FOO YING AND ANOTHER v. COMMISSIONER OF ESTATE DUTY

Headnote

Section 31 of the Estates Duty Ordinance, Chapter 111 provides : -

"Where the Commissioner is satisfied that estate duty has become payable on any property consisting of leasehold property .... or any interest in leasehold property .... passing upon the death of any person, and that subsequently within five years estate duty has again become payable on the same property or any part thereof passing on the death of the person to whom the property passed on the first death, the amount of estate duty payable on the second death ... in respect of the property so passing shall be reduced ...."

    F and his sons died in an air crash on 9.7.82. (the 1st death). In consequence F's residuary estate, including leasehold property upon which estate duty was paid, devolved upon M. Less than 3 months later M died (the 2nd death) before F's estate had been administered or distributed. On M s death the same leasehold property was assessed for estate duty. M's executor contended that the leasehold property qualified for quick succession relief under Section 31 of the Ordinance on the 2nd death.

    The Commissioner refused relief on the grounds that as the leasehold property formed part of undistributed residuary estate no legal or equitable interest in that property passed to M on the 1st death.

    On appeal by the executor:-

Held: Allowing the appeal, that property passing to M s estate on the 1st death is to be equated with property passing to her in her lifetime. That 'property passing on the death' in Section 31 of the Ordinance includes property passing on account of the death. That in the circumstances the leasehold property passed to M on account of F's death (the 1st death), the same leasehold property attracted duty on M's death (the 2nd death) and the leasehold poperty qualified for quick succession relief under the section.

Quaere : Whether in any event sufficient beneficial interest (a 'floating equity') in the leasehold property passed to M on the 1st death to satisfy the section. See Warren's Trustees v. Inland Revenue (1928) S.C. 806.

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

ESTATE DUTY APPEAL NO. 1 of 1988

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J U D G M E N T

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Mortimer J:

The facts

1. Foo Shun and his two sons Fu Kwok Yee and Fu Kwok Bun died in an aeroplane crash on 9th July 1982. By reason of their deaths 5/11th of Foo Shun's residuary estate under his will devolved upon his mother Ivy Foo.

2. Fu Shun's estate included leasehold property and interest in leasehold property. This is listed in Exh. FY-7 pages 10/11 paras. 19(a) to (g) and (i) and paras. 20(a) to (e). 5/11th interest amounted to $26,162,968.52 based on a net full value of the estate at $72,113,304 00. Estate duty was payable under Section 5 of the Estate Duty Ordinance. The duty included duty on the leasehold and interest n leasehold property

3. Less than 3 months later on 28th October 1982 Ivy Foo died. Her estate was valued at $26,982,600.00 of which $26,162,968.52 was the 5/11th share of Foo Shun's estate. Estate Duty was payable and was assessed upon the leasehold property and interest in leasehold property which had devolved upon her from Foo Shun.

4. When Ivy Foo died, Foo Shun's estate had not been administered or distributed but the same leasehold property or part of it was assessed for estate duty on Ivy Foo's death as part of her estate. It became part of her estate on completion of the administration after the first death.

The issue

5. Ivy Fools executor contend s that this leasehold property and interest in leasehold property qualifies for quick succession relief under Section 31 of the Estate Duty Ordinance Cap. 111. It was disallowed by the Commissioner and the executor appeals

6. This Section provides quick succession relief for leasehold property and businesses. The relevant parts are as follows :

"31. Where the Commissioner is satisfied that estate duty has become payable on any property consisting of leasehold property..... or any interest in leasehold property..... passing upon the death of any person, and that subsequently within five years estate duty has again become payable on the same property or any part thereof passing on the death of the person to whom the property passed on the first death, the amount of estate duty payable on the second death...... in respect of the property so passing shall be reduced..."

Four conditions must therefore be satisfied:

(1) the property must be leasehold property.

(2) the duty must have become payable on the death of a person upon that property (the first death).

(3) Within five years estate duty must have become payable again on the same property or part of it (the second death).

(4) The se duty must have become payable on the death of the person to whom the property passed on the first death.

7. The issue is whether the leasehold property (the same property or any part thereof) passed to Ivy Foo on Foo Shun's death, that is the first death.

The contentions

8. The taxpayer contends that as the 'same property or part thereof' attracted duty on both deaths the only question is whether Ivy Foo is "the person to whom the property passed on the first death". Summarized the submissions are:

(1) That the words "passing on death" is not a term of art.

