Scottish Court of Session Decisions

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The Finance Act 1894 (57 and 58 Vict. cap. 30), sec. 6, which deals with the collection and recovery of estate duty, provides—Sub-section (8)—“Provided that the duty due upon an account of real property may, at the option of the person delivering the account, be paid by eight equal yearly instalments.… with interest at the rate of 3 per cent. per annum from the date at which the first instalment is due, … and the first instalment shall be due at the expiration of twelve months from the death.…” Section 9 enacts—Sub-section (1)—“A rateable part of the estate duty on an estate … shall be a first charge on the property in respect of which duty is leviable.…”

On 5th March 1912 Ian Keith Mackintosh of Usan, Forfarshire, with consent and concurrence of his mother Mrs A. M. Mackintosh, Inchbrayock, Montrose, widow of W. A. Mackintosh, M.B.,C.M., who resided there, as his curator and administrator-in-law, presented a petition under the Entail Acts 1824 to 1882 and the Finance Act 1894 for authority to charge the said estate with estate duty, settlement estate duty, and provisions to younger children.

The deed of entail provided, inter alia, that it should be lawful for the heirs of entail to grant to their widows provisions by way of annuity not exceeding “one-fourth part of the free rents thereof, to be computed and taken as at the date of the deed granting the annuity, after deduction of all annual public and parochial burdens and interests of debts and provisions affecting the same at the time.”

The deed further provided that with regard to provisions for younger children it should be lawful for the heir of entail in possession—in the event of their having three or more children other than the heir—to grant a bond in favour of his younger children, burdening the succeeding heirs for payment of provisions not exceeding “the sum of five years' free rent of the said whole lands and others, the rent in all such cases to be computed and taken as at the date of the deed granting the provisions, after deduction of all annual public and parochial burdens affecting the same at the time, but not of the existing liferents to wives or husbands.”

The petitioner succeeded to the entailed estate on the death of his grandmother the late Mrs Helen Keith or Keith Mackintosh of Usan, wife of the Rev. Thomas Mackintosh, St Cyrus, and the Government duties which he now sought to charge on the said estate were the estate duty and the settlement estate duty thereon, exigible in respect of the passing of the estate to the said Mrs Keith Mackintosh on the death of her brother the late George Keith, Secundus of Usan, the former amounting to £1481, 12s. 6d., and the latter to £276, 4s. 8d., together £1757, 17s. 2d. At the date of Mrs Keith Mackintosh's death the said duties were unpaid, and on 29th December 1911 her executors paid the amount of said duties to the Inland Revenue.

On 16th March 1912 the Lord Ordinary ( Hunter) remitted to Mr W. S. Haldane, W. S., Edinburgh, to inquire into the facts set forth in the petition, and as to the regularity of the procedure, and to report.

With reference to the provisions for younger children the reporter stated:—“By bond of provision, dated 16th March 1909, the said Mrs Keith Mackintosh, on the narrative that she was heiress of entail in possession of the said lands and estate, that the free rental of the said lands and others at the date of said bond of provision amounted to the sum of £1628, 6s. 5d., and that she was desirous of exercising the powers conferred on her by the said deed of entail, by securing the sum of eight thousand one hundred and forty pounds sterling to the said Thomas Mackintosh and Archibald Mackintosh, and to Mrs Jane Christina Mackintosh or Tod, wife of William Leonard Tod, residing at Glenesk, Polton, being her whole children then in existence other than and besides the said William Alexander Mackintosh, her eldest son, and then heir-apparent to the said lands and estate, inter alia, bound and obliged herself and the heirs of entail succeeding to her in the saids lands and estate on the day after her death to pay to the said Thomas Mackintosh, Archibald Mackintosh, and Mrs Jane Christina Mackintosh or Tod the said sum of £8140, which was therein stated to be ‘under five years' free rent’ of the said estates as at that date after deduction of all legal and public burdens in terms of the said disposition and deed of entail, and that in the following proportions, videlicet—to the said Thomas Mackintosh the sum of £2714, to the said Archibald Mackintosh the sum of £2713, and to the said Mrs Jane Christina Mackintosh or Tod the sum of £2713, together with interest on the same at the rate of five pounds per centum per annum from the date of payment during the non-payment, and penalty as therein specified. The said provisions were declared to be granted with and under the provisions, declarations, and others contained in the said deed of entail, and restrictable so as to be precisely consistent with the powers thereby bestowed.…

“A point which has arisen in connection with the ascertainment of the precise amount of the younger children's provisions is whether interest on the estate duties now proposed to be charged on the estate in respect of the late Mrs Mackintosh's succession, and which, by section 9, sub-section 1 of the Finance Act of 1894, became first charges on the estate, falls to be taken into computation. The reporter is of opinion that in the circumstances of the present case it does not, the duties not having become exigible until one year after her succession, in terms of section 6, subsection 8 of the Finance Act 1894, which in this case would mean that the first instalment of duty became due on 1st February 1910—the year following the creation of the provisions. Moreover, they have not in point of fact been yet created charges on the estate.…

