HSBC TRUSTEE (HONG KONG) LTD v. ALEXANDER LAUFER AND OTHERS

HCMP 2967/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 2967 OF 2015

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DECISION

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THE APPLICATION

1. These proceedings are taken by HSBC Trustee (Hong Kong) Limited (“Executor”) as the executor and trustee of the estate (“Estate”) of the late Edgar Martin Laufer (“Deceased”) pursuant to Order 85 of the Rules of the High Court (Cap 4A), in particular, rule 2(2)(a) and (3)(c) thereof, for the court’s directions in the administration of the Estate.

CIRCUMSTANCES GIVING RISE TO NEED FOR DIRECTIONS

2. The Deceased died on 19 April 2010, leaving a will dated 10 March 2004[1] (“Will”).

3. Insofar as it is material, Clauses 3 and 4 of the Will read as follows:

“3. I DECLARE that I am domiciled in Hong Kong and this Will shall be construed according to the laws of Hong Kong.

4. I GIVE devise bequeath and appoint all my estate both real and personal whatsoever and wheresoever situate not by this Will nor any Codicil to it otherwise disposed of … to my Trustee UPON TRUST:

(a) to sell call in and convert the same into money … ;

(b) from the net proceeds of sale and conversion and ready money to pay all debts funeral and testamentary expenses and estate duty; and

(c) to hold the balance then remaining together with all parts of my estate for the time being unsold (hereinafter called “my Residuary Estate”) (as to both capital and income thereof) to divide the same into 20 parts to hold the same upon the following trusts:

(i) as to 7 such parts for my nephew ALEXANDER LAUFER absolutely PROVIDED THAT if my said nephew shall die before me then upon the same trusts as set out in clause 4(c)(iv) hereof proportionately;

(ii) as to 6 such parts for my brother‑in‑law RAYMOND ARTHUR SELLERS absolutely PROVIDED THAT if my said brother‑in‑law shall die before me then for such of ANTONY SELLERS (“Antony”), PETER SELLERS (“Peter”) and JONATHAN SELLERS (“Jonathan”) as shall survive me in equal shares absolutely PROVIDED THAT if any of the said Antony, Peter and Jonathan shall predecease me leaving a wife surviving me then such wife shall take the share which her husband would otherwise have taken had he so survived me and PROVIDED FURTHERTHAT in the event that none of Antony, Peter, Jonathan or their respective wives shall so survive me then the 6 parts to be held upon the same trustsassetoutinclause 4(c)(iv)hereofproportionately ;

(iii) as to 1 such part for my sister‑in‑law PAMELA SELLERS absolutely PROVIDED THAT if my said sister‑in‑law shall die before me then upon the same trustsassetoutinclause 4(c)(iv)hereofproportionately ;

(iv) as to the remainder as follows:–

(1) as to 43% (forty three per cent) thereof for CANCER RESEARCH FUND … absolutely;

(2) as to 17% (seventeen per cent) thereof for THE CANCER RELIEF MACMILLAN FUND … absolutely;

(3) as to 10% (ten per cent) thereof for THE SALVATION ARMY … absolutely;

(4) as to 20% (twenty three per cent) thereof for THE COMMUNITY CHEST OF HONH KONG … absolutely; and

(5) as to the remaining 10% (ten per cent) thereof for BRITISH RED CROSS … absolutely” (emphases added)

4. The Deceased made one Codicil dated 12 November 2007 (“Codicil”) which, insofar as it is material, substituted Clause 4(c)(iii) of the Will with the following:

“as to 1 such part for my sister‑in‑law PAMELA SELLERS absolutely PROVIDED THAT if my said sister‑in‑law shall die before me then to divide the same into 13 parts as to 7 such parts upon the same trusts as set out in clause 4(c)(i) hereof; AND as to 6 such parts upon the same trusts as set out in clause 4(c)(ii) hereof PROVIDED FURTHER THAT if any trust relating to any of the said 1 part herein fails to take effect then any such failed parts shall be held upon the same trusts as set out in clause 4(c)(iv) hereof proportionately.”

5. The Will contained no specific legacy or bequest so that the entire Estate was disposed of under the above gifts of residue.

6. Both Raymond Arthur Sellers and Pamela Sellers predeceased the Deceased with the consequence that the gifts to them respectively pass to other of the beneficiaries as provided for in the Will and the Codicil.  The 20 parts into which the Estate (after deduction of all debts, funeral and testamentary expenses and estate duty) is divided are now being held upon trust for the defendants (“Beneficiaries” collectively) as follows (expressed in percentages):

Beneficiary	Country of Residence	Share in Estate
1st defendant	USA	37.69%
2nd defendant	Republic of Ireland	10.77%
3rd defendant	Republic of Ireland	10.77%
4th defendant	Republic of Ireland	10.77%
5th defendant	UK	12.90%
6th defendant	UK	5.10%
7th defendant	UK	3.00%
8th defendant	HK	6.00%
9th defendant	UK	3.00%

I shall refer to the 2^nd to 4^th defendants who are and have at all material times been resident in Ireland as “the Irish Beneficiaries” collectively and the 5^th, 6^th, 7^th and 9^th defendants which are all charities based in the UK as the “UK Charities” collectively.

