FOO YING AND OTHERS v. COMMISSIONER OF ESATE DUTY

Revenue - estate duty - leasehold property - unadministered estate - whether quick succession relief available under s.31 of Estate Duty Ordinance (Cap.111).

BETWEEN

Judgment handed down: 15 June 1990

------------------

JUDGMENT

------------------

Fuad, V.-P.,

1. This is an appeal by the Commissioner of Estate Duty, pursuant to leave granted by Mortimer J. under section 22(2) of the Estate Duty Ordinance, Cap. 111 ("the Ordinance") from the decision of the judge dated 31st March 1990 upon an appeal by an executor under section 22(1) of the Ordinance. Mortimer J. found in favour of the executor of the estate of a deceased lady regarding the application of the "quick succession relief" provisions contained in section 31 of the Ordinance to the matrix of facts agreed by the parties.

2. Mr. Foo Shun ("the 1st Deceased"), his two sons and their mother died tragically in an air crash in the USA on 9th July 1982. Although he had left a will, as a result of those deaths, he died partially intestate and part of his residuary estate devolved upon his mother, Madam Ivy Foo ("the 2nd Deceased"). Madam Foo herself died on 28th October 1982 before the estate of the 1st Deceased had been administered or distributed; letters of administration were not granted to his executor until 15th March 1983.

3. It was not until 30th April 1984 that it became clear that the share of the 1st Deceased's residuary estate which devolved upon (the estate of) the 2nd Deceased was 5/11ths, when Deputy Judge Leathlan made an order, inter alia, to that effect upon an application under RSC O.85, r.2.

4. Six years passed before the Commissioner finally ascertained the amount of estate duty payable in respect of the 2nd Deceased's estate - he issued the certificate for which provision is made by section 14(12) of the Ordinance on 1st September 1988. As a result of the devolution of part of the 1st Deceased's residuary estate, the value of the 2nd Deceased's estate was increased from $819,632 to $26,982,600.

5. Estate duty was levied and paid on the estate of the 1st Deceased in accordance with the provisions of the Ordinance. His estate included leasehold property and interests in leasehold property. When the 2nd Deceased died, estate duty became payable on her estate. It is clear from the Commissioner's letter dated 22 June 1988 addressed to the Solicitors acting for the 2nd Deceased's executor how the value of the "Deceased's 5/11th interest" ($26,162,968) was computed, for the letter begins :

6. The details and figures shown by Mr. Litton in his helpful "skeleton" demonstrate that the very same leasehold properties, and interests in leasehold properties, which formed part of the property passing on the death of the 1st Deceased (upon which estate duty was paid by his executors) were reassessed and a value put upon them for the purposes of computing the estate duty payable on the death of the 2nd Deceased.

7. The controversy which brought the Commissioner and the 2nd Deceased's executor before Mortimer J., on appeal from the Commissioner's assessment, was whether, contrary to the Commissioner's view, the relief for which provision is made by section 31 of the Ordinance applied to the assessment of estate duty in relation to the 2nd Deceased's estate. The relevant part of the section is as follows :

8. After giving the background and setting out the rival contentions, Mortimer J., in his reserved judgment, recognised that on the authorities he cited it followed that during her life time, the 2nd Deceased had no legal or equitable interest in the 1st Deceased's residuary leasehold property, which eventually became part of her estate after her death and the completion of the administration pursuant to the 1st Deceased's will.

9. The judgment went on to say that if an assent in favour of the 2nd Deceased's estate could be equated to the passing of property to her in her life time, and if relevant property meant strictly either a legal or an equitable interest it would appear that no relevant property passed to the 2nd Deceased at the time of, or immediately after, the death of the 1st Deceased but that it did pass to her as a result of or on account of the first death. He thought that two questions arose :

10. He held that the expression "property passed on the first death" was far from plain. Relying on the remedial purpose and context of section 31, and the injunction contained in section 19 of the Interpretation and General Clauses ordinance, he held that the expression included property passing on account of the death. The judge then observed :

            "In my judgment the relief is triggered if the relevant property passes to the estate of the second deceased. Any other result would be absurd. If relief depended upon whether the first estate had been administered before the second death, the shorter the interval between the deaths the less likely that relief would be given.

            Further, the interpretation contended for by the Commissioner would not only defeat the remedial purpose of the section in many cases but would also lead in some cases to absurd and unreasonable results. Quick succession relief would in some cases depend upon whether the property passed by will or upon intestacy; whether the estate was  solvent; whether there was a specific gift of the property; how soon the second death took place; and the speed with which an estate was administered. The effect of the Section would be capricious and, in my judgment, unpredicable."