In computing the free rental, as stated in the said bond of provision, on which the

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said Mrs Keith Mackintosh fixed the amount of her younger children's provisions, no deduction apparently was made in respect of interest on debt affecting the estate, which the reporter understands amounted to £5575, created subsequent to the date of the entail. The deed of entail itself only expressly excludes from computation ‘existing liferents to wives or husbands,’ but having regard to the terms of section 4 of the Aberdeen Act (5 Geo. IV, cap. 87), and to the reasoning of the Judges in the case of Lord Lovat v. Fraser, &c., 30th June 1885, 12 R. p. 1179, 22 S.L.R. 786, it appears to the reporter that interest on debt affecting the estate falls to be deducted in ascertaining the ‘free rent.’ The point is respectfully submitted for your Lordship's consideration. The reporter is informed that in 1909 the interest actually paid on such debt was at the rate of 3 1 2 per cent., and amounted to £195, 2s. 6d. per annum, and if it falls to be deducted the free yearly rent as at the date of the bond of provision would be reduced to £1441 0 10 Five years thereof would amount to … 7205 4 2 to which, in that view, the sum which the petitioner should be authorised to charge under this head would fall to be restricted. If interest on the Government duties falls also to be computed, the amount of the provisions would be correspondingly still further reduced by five times the amount. In the alternative view the sum stated in the bond of provision, viz., £8140, is within the limits prescribed by the entail.”

On 22nd May 1912 the Lord Ordinary ( Hunter) pronounced the following interlocutor:—“Finds (1) that the interest on debts charged upon the entailed estate falls to be deducted in calculating the free rent on which the amount of the provision to younger children is to be based; (2) that interest on the amount of the estate duty (including settlement estate duty), payable in respect of Mrs Keith Mackintosh's succession, also falls to be deducted in calculating the said free rent; and (3) that the expenses of the bond or bonds and dispositions in security for the amounts of the said younger children's provisions, and the said estate duty, cannot form a charge upon the entailed estate: Remits of new to Mr W. S. Haldane to proceed with the remit contained in the interlocutor of 16th March 1912.”

Opinion.—“This is an application by an heir of entail in possession to charge the entailed estate with estate duty, settlement estate duty, and provisions to children. Mr Haldane, to whom a remit was made, has raised certain questions which were argued before me. They arise in this way.

Mrs Keith or Keith Mackintosh, the former heir in possession, succeeded to the estate on 1st February 1909. On 16th March 1909 she executed a deed of provision in favour of her younger children for the sum of £8140, a sum said to be under five years' free rent of the estate, and therefore competent under the deed of entail. In calculating free rent no deduction was made in respect of interest on debts charged upon the estate. The reporter is of opinion that this was wrong. I agree with him.

Under the deed of entail it is provided that the heir of entail in possession may, in the event of there being three children other than the heir—the case in point—grant a bond to his said younger children burdening the succeeding heirs for payment of provisions not exceeding ‘the sum of five years' free rent of the whole lands and others’—‘the rent to be computed and taken after deduction of all annual public and parochial burdens affecting the same at the time, but not of the existing liferents to wives or husbands.’ If these words stood alone I do not think it could be successfully contended that interest upon debt charged upon the estate did not form a proper deduction from the rental to be taken as the basis for calculating the amount of the provision to younger children. The expression ‘free rent’ would appear to be used in the same sense as it is used in the Aberdeen Act (5 Geo. IV, cap. 87, sec. 4). It was, however, contended on behalf of the younger children that an examination of the different provisions of the deed showed that the entailer intended that the free rental should be ascertained, after deduction of public and parochial burdens payable annually, and without any deduction for interest payable on debt. This argument is founded mainly, if not exclusively, upon the circumstance that, in providing for a widow's annuity, free rent is to be computed ‘after deduction of all annual, public, and parochial burdens and interests of debts and provisions,’ while nothing is said about deducting ‘interest of debts and provisions,’ in the case of a provision for younger children. I do not, however, think that the mere absence of these words in the later part of the deed necessarily leads to what appears to me to be an unnatural construction of the actual word used. It has to be kept in view, as pointed out by the Lord President in the case of Lovat, 1885, 12 R. 1179, at p. 1185, 22 S.L.R. 786, that it would be difficult to suppose that the entailer used the expression free rent ‘in a sense which would allow the whole rents of the estate to be covered by provisions to widows and children so as to leave nothing at all for the heir in possession.’ After he has expressly provided for the deduction of interest of debts and provisions from the rental in computing a widow's annuity, the entailer speaks further on in the deed of ‘annual burdens as aforesaid’ as including the more detailed enumeration he had previously given. I think the same significance was intended to be given to the shorter expression when used in dealing with provisions to younger children. Besides, on the construction put forward on behalf of the younger children, I do not think there would be any necessity for the words ‘but not of the existing liferents to wives or husbands.’ These words are introduced as an exception from what has already been dealt with, and presumably because otherwise such liferents would have been deducted as annual burdens.