7. The net estate left by the Deceased had an aggregate value of £8,307,203 as at the date of his death and was located as follows:

Location	Value as at 19 April 2010
UK (“UK Estate”)	£1,047,907.78
Jersey	£431,157.66
HK	HK$74,049,496.90
USA	US$941,165.07

8. The Executor has obtained probate of the Will and the Codicil from the High Court of Hong Kong (“Hong Kong Grant”) and the Royal Court of Jersey on 7 January and 5 April 2011 respectively.  No grant of representation has yet been obtained in the UK or the USA.  The Executor does not intend to obtain any grant of representation in respect of the assets in the USA as it is possible to deal with them without a grant.  As for the UK Estate, the Executor cannot have the Hong Kong Grant resealed in the UK or otherwise taken out a grant in the UK without first settling the UK inheritance tax (“UK IHT”) that is the subject matter of these proceedings.

9. In this regard, although the Deceased declared his domicile in Hong Kong in Clause 3 of the Will, he had spent not less than 17 of the 20 years preceding his death resident in the UK. ‌As a result, the Deceased was treated under s 267 of the UK Inheritance Tax Act 1984 (“IHTA”) as being domiciled in the UK at the time of this death, with the consequence that his world‑wide estate above the tax free allowance of £650,000 (except the 24% gifted to the UK Charities which are exempt under s 23 of the IHTA) [2] is chargeable with the UK IHT under the IHTA at 40%.

10. Despite its name, the UK IHT is not a tax on the inheritors of an estate.  Rather, it is an estate duty chargeable on the estate due, in this case, solely to the deemed UK IHT domicile status of the Deceased under English law.  It is to be distinguished from taxes imposed as a result of the domicile, nationality or place of residence of the beneficiaries, or of specific legacies made to specific beneficiaries.

11. According to the UK solicitors for the Executor, the effect of section 204(1) and (3) of the IHTA taken together is that while a personal representative is liable for the full amount of the tax to the extent of the assets which he has received, or might have received but for his own neglect or default, a beneficiary would not be liable for the tax except to the extent of the property vested in him or to which he is beneficially entitled.

12. Under the IHTA, depending on how the exemptions for the UK Charities are to be treated, the full amount of the UK IHT that is chargeable on the Estate is approximately either £2,395,390 (if the tax is not apportioned to the UK Charities) or £2,649,767 (if the tax is paid as part of the testamentary expenses before distributing the residuary Estate in the proportions set out in the Will and the Codicil so that all the Beneficiaries effectively share the same proportionately).

13. Negotiations have taken place between the UK revenue authorities, HM Revenue & Customs (“HMRC”), and the Executor’s solicitors in the UK.  HMRC, acknowledging the potential difficulties in enforcement and being realistic, has indicated its agreement in principle to accept a lesser sum, £1,615,000 (together with interest thereon at the statutory rate), in full satisfaction of the Estate’s liability for the UK IHT.  The following breakdown of £1,615,000 was provided by the Executor’s UK solicitors to HMRC by letters dated 3 December 2013 and 20 January 2015   : 

Amount	Remarks
£514,090	Said to be the 1st defendant’s proportionate share of the UK Estate
£1,018,266	Said to be the Irish Beneficiaries’ proportionate liability for UK IHT on their shares of the worldwide Estate
£81,835	Said to be the 8th defendant’s proportionate share of the UK Estate
£1,614,191

14. There is no evidence of the up‑to‑date value of the UK Estate which comprises, inter alia, a real property (the Deceased’s home in Dorset) and various bonds, stocks and shares.  However, going by the value as at the date of death (ie £1,047,907), the amount of the UK IHT (even at the said discounted amount and disregarding interest) exceeds the value of the UK Estate to be collected by such payment.

15. The Executor, mindful of the general rule that an executor should not normally pay an unenforceable debt without either the unanimous consent of the beneficiaries or the authorisation to do so by the court,[3] is concerned that the UK IHT is such a debt.

(1)  One country will not enforce the revenue laws of another.  See Dicey, Morris & Collins: The Conflict of Laws (15^th edition, 2012), Volume 1, §5R‑019.

(2)  This rule, known as the non‑enforceability rule, is applicable in Hong Kong: Her Majesty’s Revenue & Customs v Shahdadpuri [2012] 1 HKLRD 223.

(3)  HMRC will therefore be unable to obtain judgment for the UK IHT by action against the Executor (which is a company incorporated and carrying on business in Hong Kong) in Hong Kong.

(4)  Nor will it be useful for HMRC to sue the Executor in England and seek to enforce the English judgment against the Executor in Hong Kong.  The Foreign Judgments (Reciprocal Enforcement) Ordinance (Cap 319) does not extend to judgments for any sum payable in respect of taxes or other charges of a like nature: s 3(2)(b).

That being the case, payment of the UK IHT that is not enforceable against the Executor may expose the Executor to a complaint of breach of trust, especially by those of the Beneficiaries who might be worse off as a result of such payment.

16. On the other hand, if the Executor does not pay the UK IHT in the discounted amount of £1,615,000 out of the Estate, HMRC may and would probably take enforcement actions to recover the full amount payable in law (ie £2,395,390 or £2,649,767).  HMRC may do so by first of all itself taking out a “creditor” grant of representation in respect of the UK Estate. Again going by the date of death value, enforcement by HMRC against the UK Estate is likely to leave a shortfall, for the recovery of which HMRC would have to turn to the Beneficiaries.