11. The judge's conclusion was that on account of or as a result of the deaths of her son and grandsons, leasehold property or interest in leasehold property passed to Madam Foo's estate, and therefore to her. The same leasehold property or interest passed upon her death. The same property attracted estate duty at the time of both deaths. In his view, the same property or part thereof passed on Madam Foo's death and she was the person to whom that property had passed on her son's death. The provisions of section 31 of the Ordinance were therefore satisfied.

12. On behalf of the Commissioner, iii. Feenstra submitted that the authorities made it absolutely clear that when the administration of an estate was incomplete, a residuary beneficiary had no right or title to any particular asset. Madam Foo's right, in relation to the estate of her son, which was transmissible, was only to have the estate properly administered and applied for her benefit when the administration was complete. These authorities were :

13. Mr. Feenstra contended, therefore, that the effect of these authorities was that only a chose in action as to 5/11ths of the residue of her son's estate passed on Madam Foo's death - that was the "property passing on [her] death" within the meaning of section 31. The same property did not, he submitted, pass on the heath of the son as on the death of the mother for section 31 relief to become available.

14. I will refer briefly to just one of those cases. In Livingston the question arose whether succession duty was payable under a Queensland statute which only applied to property situate in Queensland. The statute imposed duty on the disposition of property by reason of which any. person "[becomes] beneficially entitled to any property" and where there is "a devolution by law of any beneficial interest in property." A widow died intestate, and domiciled and resident in New South wales. She had been a residuary legatee of her husband's estate which was still in the course of administration at the time of her death, and that estate included land in Queensland. The Privy Council held that succession duty was not due on that estate. The widow was the owner of a chose in action, which was situate in New South Wales. In my judgment paragraph (2) of the headnote on p.695 of [1965] AC 694 correctly summarises the main principles enunciated by Viscount Radcliffe :

             "(2)      That in the case of an unadministered estate the assets as a whole were in the hands of the executor, his property, and until administration was complete it could not be said of what the residue, when ascertained, would consist or what its value would be. At the date of the widow's death, therefore, there was no trust fund consisting of the testator's residuary estate in which she could be said to have any beneficial interest because no trust had as yet come into existence to affect the assets of his estate. The testator's property in Queensland, real or personal, was vested in his executors in full right and no beneficial interest in any item of that property belonged to his widow at the date of her death, and succession duty was not therefore exigible."

15. When considering the impact of Livingston upon the case before us, I think it is necessary to bear in mind that the statutory provisions we have to interpret do not expressly address the concept of beneficial interest, as did the Queensland statute. The word "interest" in the expression "interest in leasehold property" used in section 31 of the Ordinance is not defined. It is sometimes used in a wide and sometimes in a narrow sense and sometimes in a highly technical sense. In my. judgment, while it is impossible to hold that Madam Foo had a legal or equitable interest in the specific assets comprising her son's unadministered estate, it does not necessarily follow that she had no interest in those assets in the more popular sense. When Viscount Radcliffe, in Livingston, was discussing what he called "criticisms" of the suggestion that a residuary legatee was denied any beneficial interest in the assets of an unadministered estate he said, at p.712:

"Criticisms of this kind arise from the fact that the terminology of our legal system has not produced a sufficient variety of words to represent the various meanings which can be conveyed by the words 'interest' and 'property'. Thus propositions are advanced or rebutted by the employment of terms that have not in themselves a common basis of definition. For instance, there are two passages quoted by the Chief Justice in his dissenting judgment in this case which illustrate the confusion. There is the remark of Jordan C. J. in MaCaughey's case 46 S. R., N.S.W. 192, 204 'The idea that beneficiaries in an unadministered or partially administered estate have no beneficial interest in the items which go to make up the estate is repugnant to elementary and fundamental in the items' it is intended to suggest that such beneficiaries have any property right at all in any of those items, the proposition cannot be accepted as either elementary or fundamental. It is, as has been shown, contrary to the principles of equity. But, on the other hand, if the meaning is only that such beneficiaries are not without legal remedy during the course of administration to secure that the assets are properly dealt with and the rights that they hope will accrue to them in the future are safeguarded, the proposition is no doubt correct. They can be said, therefore, to have an interest in respect of the assets, or even a beneficial interest in the assets, so long as it is understood in what sense the word 'interest' is used in such a context."

16. Unless the Commissioner was assessing Madam Foo' s "interest" in that sense, he surely was not justified in assigning the full value to her share, as he did. I do not think that it would be doing violence to the words used by the legislature in enacting section 31 to interpret the expression "interest in leasehold property" in what I have called the popular sense.