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The next question is whether interest on the amount of the estate duty (including settlement estate duty), payable in respect of Mrs Keith Mackintosh's succession, ought also to be a deduction from the rental on which the younger children's provision is calculated. The reporter thinks that it ought not, because the rental to be taken is that at the date of the deed granting the provision after deduction of annual burdens then affecting the same, and by section 6 (8) of the Finance Act 1894, the duty was not exigible for a year after Mrs Keith Mackintosh's succession opened, i.e., subsequent to the date of granting the provisions in favour of younger children. I am unable to agree with the reporter. By section 9 (1) of the Finance Act the duty is, in a question with the Crown, made a first charge upon the estate in respect of which it is leviable. It was therefore a statutory burden upon the estate as at the date when the succession to Mrs Keith Mackintosh opened. Such a burden diminishes the annual value of an estate so burdened. The amount of the annual diminution is practically the interest that has to be paid to the heir of entail, his executors or others, who pay the duty and get a bond over the estate for the amount. I do not think the circumstance that the Crown postpones the demand for a year entitles the heir in possession to disregard the duty in providing for younger children. Under section 6 (6) of the Finance Act interest at the rate of 3 per cent. per annum falls to be paid from the date of the death up to the date of the Inland Revenue affidavit or account or the expiration of six months after the death. As pointed out in the late Mr Hanson's work on Death Duties (5th ed.), p. 160, the effect of sub-sections (6) and (8) of section 6 is to leave an interval of at least six months during which interest is not payable. Apparently, therefore, at the date when the bond of provision was executed interest was running. In calculating the annual rate perhaps some allowance ought to be made for the period in respect of which interest is not exacted; but I doubt if it is sufficient to make an appreciable difference upon the stipulated rate in the bond.

The last question argued was as to whether the petitioner is entitled to a charge on the estate in respect of the bond or bonds to be granted. Upon this point I agree with the reporter that, in view of the decision in Laurie, 25 R. 636, and the opinions there expressed, the petitioner's claim cannot be allowed.”

Thomas Mackintosh and Archibald Mackintosh, two of the younger children, reclaimed.

Argued for reclaimers—(1) As to the Interest on Debt Charged on the Estate.—Such interest was not deductible in ascertaining the “free rent,” for the entail provided only for the deductions of “annual public and parochial burdens.” Had the entailer meant otherwise he would have said so, as he had in fact done in the case of the widow's annuity. Where, as here, the power to grant provisions was conferred by the deed of entail and not by statute, the expression “free rent” was not limited to the meaning ascribed to it by the Aberdeen Act (5 Geo. IV, cap. 87)— Callander v. Callander, May 21, 1869, 7 Macph. 777, 6 S.L.R. 506; Lord Lovat v. Fraser, June 30, 1885, 12 R. 1179, 22 S.L.R. 786; Entail Amendment (Scotland) Act 1868 (31 and 32 Vict. cap. 84), sec. 6. (2) As to Interest on Estate Duty.—Such interest was not deductible, for at the time of the deed it had not been made a charge on the estate. Esto that the duty was due on 16th March 1909, the date of the deed of provision, it was not exigible till 1st February 1910 (being a year after the granter's succession), and interest only ran from the date when payment was due—Finance Act 1894 (57 and 58 Vict. cap. 30), sec. 6, sub-sec. 8; Finance Act 1896 (59 and 60 Vict. cap. 28), sec. 18 (1). The reporter was therefore right in holding that it was not deductible.

Argued for respondents—(1) As to the Interest on Debt Charged on the Estate.—The reporter was right, for the entailer clearly meant that the same burdens were to be deducted in calculating the provisions to younger children as in ascertaining the widow's annuity. (2) As to Interest on Estate Duty.—Interest on the duty was plainly deductible, for the duty was made a first charge on the estate—Finance Act 1894, sec. 1. It was immaterial that the duty had not been charged upon the estate at the date of the deed, for it was clearly a debt affecting the estate as at that date— Laurie, Petitioner, February 22, 1898, 25 R. 636, 35 S.L.R. 496; Lord Advocate v. Earl of Moray's Trustees, August 4, 1905, 7 F. (H.L.) 116, per Lord Dunedin at p. 123, 42 S.L.R. 839; Hanson's Death Duties (6th ed.), pp. 15–16.

At advising—