17. There appears to be no dispute that the 1^st and 8^th defendants, being respectively resident in the USA and Hong Kong, are not at risk.

18. By a letter dated 8 July 2013, HMRC has threatened to recover such shortfall from the Irish Beneficiaries via the Irish revenue authorities.  This has since 1 January 2012 become possible with the coming into force of the UK legislation giving effect to Council Directive 2010/24/EU for the mutual assistance for the recovery of tax debts between member states of the European Union (“MARD”).  The MARD has retrospective effect.

19. As for the UK Charities:

(1)  According to paragraph 23 of the Affidavit dated 16 December 2015 (“M Harris’ Affidavit”) by one Daniel Peter Harris (“Mr Harris”) of Stone King LLP, a firm of solicitors in the UK acting for the UK Charities, the MARD does not enable HMRC to enforce the UK IHT against an exempt beneficiary such as the UK Charities by virtue of s 41(b) of the IHTA which provides:

“Notwithstanding the terms of any disposition –

…

(b)  none of the tax attributable to the value of the property comprised in residue shall fall on any gift of a share of residue if or to the extent that the transfer is exempt with respect to the gift.”

(2)  Paragraph 16.3 of the Affidavit dated 17 November 2015 (“Mr Paul’s Affidavit”) by one Robin Paul of Withers LLP, solicitor acting for the Executor in the UK, suggests that as a matter of law a different view could be taken.

(3)  However, it is apparent from the letter dated 22 July 2015 from HMRC to the Executor’s said UK solicitors to be mentioned in greater detail in paragraph 99 below that HMRC is unlikely to target the UK Charities in enforcing payment of the UK IHT.

20. That being the case, I shall proceed on the basis of the worst case scenario for the Irish Beneficiaries, which is that they would be the only beneficiaries left vulnerable to absorb the full shortfall of the UK IHT that is not recoverable by HMRC from the value of the UK Estate.

21. In this connection, the Irish Beneficiaries’ liability is joint and several in nature, i.e. each of them is liable for the whole tax up to the total value of what he receives and the liability arises when the distribution is made.

22. To put in context the Irish Beneficiaries’ exposure in the event of non‑payment of the UK IHT by the Executor, I refer to the following table which is based on exhibit “RJP‑1” to Mr Paul’s Affidavit.

1	2	3	4	5	6
Beneficiary	Share in Estate	Entitlement before Tax if Whole Estate Collected	Entitlement before Tax if UK Estate Abandoned	Share in Discounted UK IHT Split ProRata as an Administration Expense	Share in Discounted UK IHT if None Apportioned to UK Charities
1st defendant	37.69%	£3,130,985	£2,736,029	(£608,692)	(£800,911)
2nd defendant	10.77%	£894,686	£781,826	(£173,936)	(£228,863)
3rd defendant	10.77%	£894,686	£781,826	(£173,936)	(£228,863)
4th defendant	10.77%	£894,686	£781,826	(£173,936)	(£228,863)
5th defendant	12.90%	£1,071,629	£936,449	(£208,335)	£0
6th defendant	5.10%	£423,667	£370,224	(£82,365)	£0
7th defendant	3.00%	£249,216	£217,779	(£48,450)	£0
8th defendant	6.00%	£498,432	£435,558	(£96,900)	(£127,500)
9th defendant	3.00%	£249,216	£217,779	(£48,450)	£0
	100%	£8,307,203	£7,259,296	(£1,615,000)	(£1,615,000)

23. Column 4 shows the amount that would be distributed to the each of the Beneficiaries based on the date of death value if the Executor does not pay the UK IHT at the reduced rate acceptable to HMRC so that the UK Estate would have to be effectively abandoned.  As discussed above, for the 1^st defendant, the UK Charities and the 8^th defendant, there would unlikely to be any further adverse consequence.  However, the same cannot be said for the Irish Beneficiaries.  After giving credit for the value of the UK Estate which HMRC would take over, the shortfall of £1,347,483 (ie £2,395,390 less £1,047,907) or £1,601,860 (£2,649,767 less £1,047,907) [4] would fall on the Irish Beneficiaries jointly and severally.  Even assuming equal sharing of such burden by the 3 Irish Beneficiaries, each of them would have to bear £449,161 or £533,953 for the UK IHT, either of which is significantly greater than what they would have to shoulder if the UK IHT be paid out of the Estate and which obviously includes the UK IHT chargeable on the distributions to those of the Beneficiaries who are immune from enforcement actions by HMRC due to their locations (i.e. the 1^st and 8^th defendants).

24. The Executor, mindful of another principle in trusts law that in the absence of some provision in the trust instrument to the contrary, a trustee must act even‑handedly as between beneficiaries of the same class and treat them equally on the basis that they enjoy equal rights, interests and expectations,[5] is therefore concerned that non‑payment of the UK IHT by the Estate would cause the Irish Beneficiaries to bear more than their fair share of the tax.

ISSUES FOR DIRECTION

25. In these circumstances, the Executor puts the following issues before the court for directions:

(1)  whether the Executor should pay the UK IHT (at the discounted amount of £1,615,000 plus statutory interest) to HMRC out of the Estate (“Payment Issue”);

(2)  if so, how such tax and interest should be borne as between the Beneficiaries, in particular, whether any such tax should be apportioned to the UK Charities whose shares are exempted from the UK IHT under ss 23(1) and 41(b) of the IHTA (“Apportionment Issue”).

