Scottish Court of Session Decisions

Mrs Catherine Hutchison or Murdoch, widow of Alexander Murdoch, wine and spirit broker, Glasgow, and others, his testamentary trustees, first parties, the said Mrs Catherine Hutchison or Murdoch, second party, and Alexander Norman Murdoch and others, the testator's children, third parties, brought a Special Case for the determination of questions with regard to the incidence of income tax upon provisions made by the testator in favour of the second party.

The trust-disposition and settlement conveyed the whole estate to the first parties for various purposes, which included—“( Fifth) I direct my said trustees to hold the whole of the free residue and remainder of my estate for behoof of my said wife in liferent for her liferent alimentary use only, and to pay to her the free revenue and proceeds thereof so long as she remains my widow and unmarried, burdened always with the maintenance and education of our children in a manner suitable to their station in life while they continue to reside in family with her and are unable to support themselves.”

A codicil dated 21st September 1899 provided, inter alia—“And ( Second) I direct that in the event of the income of the free

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residue of my estate, which in terms of the fifth article of my said trust-disposition and settlement is to be paid to my wife so long as she remains my widow and unmarried, for the support of herself and our children as therein specified, exceeding in any year the sum of Two thousand pounds, my trustees shall restrict the payment to my wife out of said income to the sum of Two thousand pounds per annum, and as regards any surplus income they shall accumulate and invest the same along with and as part of the capital of the trust estate, and it shall be dealt with in the same manner as I have directed with reference to the capital of the trust estate.”

The Case set forth—“1. Alexander Murdoch died at Glasgow on 11th July 1900 survived by his wife and by five children…. All of the said children, except Alan Murdoch, have attained the age of twenty-five. The said Alan Murdoch has attained majority. 2…. By the sixth purpose the trustees were directed to hold the residue of the testator's estate for such of his children as should attain the age of twenty-five, all as set forth in the said purpose. … 4. The free income of the trust estate, after meeting all expenses of the trust and after deduction of income tax from the gross income of the trust estate, has always largely exceeded the sum of £2000. Since the testator's death his trustees, of whom the second party was one, have regularly paid to the second party in monthly instalments the said sum of £2000 per annum, less income tax, for which she has regularly granted receipts in similar terms to the following receipt for the monthly instalment due for June 1917:—‘Received from the trustees of the late Alexander Murdoch, Esquire, per Wilson, Stirling, & Company, their factors, the sum of One hundred and twenty-five pounds sterling, being my annuity for June less income tax. Catherine Murdoch.’ The parties hereto are agreed that the total deductions in respect of income tax up to 11th July 1917, including the appropriate interest thereon to said date, are to be taken as amounting as at said date to the sum of £2634, 9s. 2d. The sums so deducted as income tax from the second party have been invested as surplus income of the trust estate and accumulated by the first parties. 5. When the said payments were made to the second party no question was ever raised as to the deduction in respect of income tax, and in accepting the said payments and granting receipts therefor in the aboverecited terms she was unaware that there was any possibility of question regarding the legality of the said deductions. She was not separately advised with regard to her rights. She has, however, recently been separately advised to the effect that the aforesaid deductions were unwarrantable, and that according to the true import of the testator's directions in the said will and codicil the first parties were in the circumstances bound to pay to her the full sum of £2000 per annum.”

The second party contended—“That in each year in which the free income of the trust estate, after deduction of expenses and income tax, exceeds £2000, and the payment to her falls to be restricted, in terms of the said codicil, she is entitled (while she remains unmarried) to payment of the sum of £2000 in full without any deduction in respect of income tax; that the first parties were not entitled to make the said deductions from the payments to her in the past and are now bound to pay to her in respect of the said past deductions and interest thereon the agreed-on sum of £2634, 9s. 2d., with interest thereon from 11th July 1917 till payment, less tax, and that she is not barred from recovering the amount of the said deductions.”

The third parties contended—“That on a sound construction of the testator's said testamentary deeds the amount payable to the second party in each year in which the income of the free residue of the testator's estate exceeds the sum of £2000, and she remains unmarried, is the sum of £2000 less the amount of income tax payable in respect of that sum, and that the second party is not entitled to recover the amount of the past deductions. Separatim, quoad the past the third parties maintain that by the said receipts the second party has discharged all right competent to her to recover payment of the aforesaid deductions, and that they are binding on her.”

The questions of law were—“1. Is the second party, in each year in which the payment to her from the testator's estate falls, in terms of his said codicil, to be restricted to the sum of £2000, and she remains unmarried, entitled to payment of that sum in full without deduction in respect of income tax? 2. Is the second party in each such year entitled to payment only of the amount remaining after deduction from the said sum of £2000 of the income tax payable in respect thereof? (3) Are the first parties bound to pay to the second party the said sum of £2634, 9s. 2d., with interest thereon at 5 per cent. from 11th July 1917, less the income tax on such interest? or (4) Is the second party now barred from demanding payment of the amount of the said deductions and interest?”

Argued for the second party—Correctly read the provision of the trust-disposition and settlement and the codicil imported a gift to the widow of a minimum sum of £2000. Free revenue meant the revenue of the trust after all charges had been met, including income tax. The codicil did not affect the quality of the bequest in the settlement, but merely set a limit to the amount of the free revenue that was to be paid to the widow. The testator's intention was that his trustees should pay the income tax on the revenue so that his widow in a question with the Crown should be in a position to say that income tax had been paid upon her liferent. If the third parties were right the widow would receives less than £2000. Brooke v. Price, [1916] 2 Ch. 345, per Warrington, L.J., at p. 350, [1917] A.C. 115, per Lord Finlay, L.C., at p. 121, and Lord Wrenbury at p. 125; and in re Musgrave, [1916] 2 Ch. 417, were referred to.

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Argued for the third parties—Income tax had to be paid by the recipient of the income, but it was collected at the source. A company or trustees therefore paid it, and then paid the dividend or liferent less income tax to the person entitled thereto. If a testator intended to include in his gift a gift of income tax he must do so in express terms. Here the terms used were free revenue. That meant the income of the trust estate after the annual deductions, not income tax, had been met— Dalrymple v. Dalrymple, 1902, 4 F. 545, per Lord Adam at p. 549, 39 S.L.R. 348; Gleadow v. Leetham (1882), L.R., 22 Ch. D. 269, per Kay, J., at p. 271; in re Saillard [1917], 2 Ch. 401. Further, if the second party was right £2600 would be required to produce an income of £2000 after the income tax had been paid. But the tax on income up to £2000 was at 3s. 8d. per £1, while on incomes above that figure the tax was at 5s. The trustees would pay at 5s., and when the second party claimed repayment of one-fourth of the tax the Crown would be entitled to say that her income was £2600. The sums which had been deducted could not be recovered, for they had been paid under an error in law. Ashton Gas Company v. Attorney-General, [1906] AC 10, per Lord Halsbury, L.C., at p. 12 was referred to.

At advising—