in the accounts at £81,258, 6s. 4d., less deductions amounting to £41,000, or altogether a sum of £40,258, 6s. 4d., thus bringing out in the aggregate a net dutiable value of £132,274, 12s. 8d.

In the schedule of debts which were deducted from the personal and moveable estate in the inventory were included the following entries:—“115. Cost of aliment of the deceased's widow from date of death to November 1899, when her provisions became payable, and mournings, £1000. 116. Amount of provisions covenanted to be paid by deceased to his widow by their antenuptial contract of marriage, dated 11th February 1863, for the considerations therein specified,

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and at the first term of Whitsunday or Martinmas happening after his death, £2000. “In preparing an estimate of the gross principal value of the heritable estate a deduction from its gross annual value was made of the following item:—“Annuity of £1500 in favour of Eliza Lady Alexander, deceased's widow, secured by deceased over Ballochmyle estate or a portion thereof, by his antenuptial contract of marriage, dated 11th February 1863, for the considerations therein specified, £1500;” and in bringing out the net principal value of the heritable estate for assessment to duty a deduction was made on account of the sum of £30,000 as a debt constituted by the deceased's bond and disposition in security, dated 6th December 1889, in favour of the trustees in the antenuptial contract of marriage between Claud Alexander younger and Lady Diana Montgomerie.

Objections having been taken by the Commissioners of Inland Revenue to these deductions, the present action was raised at the instance of the Lord Advocate on behalf of the Commissioners to have the defenders ordained to deliver a full account of the estate of the deceased, and concluding, inter alia, that the deductions objected to should be disallowed. A claim was also made for settlement estate duty in respect of the lands of Ballochmyle settled in terms of the codicil above mentioned and of the residue, deducting therefrom the sum of £20,000, payment of which could be demanded in terms of the codicil.

The pursuer pleaded—“(1) The deductions which the defenders claim a right to make in assessing the value of the deceased's property for the purpose of duty are not such as can be allowed on a sound construction of the Finance Act 1894. (2) The lands of Ballochmyle and others, and the residue of the deceased's whole estates, being property settled under the deceased's testamentary writings, settlement estate duty is due at the rate specified by statute.”

The defenders pleaded—“(2) On a sound construction of the Finance Act 1894, the defenders are entitled to make the deductions claimed in assessing the value of the deceased's property for the purpose of estate duty. (3) On a sound construction of section 5 of the Finance Act of 1894, settlement estate duty is not due on the lands of Ballochmyle and others, and on the residue of the deceased's property, in respect that the said lands and the said residue are not ‘settled property’ within the meaning of section 22 of said Act.”

On 22nd November 1904 the Lord Ordinary ( Lord Stormonth Darling) pronounced an interlocutor ordaining the defenders to deliver to the pursuer the account called for in the summons both as regarded estate duty and settlement estate duty, and found the pursuer entitled to expenses.

Opinion.—“The first question in this case is whether, in determining the value of the late Sir Claud Alexander's estate for the purpose of estate duty, his trustees are entitled to make certain deductions in respect of provisions contained in his own marriage contract and in that of his son, to which he was a party. The question turns on section 7 of the Finance Act 1894, which provides that allowance shall be made for ‘debts and incumbrances,’ but not ‘for debts incurred by the deceased, or incumbrances created by a disposition made by the deceased, unless such debts or incumbrances were incurred or created bona fide for full consideration in money or money's worth, wholly for the deceased's own use and benefit.” The obligations undertaken by Sir Claud in his own and his son's marriage contract were undoubtedly debts, and, in so far as secured over his estate, they were also ‘incumbrances.’ But the trustees must show that the debts or incumbrances are of a kind which satisfy the other requirements of section 7. They endeavour to do this, as regards Sir Claud's own contract, by pointing to the fact that his intended wife brought into settlement a considerable fortune, which she had partly in her own right and partly in expectancy, and that she accepted Sir Claud's provisions in her favour as in full satisfaction of her legal rights in the event of her surviving him. As regards his son's contract, they find the ‘full consideration in money or money's worth’ required by section 7 for the provision of £30,000 made by Sir Claud in the counter-stipulations undertaken by the lady and her father Lord Eglinton in favour of the spouses and the children of the marriage.

“Now, even if this question had to be solved on the words of section 7 of the Finance Act alone, without the aid of decision, I should find it very difficult to resist the argument for the Crown. I should say that to make a debt incurred or incumbrance created by the deceased himself deductible in determining the value of his estate for the purpose of estate duty, the debt or incumbrance must be shown to have originated in something of the nature of a proper purchase, in which the deceased received for his own use and benefit full consideration in money or money's worth. I should say that it could not, therefore, cover any stipulation in a marriage contract, although reciprocal in character and issuing in a debt incumbrance, where the true consideration is a thing incapable of being expressed in money or money's worth—to wit, the marriage itself.