THE PARTIES’ POSITIONS

26. At this point, without going into their detailed reasons, the positions of the parties can be summarised as follows.

The Executor

27. The Executor, after obtaining advice from Counsel, including Leading Counsel, recommends:

(1)  that the Estate should pay the UK IHT; and

(2)  that the burden of the UK IHT should be shared by all the Beneficiaries (including the UK Charities) on a proratabasis  . 

28. The Executor’s solicitors have been corresponding with the Beneficiaries or their professional representatives to ascertain their respective positions on these issues but have not been able to obtain unanimous consent from the Beneficiaries.

The 1^st defendant

29. The 1^st defendant who is resident in the USAdoes not agree that the Estate should pay the UK IHT.  Given that the UK IHT exceeds the value of the UK Estate, the 1^st defendant is favour of ‘abandoning’ the UK Estate by not paying the UK IHT so as to avoid a “net loss” (or achieve “net gain”) to the Estate as a whole.

30. However, if the court should decide that there are exceptional circumstances warranting the payment of the UK IHT by the Estate, such liability should be shared pro rata by all the Beneficiaries (including the UK Charities) but limited to their respective interests in the UK Estate so that, insofar as the 1^st defendant is concerned, his total UK IHT liability (inclusive of interest) should be limited to his 37.69% share in the UK Estate (which is £394,980 based on the date of death value) only.

The Irish Beneficiaries (2^nd to 4^th defendants)

31. The 2^nd and 4^th defendants support the Executor’s positions on both issues.

32. The 3^rd defendant has been properly served with these proceedings but has not filed an Acknowledgment of Service. ‌Nonetheless, he has previously, by letters to the Executors and the Beneficiaries, expressed the views that the Executor should pay the UK IHT out of the Estate and then distribute the net residuary Estate in accordance with the provisions of the Will.

The UK Charities (5^th, 6^th, 7^th and 9^th defendants)

33. The UK Charities have each filed an Acknowledgment of Service, stating that they have no intention to contest these proceedings. Accompanying such Acknowledgments of Service is Mr Harris’ Affidavit, by which the UK Charities, inter alia, acknowledge their understanding that their non‑participation in these proceedings may lead to the court making an order as contended for by the Executor.

34. It is unclear whether the UK Charities have acknowledged service in person or by a solicitor as each of their Acknowledgments of Service appears to be signed by an officer on its behalf but gives the address of their said UK solicitors as the address for service. ‌The argument can be made that such Acknowledgments of Service are irregular and defective under Order 12, rule 3 in that they are not signed by a solicitor who is admitted to practise in Hong Kong,[6] if service is intended to be acknowledged by a solicitor, and they do not specify an address within the jurisdiction for the purpose of service.

35. However, what I find to be more intriguing is that despite their said express statements of having no intention to contest these proceedings, the UK Charities then contradict such statements by indicating in Mr Harris’ Affidavit that they would wish to be “formally joined in the action” if this court should rule both that the 1^st defendant be exempt from the UK IHT on the worldwide Estate and that the Executor could apportion the UK IHT to the UK Charities.  Indeed, Mr Harris’ Affidavit then goes on to advance arguments on both fact and law which the UK Charities say should lead the court to:

(1)  recognise that the Deceased was domiciled in the UK, not Hong Kong, at the time of his death and to hear this matter “as though it was sitting as a UK court”;

(2)  grant an order to allow the payment of the UK IHT in the reduced sum of £1,615,000;

(3)  order that no UK IHT should be apportioned to the UK Charities, whether or not such tax is classified as an administration expense; and

(4)  allow the Executor to be paid only its reasonable expenses and subject to the immediate provision by the Executor to the Beneficiaries of “current draft estate accounts”.

36. I am afraid I cannot and will not entertain any application by the UK Charities to be “formally joined” after I have ruled on this application.  First, the UK Charities have already been joined as the 5^th, 6^th, 7^th and 9^th defendants.  Second, they have been served with these proceedings including the Executor’s evidence setting out, and giving reasons for, the directions that it wishes to obtain on both the Payment and Apportionment Issues. ‌If the UK Charities disagree with the Executor’s proposed direction on the Apportionment Issue which affect them, the time to make submissions to the contrary is at the hearing of, and not after the court has reached its decision on, the Originating Summons.  No party should be allowed to adopt a ‘wait and see’ approach.

37. That is not to say that the court would ignore the UK Charities’ viewpoint. ‌And for the avoidance of doubt, notwithstanding the doubtful validity of the UK Charities’ Acknowledgments of Service, the Executor has reproduced Mr Harris’ Affidavit and the exhibits thereto in volume D of the Hearing Bundles and Mr Eugene Fung SC, Leading Counsel for the Executor, has specifically drawn my attention to the same.  I have read, and will take into consideration, the UK Charities’ evidence and submissions contained in Mr Harris’ Affidavit, though regrettably without any further assistance by way of submissions in court.  The only matter that I will leave out is the complaint that the Executor has not acceded to the UK Charities’ request for draft estate accounts, which is wholly unrelated to the issues on which the Executor is seeking directions.