17. However that may be, if the Commissioner is right it would be very rarely indeed that the section could come into play in the case of two deaths very closely following each other; the shorter the interval between the two relevant deaths the more would appear to be the need for the relief provided for by section 31. When attempting to interpret the section, it is also important to recognise, as my Lord Hunter J. A. suggested during the argument, that it is extremely difficult, in practical terms, to put a proper value upon the chose in action which passed from the 1st Deceased to the 2nd. And it is very clear from the material to which I have referred that the Commissioner made no attempt to value the chose in action. What he did, as we have seen, when valuing the "property passing" on the 2nd Deceased's death under section 5 of the Ordinance was to value her share of the actual leaseholds etc. involved. No discount of any sort was given. The 2nd Deceased's estate is therefore being held liable for duty for the same amount as if the share of the leaseholds in question had been actually vested in her at her death, but the Commissioner is denying her quick succession relief on the basis that only a chose in action passed on her death. This must surely be regarded as a distinction without a difference, and produces a bizarre and harsh result which could not have been intended by the legislature.

18. The notion of property passing (see section 5 of the Ordinance) on a death presents no difficulty. However, the concept of property passing to a person is more complex in relation to the devolution of the property of a testator or an intestate. In that case the property must necessarily always devolve initially on the personal representatives of the deceased in full right, save in the case of a specific bequest or devise where in equity the property is in the legatee as soon as the testator dies although vested in law in the personal representatives who can resort to it for the payment of debts : see Shell, 28th Edition, pp.337-8. In some cases administration might not be complete by the end of the quick succession relief period of 3 years specified in section 31.

19. I cannot conceive that it could have been the intention of the framers of the section to provide an exemption which would have been available in relation to the relevant class of property, not generally, but in such a manner as to discriminate against devolutions in the case of the death of a testator merely because the administration of his estate had not been completed within a short time. This is the effect the Commissioner's literal interpretation of section 31 would, not infrequently, have. I would respectfully follow Lord Reid's approach in Luke v. Inland Revenue Commissioners [1963] AC 557, at p.577:

"To apply the words literally is to defeat the obvious intention of the legislation and to produce a wholly unreasonable result. To achieve the obvious intention and produce a reasonable result we must do some violence to the words. This is not a new problem, though our standard of drafting is such that it rarely emerges. The general principle is well settled. It is only where the words are absolutely incapable of a construction which will accord with the apparent intention of the provision and will avoid a wholly unreasonable result that the words of the enactment must prevail."

20. Estate duty has, as we know, been abolished in England. Our section 31 is drawn very closely from section 15 of the Finance Act 1915. The relevant provisions were replaced by provisions contained in the 1958 Finance Act, which themselves are no longer in force. As explained in Dymond's Death Duties (15th Edition) pp. 1215-6, the 1958 legislation was "much more widely drawn" and the expression "the same property" is very liberally interpreted by Schedule 8. We have not kept up with those changes in the law, but I draw comfort from what is to be found on p. 1247 of Dymond, while recognising that it does not necessarily follow that the Revenue in England was applying section 15 of the repealed Act of 1914 strictly. This is the passage I have in mind:

"In general, the tests of the application of s. 15 are (1) whether the same property can be said to pass on both deaths, and (2) whether or not on the second death it again becomes necessary to value the land or business in order to arrive at the taxable value of the property then passing. Thus, the allowance has been held to apply in a case where a testator bequeathed his business on trust for sale and gave the whole income of his estate to a beneficiary who died a few days later, before the business had been sold or dealt with (Warren's Trustees v. Ld. Adv. [1928] S.C. 806). The Revenue accepts generally that land or a business subject to a trust for sale qualifies for the allowance, provided it has not actually been sold or been contracted to be sold and that test (2), above, is satisfied. This applies whether the trust for sale is express or implied, statutory or non-statutory, except that, as already noted, if the death is of a reversioner and the option to defer payment of Estate Duty is exercised and the property is sold before the reversion falls into possession, the allowance is lost."

...........................................

"The allowance is given notwithstanding that, on the second death, the land or business is part of an unadministered estate."

21. It seems to me that Madam Foo's estate would have received the section 31 quick succession relief under the pre-1958 English practice. The same property has. been identified for the purpose of assessing duty on both the estates. I think that a wide interpretation of the expression "same property" as it is used in the section would permit a conclusion that the same property or part thereof passed on both deaths. In my judgment relief can be given to Madam Foo's estate by an interpretation of the section which the words must bear unless nonsense is to be made of it.