(2) That the section is concerned with the liability to pay duty upon certain property and not with the mechanics of transfer of that property nor with the particular time of such transfer:

(3) That "the person to whom the property passed on the first death" is a question of fact and that the words do not mean "at the time of" the first death but "on account of" or "as a result of" the first death. (see Warren's Trustees v. Inland Revenue, [1928] S C 806).

(4) That if the quoted words of the section are ambiguous, then Section 19 of the interpretation and General Clauses Ordinance Cap. 1 has to be applied and if applied will result in the interpretation contended for See Section 19 which reads:

"19. An Ordinance shall be deemed to be remedial and shall receive such fair, large and liberal construction and interpretation as will best ensure the attainment of the object of the Ordinance according to its true intent, meaning and spirit."

(5) That Sudeley v. the Attorney General [1897] A.C 11; Dr. Barnardo's Homes v. Special Income Tax Commissioners [1921] 2 A C 1 and Commissioner of Stamp Duty v. Livingston [1965) A C 694 are not in point because they address. The narrow proprietary issue of what passes immediately after death with which the relevant section is not concerned.

(6) that in any event sufficient interest in residuary estate passes to a beneficiary at the time of the death of the testator to satisfy the section; that is on the first death. (See Warren's case already cited.)

On the other hand, the Commissioner submits:

(1) That Ivy Foo was never "the person to whom the property passed on the first death" because the leasehold property was part of the residuary estate and that at the time of death or immediately after nothing passed to her save a 'chose in action' being a right against the executors to have the estate properly administered and distributed.

(2) As only a 'chose in action' passed this is not the leasehold property, and therefore cannot be "the same property or part of it" within the Section (see Sudeley v. the Attorney General and the cases following already cited).

(3) Further, the estate on the first death had not been administered and distributed before the second death and so (as a question of fact as well as law) the leasehold property did not pass to Ivy Foo on the first death.

(4) That Warren's case was wrongly decided and should not be followed and in any event is not binding on the court.

Alternatively, the Commissioner submits:

(5) Warren's case only applies (a) where there is a sole residuary beneficiary or (b) where all the assets are leasehold property. See Lau Yiu Sum v. the Commissioner of Inland Revenue [1983] 2 HKTC 1.

The Legal Problem:

9. A beneficiary entitled to residue or a share of residue under a will has no legal or equitable interest in any of the assets which form part of the residue and remain unadministered. Until liabilities have been discharged, the assets which pass in residuary estate cannot be ascertained. The whole legal and equitable interest in the residuary estate is vested in the personal representatives. The beneficiary has the right to require the estate to be properly administered. This is a 'chose in action' which he also can pass on death. (See Sudeley v. the Attorney General; Dr. Barnardo's Homes v. the Commissioner of Income Tax; Commissioner of Stamp Duty v. Livingston).

10. A beneficiary who dies before residuary estate to which he is entitled has been administered therefore has no legal or equitable rights in the residuary estate during his life but on completion of administration on assent the property becomes part of his estate. Duty is attracted upon the death of the beneficiary upon the unadministered residuary estate.

11. It follows that during her life time Ivy Foo had no legal or equitable estate interest in her son's residuary leasehold property which eventually become part of her estate after her death on the completion of administration pursuant to her son's will.

12. If an assent in favour of Ivy Foo's estate can be equated with the passing of property to her in her life time and if relevant property means strictly either a legal or an equitable interest it would appear that no relevant property passed to Ivy Foo at the time of or immediately after the first death but that it did pass to her as a result of or on account of the first death.

13. It seems to me that two questions arise:-

1. Are the words 'passed on death' plain in their meaning or ambiguous?

2. In order to trigger the relief must a strict legal or equitable interest in the same property (or part of it) pass on the first death to the second deceased or is a 'floating equity' in the relevant property sufficient? Obviously these two questions are closely inter-related but initially I consider them separately.

Are the words 'passed on death' plain in their meaning or ambiguous?

14. If the plain meaning 'of on the death' is 'at the time of' or 'immediately after' the death then effect must be given to this meaning. Assuming that 'leasehold property' means a legal or equitable interest in that property nothing passed to Ivy Foo 'at the time of' or 'immediately after' her son's death.

15. Section 3 of the b Ordinance is the interpretation section. The relevant parts are:

3.(1) In this Ordinance, unless the context otherwise requires-

"property" includes movable and immovable property and the proceeds of sale thereof respectively and any money or investment for the time being representing the proceeds of sale;

"property passing on the death" includes property passing either immediately on the death or after any interval, and either originally or by way of substitutive limitation, and "on the death" includes "at a period ascertainable only by reference to the death "

16. Even if the context does not "otherwise require" these definitions are not exclusive - e.g. property obviously includes legal or equitable interests in property.