38. Lastly, while on the UK Charities’ position, Mr Fung SC has shown me 2 emails dated 31 August and 1 September 2016 (ie after the filing and service of Mr Fung SC’s written submissions) from Mr Harris to the Executor’s solicitors in Hong Kong, complaining that the comments made in the Executor’s written submissions concerning the UK Charities’ position are “incomplete, misrepresentative, selective to the point of being deceptive, disingenuous, deliberately out of context and as a consequence it is clear that they actively seek to mislead the court” (original emphasis).  Mr Fung SC has also informed me that he has personally received messages along similar line from Mr Harris.  These are very serious allegations against solicitors and counsel and should not be made lightly without grounds, especially by someone who is an officer of the court (though not of this court).  Unfortunately, Mr Harris has not in the emails shown to me identified in what ways the Executor has tried to mislead the court.  Suffice it to repeat that the Executor has included in the Hearing Bundles, and specifically drawn my attention to, Mr Harris’ Affidavit and I have duly read it.  I do not believe there has been any attempt to mislead me, nor have I been misled.

The 8^th defendant

39. The 8^th defendant (a Hong Kong charity) has filed an Acknowledgment of Service stating that it has no intention to contest the proceedings and has not filed any evidence.

PAYMENT ISSUE

Principles

40. In opposing the direction sought by the Executor on the Payment Issue, Mr Jeremy S K Chan, Counsel for the 1^st defendant, refers to the following 4 principal propositions as a matter of English and international law established by the authorities regarding the payment of foreign tax or duty by a trustee or personal representative summarised in Whiteman & Sherry on Capital Gains Tax (5^th edition, 2014) at §34.153:

“1. If a foreign government were to bring an action in an English court, even against one of its own citizens, for the explicit purpose of enforcing payment of its claims for taxes or duty, an English court could not, and would not, entertain it. To do otherwise would be to assist a claim for the enforcement of a revenue law of another sovereign state contrary to international law ….

2. Accordingly an English court would not give leave to trustees or personal representatives to remit assets situated in the United Kingdom to overseas trustees or personal representatives if the only purpose of such remittance was to meet the revenue claim of a foreign government where such claim could not be enforced against the trustees or personal representatives in the United Kingdom.

3. However, the principle just mentioned is subject to the qualification that an English court may be prepared to give leave to remit assets situated in the United Kingdom to a trustee or personal representative resident in another country for the explicit purpose of paying tax or duty chargeable in accordance with the laws of that country in circumstances where the trustee or personal representative would otherwise commit or be a party to breaches of the law of that country or be exposed to penalties if that foreign tax or duty was not paid. In such a situation, the court would regard the personal protection of the trustees as affording sufficient justification for permitting a remittance to a foreign country, although it may be that a court would only so act where the proper law governing the trusts of the settlement or the estate of the deceased is that of the foreign country seeking to enforce its revenue law.

4.  A trustee or personal representative is entitled to be indemnified out of the assets of the trust or estate (as the case may be) situated in the United Kingdom for any foreign taxes or duty which he has paid under the law of the foreign state in question, provided that the liability to pay that tax or duty could have been enforced against him.  Such indemnification does not constitute the enforcement of foreign revenue laws, for whether or not the trustee or personal representative is indemnified does not affect the tax or duty collected by the foreign government, because, as indicated, it could always have enforced its claim.”

41. As the Executor’s position falls within neither the 3^rd nor 4^th propositions,[7] Mr Chan questions the basis upon which the Executor recommends the payment of the UK IHT out of the Estate.

42. In justifying the Executor’s position on the Payment Issue, Mr Fung SC draws my attention to §8.45 of Chapter 8 entitled “Payment by Trustees of Foreign Taxes” by C Sly & M Parker in The International Trust (3^rd edition, 2011):

“Judicial decisions suggest that, as a general rule, the courts recognise as a general principle that executors (and by analogy trustees) have a duty to pay foreign taxes if unfairness to a beneficiary would otherwise result and if payment would be consistent with the intention or presumed intention of the testator (or settlor).” (emphasis added)

43. G Thomas & A Hudson, The Law of Trusts (2^nd edition, 2010) §44.145 (under the heading “Payment required to achieve a fair and proper administration”) is to the same effect, and further points out that unfairness to a beneficiary would result where if executors in jurisdiction A fail to pay tax due in jurisdiction B, the revenue authorities in jurisdiction B may have power to enforce payment of the whole amount due against beneficiaries/assets in jurisdiction B, thereby leaving the beneficiaries in jurisdiction B bearing an unfair proportion of the tax.

44. Relying on these texts and the authorities cited therein, Mr Fung SC submits that the courts may allow executors to pay foreign taxes if (1) unfairness to a beneficiary would otherwise result and (2) payment would be consistent with the intention of the testator. ‌Mr Kerby Lau makes the same submissions for the 2^nd and 4^th defendants.

45. Mr Chan queries the relevance of ‘unfairness to a beneficiary’, a testator being free to make his will as he pleases.

