[KING'S BENCH DIVISION]

HERBERT (LORD) v. INLAND REVENUE COMMISSIONERS.

Revenue - Income tax - Settlement - Power to revoke - Settlor entitled to property or income thereof - Income arising under settlement to be treated as income of settlor - More than one settlor Finance Act, 1938 (1 & 2 Geo. 6, c. 46), s. 38, sub-s. 2.

By s. 38, sub-s. 2, of the Finance Act, 1938: "If and so long as the terms of any settlement are such that - (a) any person has or may have power .... to revoke .... the settlement or any provision thereof; and (b) in the event of the exercise of the power, the settlor or the wife or husband of the settlor will or may become beneficially entitled to the .... property then comprised in the settlement or of the income arising from the whole or any part of the property so comprised; any income arising under the settlement from the property comprised in the settlement in any year of assessment .... shall be treated as the income of the settlor for that year and not as the income of any other person."

By a settlement, P. and H., as settlors, appointed property to trustees on trust to pay out of the income thereof certain premiums on life policies on the life of P. The settlement contained provisions which brought it within the terms of sub-s. 2. If the settlement had not been made, the income from the property settled would have been that of P. as tenant for life under the will of his father. The income under the settlement was assessed for a year of assessment to income tax on H. by virtue of the provisions of sub-s. 2:-

Held, that no assessment under the sub-section could be made on H.

Where there is more than one settlor the provisions of the sub-section do not authorize an assessment on a settlor who would not be entitled to the income of the property settled if there were no settlement in existence, and semble become entirely inapplicable.

CASE stated by the Special Commissioners of Income Tax, who had confirmed assessments to income tax for the years 1938-1939, 1939-1940, and 1940-1941, made on the appellant, Lord Herbert, eldest son of the fifteenth Earl of Pembroke, under s. 38 of the Finance Act, 1938, in respect of income arising under a settlement known as "The accumulation settlement" made by Lord Pembroke and Lord Herbert on April 5, 1930.

By his will the fourteenth Earl of Pembroke, who died on March 30, 1913, settled English estates, Irish estates and capital moneys, known as "the will estate," on his son, the fifteenth earl, as tenant for life with remainder to his grandson, Lord Herbert, as tenant in tail. The fifteenth earl (hereinafter

called "Lord Pembroke") was also tenant in tail male of property in Wiltshire which was granted by the Crown in tail male, and could not, therefore, be disentailed. This property was known as "the Crown estate." In 1925, Lord Herbert being then a minor, the sanction of the court was obtained to a scheme whereby mortgages for substantial sums on Lord Pembroke's life interests in the Crown estate and the will estate, supported by collateral mortgages of policies of insurance on Lord Pembroke's life, were transferred to the trustees of those estates, the mortgages so transferred to each set of trustees being subsequently consolidated. In 1927 Lord Herbert came of age, and in 1930, to ensure provision for Lord Pembroke and members of his family, a second scheme was carried out with the sanction of the court, where necessary. One of the provisions of this scheme was that part of the Irish estates included in the will estate should be vested in trustees upon trust to apply the income arising therefrom in payment of the premiums on the policies on Lord Pembroke's life which were collateral security for the mortgages on his life interests in the Crown and the will estates. The accumulation settlement, made in accordance with that provision of the scheme, and dated April 5, 1930, was made between Lord Pembroke, of the first part, Lord Herbert, of the second part, and the trustees of the settlement, of the third part. The property comprised in the settlement, which consisted mainly of freehold property situated in Eire, was disentailed by a deed dated March 29, 1930. By cl. 1 (ii.) of the accumulation settlement Lord Pembroke and Lord Herbert, as settlors, appointed this property to the trustees on trust to pay out of the income of the property the premiums on the life policies, but this appointment was revocable under the provisions of cl. 1 (i.) of the settlement, and in that event Lord Pembroke and Lord Herbert might become entitled to the property comprised in the settlement.

Tucker K.C. and J. A. Wolfe for Lord Herbert.

Sir David Maxwell Fyfe S.-G., J. H. Stamp and R. P. Hillsfor the Crown.

1943. Jan. 26. MACNAGHTEN J. read a judgment in which he stated the facts, read s. 38, sub-s. 2, of the Finance Act, 1938, and continued: The accumulation settlement

admittedly contains provisions which bring it within sub-s. 2 of s. 38, and Lord Herbert is admittedly a settlor. But he is not the only settlor. His father is also a settlor, and Mr. Tucker contends that in the circumstances no assessment can be made on Lord Herbert in respect of the income from the property comprised in the accumulation settlement. Mr. Tucker points out that s. 38, sub-s. 2, provides that the income "shall be treated as the income of the settlor for that year and not as the income of any other person." Lord Pembroke is admittedly a "settlor," and, it is said, therefore, that the income must be treated as his income and not as the income of any other person. Lord Herbert is "another person," and, therefore, the income cannot be treated as his. If Lord Pembroke were assessed, the same argument, mutatis mutandis, could be raised. If there is no flaw in the argument and the words of the sub-section are imperative, as they seem to be, the result is that the provisions of the sub-section become inapplicable where there is more than one settlor.

In view of the fact that the expression "settlement" in this sub-section includes any disposition, trust, covenant, agreement or arrangement, and the expression "settlor" in relation to a settlement means any person by whom the settlement was made, it would seem probable that in many of the settlements that come within this sub-section there must be more than one settlor, but the Act does not prescribe what is to happen when there is more than one settlor, and the question has never come up for decision. It is not suggested that all the settlors can all be assessed in respect of all the income. That, indeed, would seem to be an extravagant proposition. Nor is it suggested by the Crown that the income should be distributed between them. In the course of the argument it was said that where there are two or more settlors the assessment should be made on the settlor to whom the income would have belonged if the settlement had not been made, but that interpretation of the sub-section is of no assistance to the Crown in the present case. The income in question is the income to which Lord Pembroke is entitled as tenant for life under the will of the fourteenth earl. Lord Herbert did not bring it into the settlement. During the lifetime of his father he has no right, title or interest in that income whatsoever.

The interpretation of the sub-section put forward on behalf of the Crown was that where there are two or more settlors the Crown has the option to assess any one of the settlors to

the exclusion of the other, and that, in the case of an assessment to income tax, the option must be exercised by the local inspector of taxes against whose choice there would be no right of appeal by the taxpayer, while, in the case of an assessment to sur-tax, the option would lie with the Special Commissioners. I find myself unable to accept that interpretation. It seems to me fantastic to suppose that Parliament has conferred on inspectors of taxes, or even on the Special Commissioners, the power to choose whether A, or B, or C should be liable to income tax or sur-tax, as the case might be. I, therefore, come to the conclusion that no assessment under the Finance Act, 1938, s. 38, can be made on Lord Herbert during the lifetime of his father in respect of the income arising under the accumulation settlement, and that the decision of the Special Commissioners should be reversed and the appeal allowed with costs.

Solicitors for appellants: Nicholl, Manisty & Co.

Solicitor for respondents: Solicitor of Inland Revenue.

C. G. M.