17. Considering the legislation and the context of the words, I am persuaded that the meaning of the words is far from plain. Clearly the meaning includes the meanings attributed in the interpretation section and therefore includes "property passing either immediately on the death or (I emphasize) after any interval". It may therefore include property passing after an interval "on account of" the death.

18. Where the meaning of the words in an Ordinance is not plain, it is permissible to seek assistance from a consideration of the remedial purpose of the Legislation and its context: As Lord Wilberforce said in R v Herrod ex parte Leed City Coucil [1978] A C P 403 at 419(G):

"this not being, then, a case where there is a plain meaning, but rather a case of a choice between two doubtful meanings, I feel justified in taking that which is more contextually apposite and also more reasonable".

19. Also, where the words are ambiguous (and not otherwise Section 19 of the Interpretation and General Clauses Ordinance enjoins me to give effect to its terms.

20. The remedial intent here is to give relief in cases where duty falls to be paid repeatedly within short periods on specified property. In Glen v. the Inland Revenue [1926] S C 44 at 53 the Lord President said of Section 15 of the Finance Act 1914 (the parent section of the one under consideration - now repealed in United Kingdom):

"the crippling effect of the repeated incident of estate duty on the management of land in the estate and on the conduct of industrial or commercial business is the relief for which the section offers a palliative. If two successive owners of the estate or the business die within a short interval the last successor must denude the estate or bleed the business to whatever extent may be necessary to enable him to pay the double estate duty with disastrous results to the estate or the business".

21. I apply Lord Wilberforce's principle and Section 19 of the interpretation and General Clauses Ordinance. I am satisfied that in Section 31 of the Estate Duty Ordinance the words "property passed on the first death" include the property passing on account of the first death. It is then a question of fact whether the property or part thereof passed on the death of the person to whom the property passed on the first death and thereby attracted duty twice.

22. 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.

23. 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.

24. If I am right the answer to the first question I have indicated is sufficient to resolve this appeal. But I feel it necessary nevertheless to turn to the second question which is:

Do the words "the same property or any part thereof" include a 'floating equity' in such property?

25. The 'chose in action' which passes at the time of the death to the beneficiary of residual estate can be termed a 'floating equity' which may or may not crystallise after administration is completed. It does not amount to an equitable interest or any proprietary interest.

26. However, in spite of this, it is submitted by Mr. Litton that sufficient interest passes to a beneficiary of residuary estate on the first death to satisfy the section. Reliance is placed upon Warren v. Lord Advocate which he submits is on all fours with the instant case.

27. That case concerned a business. A testator directed his trustees to convey the residue of his estate (which included the business) to his daughter on her 25th birthday with a gift over should she die before. They were directed to pay her the income until that date. Further, the trustees were directed to sell the business.

28. The daughter died before she was 25, 8 days after the testator and before the business had been sold. Counsel for the Inland Revenue presented similar arguments to those of the Commissioner in this case (see page 812).

29. The majority of the court held that during the 8 days the daughter was in the beneficial possession and enjoyment of the whole residue including the business which had not been sold. Therefore the provisions of the section were satisfied and quick succession relief was given.

30. I confess to having difficulty with the ratio decidendi in Warren's case. This may be consequent upon differences between Scottish and Hong Kong law. However, I respectfully agree with the result of that case on its facts. It seems that the majority decided that as the ultimate beneficiary of the residuary estate which comprised relevant property, she acquired sufficient beneficial interest in that property on the first death to come within the section, and that the beneficial interest passed on her father's death - that is on account of her father's death. In so far as Warren's case supports my conclusion I follow it, however I do not find it necessary to rely upon it and, of course, it is not binding upon me. I reach the same conclusion by the route which I have indicated when considering the first question I posed.

CONCLUSION

31. On account of or as a result of the deaths of her son and grandsons, leasehold property or interest in leasehold property passed to Ivy Foo's estate, and therefore to Ivy Foo. The same leasehold property or interest passed upon her death. The same property attracted estate duty at the time of both deaths. In my judgment the same property or part thereof passed on Ivy Foo's death and she was the person to whom that property had passed on her son's death. In my judgment, the provisions of Section 31 of the Estate Duty Ordinance are satisfied and the relevant leasehold property qualifies for quick succession relief.

32. It follows that this appeal is allowed. I will hear counsel upon any consequential order which may be necessary.