46. I likewise have reservation but it is as to whether ‘unfairness to a beneficiary’ is a separate and additional condition that is required to be satisfied before an executor can pay an otherwise unenforceable foreign tax out of the estate or merely one of the factors that the court looks at in searching for the testator’s intention or presumed intention regarding the payment of such tax or duty.  According to the formulation in the passage cited in paragraph 42 above, if the testator clearly intended that unenforceable foreign tax should not be paid, the fact that a beneficiary might thereby be unfairly prejudiced would be immaterial.  However, the elevation of ‘unfairness to a beneficiary’ as an independent concurrent condition would, in the converse situation, mean that an executor would be prevented from making payment even though it was the testator’s clear intention that the foreign tax (albeit unenforceable) should be paid if non‑payment would not cause unfairness to at least one beneficiary.  I find it difficult to grapple with the idea that the absence of ‘unfairness to a beneficiary’ caused by payment could defeat an otherwise clear intention on the part of the testator that payment should be made.  A closer look at the couple of cases that are cited by the said texts as supporting this proposition appears to me to be called for.

47. The first such case is Re Hollins (1913) 139 NYS 713.[8]  In that case, an English domiciled testatrix appointed different executors for her estate in England and America.  One of the gifts made by her will was an annuity of £800 to an Austrian legatee, Countess Zichy, which gift was directed to be paid out of the American assets.  Other bequests had been made to English legatees by the testatrix.  Under English law, legacy duty was imposed upon the annuity given to the Countess.  The American executors remitted to the English executors a sum sufficient to pay the legacy duty on the annuity.  The Countess objected and contended that the American executors should have ignored the laws of England and were bound to pay the annuity over to her, free of the English duty.  Although the English courts were unable to enforce payment of that duty against the Countess because of their lack of jurisdiction over her, they had made clear that it would enforce payment of the legacy duty upon the Countess’ annuity from any property of the testatrix’s estate located in England or forwarded to England by the American executors for the purpose of paying the other legacies.  In that event, the other legatees would be compelled to pay the duty properly payable by the Countess.

48. I am unable to find in this judgment any express formulation of principle in the terms put forward by the textbook writers.  However, in overruling the Countess’ objection, the New York County Surrogate said this:

“This would result in an injustice which the courts of this country should not sanction. While it is doubtless true that this court will not aid a foreign country in the enforcement of its revenue laws, it will not refuse to direct a just and equitable administration of that part of an estate within its jurisdiction merely because such direction would result in the enforcement of such revenue laws. The court should favor such an administration of the estate here as will be conformity with the intention of the testatrix. It certainly was not the intention of [testatrix] that the bequests made by her to the English legatees should be partly confiscated in the payment of death duties imposed upon the bequests to foreign legatees. The orderly and equitable administration of the estate seems in this instance to require that the legacy duty imposed by English law upon the annuity given to the Countess Zichy by the will of the [testatrix] should be paid out of the property set apart by the executors in this country for the production of such annuity.” (emphases added)

Mr Fung SC pointed to the highlighted words as grounding the ‘unfairness to a beneficiary’ condition.  I shall come back to them in a moment.

49. Payment of an otherwise unenforceable foreign tax was also allowed in Scottish National Orchestra Society Ltd v Thomson’s Executor 1969 SLT 325.[9] There the testatrix who was born in Scotland and died a permanent resident of Sweden left assets which had an aggregate gross value of £39,000 and which were located in Scotland (£31,186), Sweden (£2,306) and Canada (£5,255).  Confirmation was granted to her executors in Scotland but the Swedish court also appointed an administrator of her estate.  One of the provisions of her will was to pay pecuniary legacies of £2,000, £1,000 and £500 “all free of Government duties” to 3 legatees resident in Sweden.  The Scottish executors remitted £16,000 to the Swedish administrator “to enable him to meet Swedish death duties” (£19,245) which was levied as a result of the testatrix’s permanent resident status.  Without this remittance, the Swedish administrator did not have enough funds in his hands and would not have paid the Swedish death duties.  After paying such duties, the Swedish administrator paid the 3 Swedish legatees out of the estate in his hands which included the Swedish and Canadian estates.  It was found (at 333) as a matter of Swedish law that if the Swedish administrator had in his hands a sum of money to pay to the Swedish legatees, and inheritance tax levied on the estate was unpaid, his legal duty was to pay the tax before the legacies.

50. An action by the non‑Swedish residuary legatees against the Scottish executors for breach of trust in enabling payment of Swedish inheritance tax out of the estate in Scotland was dismissed.  Although it was held (at 330) that the remittance would have been improper if its only purpose was to enable the Swedish administrator to pay the Swedish inheritance tax, Lord Robertson found (also at 330) that “the deceased clearly intended that the legatees should get their legacies in full, free of any Government duty that might be exigible out of them”.

51. In exonerating the Scottish executors, Lord Robertson did not refer to any perceived unfairness to the Swedish legatees if the Swedish inheritance tax were not paid.  His Lordship simply applied the provision in the will for the Swedish legatees to obtain their entitlements “all free of Government duties” and found that these legatees could not receive these legacies while the Swedish inheritance tax remained unpaid and that the Swedish administrator would have to take steps to recover the legacies from the Swedish legatees if these were paid direct to them by the Scottish executors (at 333).