“But I find that the question is, for me at least, foreclosed by the decision in Lord Advocate v. Sidgwiclc, 4 R. 815. That judgment is none the less apposite for having been pronounced before the date of the Finance Act, inasmuch as it proceeded on the words of section 17 of the Succession Duty Act of 1853, which are similar to, but less forcible than, the words of section 7 (1) ( a). I call them less forcible, for instead of ‘valuable consideration in money or money's worth,’ the latter Act speaks of ‘full consideration in money or money's worth.’ It is true that Lord Deas dissented, but the view of the majority (Lord President Inglis, Lord Mure, and Lord Shand) found support in the reasoning of Lord Westbury in Floyer v. Bankes, 3 De G. J. & S. 306. Sidgwick's case presented both of the important elements that are here founded on, viz., that

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the intending wife and her father brought her own fortune into settlement, and that she accepted the intending husband's provisions in her favour as in full satisfaction of her legal rights. Some stress is laid in the opinions of the judges on the intending husband having had no estate of his own at the date of the contract on which terce or jus relictœ could arise, whereas here it is said (at least in the case of Sir Claud's own contract) the intending husband had a valuable estate. But I do not read the opinions as turning essentially on that circumstance; and indeed it is manifest that, whatever may be the state of the husband's property at the date of the contract, the legal rights emerging in the event of his predecease are always more or less problematical in value. In another respect this case is stronger than Sidgwick's, for the words of the Finance Act requiring that the deductible debts or incumbrances must have been incurred or created ‘wholly for the deceased's own use and benefit’ are not to be found in the Succession Duty Act, and it would be difficult to say that Sir Claud took any personal benefit either from the renunciation of Lady Alexander's legal rights in his own marriage contract, or from the provisions made by Lord Eglinton and his daughter in the marriage contract of the son. Accordingly my judgment on the first question is for the Crown.

“The second question relates to the liability of the trustees for settlement estate duty; but the trustees concede that this question is determined against them by the case of Stewart's Trustees, 1 F. 416.

“There is a subsidiary question as to the obligation undertaken by Sir Claud, in the event of his predecease, to aliment his widow from the day of his death until the first tern: of Whitsunday or Martinmas thereafter, and to provide mournings for her. I under stood the Crown to concede that a sum for mournings was deductible as falling under ‘reasonable funeral expenses,’ which are expressly mentioned in section 7; and that is the legal category to which a widow's mournings may be referred, according to Lord Fraser's book on ‘Husband and Wife,’ at p. 967. But it is clear that the claim for interim aliment cannot be brought under that head; and however much it may be a proper debt against an executor, I do not see that where it forms part of the provisions in a marriage contract it is in any different position from the other provisions of the deed for the purposes of estate duty.

“I shall therefore order an account, both as regards estate duty and settlement estate duty.”

The defenders reclaimed, and argued—As to provisions in deceased's own marriage contract—The debts in question fell to be deducted, seeing that full consideration in money or money's worth had been given looking to the fortune which Lady Alexander brought into settlement and what she renounced. The provisions on the one side were made in consideration of those on tin other. The rights renounced were valuable rights. Each of the parties had property and each could contract. That distinguished the case from that of the Lord Advocate v. Sidgwick, June 6, 1877, 4 R. 815, 14 S.L.R. 522. In that case the contract made was really one between the parents of the spouses. As to Aliment.—The obligation to aliment was a debt at common law. It was none the less so in respect that it was made matter of contract. It was therefore deductible. The sum of £50 had been allowed for mournings but nothing was allowed for aliment. That was unreasonable. It was debt incurred by him and exigible from his estate—Fraser, H. and W., 965-7; Hanson's Death Duties, 5th ed. 168. As to the Provisions in Son's Marriage-Contract.—The provisions were made by Sir Claud and Lord Eglinton, and each parent was considering what the other was to give. They were given for full consideration and were therefore deductible. As to Settlement-Estate-Duty.—The reclaimers admitted that in view of the decision in Inland Revenue v. Stewart's Trustees, January 20, 1899, 1 F. 416, 36 S.L.R. 297, the question was determined against them.

Argued for the respondents— As to the marriage contracts—No full consideration in money or money's worth had been given, nor were the debts in question created solely for Sir Claud's own use and benefit. The leading consideration was the marriage. The provisions were family provisions and were also for the benefit of the children. Failing children Lady Alexander was entitled to deal with her own estate as she pleased. The provisions in the son's marriage contract were also family provisions. Moreover, the obligation to pay £30,000 did not require implement at once—so long as Sir Claud paid £1000 annually. That brought the case within the rule of H. M. Advocate v. Gunning's Trustees, January 28, 1902, 39 S.L.R. 534; Attorney-General v. Holden, April 1, 1903, [1903] 1 KB 832. The distinctions between the present case and that of Sidgwick were merely verbal and not vital. Sidgwick's case really governed the present. The case of Sidgwick was supported by the reasoning in Floyer v. Bankes, 1863, 3 De G. J. & S. 306. As to Aliment.—The Lord Ordinary was right. The obligation to pay interim aliment was not a debt of Sir Claud's in the sense of the Act. It was simply part of the provisions of the marriage contract and fell under the same principle—the consideration being the marriage. As to Settlement-Estate-Duty.—It was settled by the case of Stewart's Trustees ( supra) that the duty was exigible.