22. I would, therefore, dismiss the appeal and uphold Mortimer J's order of 31st March 1989.

Hunter, JA :

23. The issue in this appeal is whether the word "interest" in section 31 of the Ordinance should be given its strict technical meaning or a more popular meaning. In my judgment the practical realities clearly revealed by the facts of this case show that the technical meaning contended for by the Commissioner would produce a result which would be conjectual, unreasonable and wholly unworkable - a consequence which the legislature cannot possibly have intended.

24. On 28th October 1982 the date of her death, Madam Ivy Foo's only strict legal or equitable interest in the residue of her son's estate was a chose in action. If the Commissioner is right, this is the property which passed on her death for the purposes of the Ordinance. This is what he had to value under section 13(5)(a) by assessing "the price", it "would fetch if sold in the open market at" 28th October 1982. At that date, in the confused and tragic situation which had arisen, none knew for certain whether and to what extent mother might benefit from her son's estate. This did not emerge until 30th April 1984. Further, since the administration of the son's estate had not started, no sensible forecast of debts or of residue could be attempted. It is conceded that the subsequent ascertainment of entitlement and clarification of residuary value could not be taken into account for an October 1982 valuation. So the valuation for which the Commissioner has to contend can readily be seen to be virtually impossible in practice; and so conjectural as not to amount to valuation at all. It was not attempted, nor was any attempt made to assess duty upon any such figure.

25. What could then properly and realistically be valued were the underlying leasehold interests. This is what the Commissioner did, making some small adjustments for the differences between property values as at the two dates of death. This was a realistic process which is not criticised. "Property" includes "money ... representing the proceeds of sale" section 3. If interest is given its more popular meaning, then Ivy Foo had an interest in the residue of her son's estate; an interest in the proceeds of sale of the leasehold properties comprising her share in the residue. Such interest can realistically be valued by reference to the underlying property values.

26. This latter approach is not only practicable, it produces consistency when the application of section 31 to the figures is considered. Property can be given the same meaning at each of the three stages referred to in the section. First, estate duty was payable on the property, these leasehold interests, upon the death of the son. Secondly, within five years estate duty became payable on part of "the same property" upon the Commissioner's own approach and assessment. Thirdly, on the popular meaning of interest, the residuary interest in these leasehold properties "passed" to Ivy Foo on her son's death, and again from her on her death. Upon a strict reading this is not so because her only interest received and transmitted was an interest in the chose inaction.

27. In theory the choice before the Commissioner is simple. If he argues for a strict meaning then he has to value the chance, the chose in action, and assess duty upon the modest speculative figure it produces. He can then deny section 31 relief. But he cannot for the purposes of section 13 value the property in the leaseholds and then deny relief because it involves him in putting different meanings upon the word "property" in the same section. In practice the only course open is the second.

28. The leading English textbooks written by those working in the Estate Duty Office suggest that before 1958 practical considerations had produced the same result in England. My Lord, the Vice-president, has cited the relevant passages from the 14th (1965) edition of Dymond. I would only emphasize the authors' second condition when they say : -

This seems to me to echo the Commissioner's approach to. valuation here. A similar conclusion is expressed by the authors of the 6th (1967) edition of Green's Death Duties at page 337 where they say : -

"The fact that, on one or both of the deaths, the property was subject to a trust for sale, statutory or otherwise, did not exclude the allowance provided the property remained unsold. A right to the proceeds of sale of land or a business was treated as the same property as the land or business itself.

        Land or business might qualify for the allowance even though it formed part of a residuary estate in the course of administration. "

29. For these reasons I agree that this appeal fails.

Penlington, J.A.:

30. I also am satisfied that this appeal must fail. It seems to me clear that although there is clear authority in Livingston and the other cases that legal estate in real property does not pass to the beneficiary of an estate until a transfer is made by the executor, that is too narrow a view in the context of section 31. That section states that relief shall be given if the Commissioner is satisfied that the property has passed on the first death and again on the second. By his assessment based, not on the value of a chose in action held by Mrs. Foo in her son's estate, but on the actual value of the leasehold property, it seems to me clear that, whatever the fine legal distinction may be as to what interest a beneficiary has in any estate, the Commissioner by basing his assessment on the full value of the leasenold properties and not on a chose in action against the executor of the 1st Deceased's estate has clearly been so satisfied and Mrs. Foo's estate is entitled to the relief sought.

Fuad, V.-P. :

31. In handing down these judgments dismissing the appeal, we make an order nisi that the appellant pays the respondent's costs.