52. Re Hollins and Scottish National Orchestra Society Ltd v Thomson’s Executor are the authorities cited by the textbook writers as establishing the proposition set out in the passage quoted in paragraph 42 above.  However, neither decision actually contained any express formulation of principle in such terms.  The common thread in these decisions that enabled payment of the otherwise unenforceable foreign tax was the testator’s intention or presumed intention that such tax should be paid.  In the case of Re Hollins, the unfairness to the English legatees (partial confiscation of their legacies for settlement of the legacy duty on the Countess’ annuity) no doubt played an important part in leading the court to the conclusion that the testatrix did not intend or could not have intended that to happen (which meant she intended or must have intended the Countess to bear the legacy duty on her own annuity).  However, I am personally doubtful if the words highlighted in the above quotation from ReHollins (paragraph 48 above) were intended or can be read to create a separate additional “unfairness to a beneficiary” requirement for the payment of an otherwise enforceable foreign tax by an executor or trustee   . 

53. It may at this point be instructive to turn to some instances in which the court refused to sanction payment of an unenforceable foreign tax.

54. In the South African decision in Jones v Borland 1969 (4) SA 29; [1969] 1 All SA 204 (W), the testatrix had executed 2 wills in Scotland where she was domiciled, one dealing with her assets in South Africa and the other with her assets in Scotland.  The wills appointed different executors for the 2 estates.  The net estate in Scotland proved insufficient to pay all the estate duty levied in the UK.  The testamentary executors of the South African estate applied for an order declaring whether or not part of the surplus of the South African estate should be transferred to the domiciliary executors in Scotland for payment of the outstanding estate duty which was due in the UK but which was not enforceable in South Africa.

55. Trollip J regarded the testatrix’s intention as contained in the expressed or implied terms of her wills to be decisive.  With regard to the question whether an ancillary executor, after completion of his local administration of the estate, would be obliged in law to transmit the final surplus to the domiciliary executor (which would enable the unenforceable foreign tax to be paid) or could himself distribute the same directly to the beneficiaries (without paying the unenforceable foreign tax), the judge said:

“In my view that would depend primarily upon the testator’s intention as contained in the expressed or implied terms of his will. If he intended that the surplus should be distributed or, conversely, transmitted by the ancillary executor, effect would have to be given thereto. In that regard, reverting to Lorillard’s case for a moment, I must confess that, if the will directs distribution, or, conversely, transmission of the surplus, I have the greatest difficulty in seeing how the Court can nevertheless have a discretion to order otherwise. … However, there is no need to pursue this aspect of the inquiry further, for, as will appear presently, I think that the testatrix’s wills are decisive in the present case.”

56. Trollip J inferred that the testatrix’s intention was that the surplus in South Africa should not be transmitted to the executors in Scotland but should be distributed by the South African executors direct to the heirs of the South African estate. ‌The fact justifying such an inference was that by her 2 wills, the testatrix divided her estate into 2 parts and provided for the separate administration and distribution of each part.

57. In Re Fudger (1984) 18 ETR 12, the testatrix disposed of her Scottish property by deeds of settlement (referred to in the judgment as the “Scottish will”) in favour of a church and her Canadian property by will and codicil (“Canadian will”) in favour of various friends and relatives.  By reason of the deemed domicile of the testatrix in the UK, the UK Capital Taxes Office (“CTO”) claimed capital transfer tax on her worldwide estate.  The amount of tax claimed greatly exceeded the value of the Scottish property.  If the tax were not paid out of the Canadian estate, the CTO could seize the entire Scottish estate in partial satisfaction of its claim, with the result that there would be nothing left for the church.  The executor under the Canadian will applied for direction as to whether the direction in clause 2(b) of the Canadian will to pay “my just debts, funeral and testamentary expenses and all estate, inheritance and succession duties or taxes which may be payable in connection with any property passing under this my will or any codicil thereto” required the Canadian executor to pay the UK capital transfer tax out of the Canadian estate.

58. It was held by the Ontario Supreme Court that the testatrix had clearly demonstrated an intention that each set of assets and liabilities should be dealt with separately and distinctly by making separate wills that disposed of assets which lay in Canada and Scotland separately, and appointed different executors for, and nominated different individuals or entities to benefit in, each jurisdiction.  The limiting words “in connection with any property passing under this my will ” in clause 2(b) of the Canadian will, when considered together with the opening paragraph which limited the scope of that will to “all my real and personal estate in the Dominion of Canada”, showed that the testatrix did not expressly intend to impose upon her Canadian executor the duty of paying duties other than duties in connection with any property passing under the Canadian will, which did not include a tax imposed under a foreign tax statute such as the UK capital transfer tax.  The court therefore answered the question raised by the Canadian executor in the negative.

59. In these 2 cases, the courts examined solely the intention of the testator.

(1)  In Jones v Borland, it did not appear from the judgment that any of the beneficiaries had claimed to be prejudiced or that the court had considered the fairness or unfairness of payment or non‑payment to any of the beneficiaries.  The learned authors of Chapter 8 of The International Trust suggest at §8.48 that possibly a different intention might have been inferred if there had been such a claim.  Such view appears to me to be consistent with ‘unfairness to a beneficiary’ being simply a consideration in ascertaining the testator’s intention or presumed intention.

(2)  In Re Fudger, it is noteworthy that the Scottish executor made submission that in the event that payment of the UK capital transfer tax were not made, the CTO could confiscate the entire Scottish estate in partial satisfaction of its claim, thereby leaving the church with nothing.  White J, having come to the view that the testatrix did not intend payment of such UK tax by the Canadian assets, responded to such submission as follows:

“… To construe the Canadian will in such a way as to require the Canadian executor to pay foreign taxes simply because a foreign beneficiary under a foreign will might otherwise be exposed to the payment of taxes imposed in the foreign jurisdiction, would be an indirect method of enforcing the revenue laws of the foreign jurisdiction.” (emphasis added)

The learned authors of Chapter 8 of The International Trust consider Re Fudger to be not inconsistent with either Re Hollins or Scottish National Orchestra Society, the difference in outcome being explained by the different intention presumed (see §8.50).

60. In view of the aforesaid 4 authorities, I would state the principles as follows:

(1)  Whether or not an executor can and should pay an otherwise unenforceable foreign tax out of the estate depends entirely on the testator’s intention or presumed intention as communicated expressly or impliedly by the words of his will, which raises an issue of construction.

(2)  It is unnecessary to prove, as a separate additional condition, that unfairness would be caused to a beneficiary if such tax were not paid.

(3)  Consistent with the principle of construction to be set out in paragraph 67(8) below, any such unfairness, if demonstrated, may however be relied upon to throw light on whether payment of the tax was intended by the testator, especially where the testator has not conveyed his intention one way or the other expressly so that the matter is left to be inferred.

(4)  Proof of ‘unfairness to a beneficiary’ would on the other hand be immaterial if the testator has expressed a clear intention that his executor should not pay any foreign tax that is not enforceable against him.

61. On these notes, I turn to the Deceased’s intention regarding the UK IHT, which is essentially a question of construction of the Will and the Codicil.

Law governing construction

62. As stated above, the UK Charities invite this court to hear this matter “as though it was sitting as a UK court”.  As I understand it, this means that I should apply the laws of the UK.  To this end, Mr Harris’ Affidavit includes matters of both fact and law which the UK Charities say would support a finding that the Deceased was domiciled in the UK, not Hong Kong, at the time of his death.

63. I do not find it unnecessary to investigate, let alone rule on, the Deceased’s domicile at the time of his death for the purpose of fixing the law for the interpretation of the Will and the Codicil.

64. The general rule is that a will, whether of movables or immovables, should be construed in accordance with that system of law intended by the testator.  This is presumed to be the law of his domicile at the time when the will was made but only where there is no indication to the contrary in the will.  See, eg Theobald on Wills, (18^th edition, 2016) at §§2‑046 (2^nd paragraph) and 2‑064.

65. By Clause 3 of the Will, the Deceased unambiguously chose Hong Kong law to be the law governing the construction of the Will.

Approach to construction of wills and codicils

66. The modern approach to interpretation of wills was recently considered by the UK Supreme Court in Marley v Rawlings [2015] AC 129 at [17]‑[26] and the Court of Final Appeal in Chinachem Charitable Foundation Ltd v The Secretary for Justice (2015) 18 HKCFAR 169 at [27]‑[33] and Tan Cheng Gay v Tan Choo Suan (2015) 18 HKCFAR 430 at [33]‑[38].

67. The principles that one can derive from these 3 cases can be summarised as follows insofar as Hong Kong is concerned:

(1)  The facts that wills are unilaterally created documents and that they are intended to take effect from the time of the testator’s death which may be some time after the will was executed are still very relevant to the construction of wills.

(2)  Although these features should be borne in mind when construing a will, subject to any statutory provision to the contrary, one otherwise adopts the same approach to interpreting wills as one does to interpreting contracts and other legal documents.

(3)  The aim of the interpretative process is to identify the intention of the party or parties to the document by interpreting the words used in their documentary, factual and commercial context.

(4)  One does this by identifying the meaning of the relevant words, (a) in the light of (i) the natural and ordinary meaning of those words, (ii) the overall purpose of the document, (iii) any other provisions of the document, (iv) the facts known or assumed by the parties at the time that the document was executed, and (v) common sense, but (b) ignoring subjective evidence of any party's intentions.  This is consistent with the “arm‑chair” principle (ie the court should place itself in the testator’s arm‑chair when interpreting his will).

(5)  In Hong Kong, s 23B(1) of the Wills Ordinance (Cap 30) [10] confirms that a will should be interpreted in the same way as a contract.  In particular, s 23B(1)(c) shows that “evidence”, including the “surrounding circumstances”, is admissible in construing a will.  And if one or more of the 3 requirements set out in s 23B(1) is satisfied, even direct evidence of the testator’s intention is admissible.

(6)  Hence, save where s 23B(1) applies, a will is to be interpreted in the same way as any other document, but, in addition, in relation to a will, or a provision in a will, to which s 23B(1) applies, it is possible to assist its interpretation by reference to evidence of the testator’s actual intention (e.g. by reference to what he told the drafter of the will, or another person, or by what was in any notes he made or earlier drafts of the will which he may have approved or caused to be prepared).

(7)  In interpreting a will, words must be read and understood in their context.  And the will must be read as a whole.

(8)  The resolution of an issue of interpretation of a will is an iterative process, involving checking each of the rival meanings against the other provisions of the document and investigation its practical consequences.  This iterative process may require the court to go forwards and backwards painstakingly between the various words and phrases, occurring in different parts of the document, which give rise to the problem.

The Deceased’s intention

68. Neither the Will nor the Codicil specifically mentions the UK IHT.

69. On the evidence, the Deceased knew that there would be UK IHT implications.

(1)  According to the 11.3.2004 Meeting Note, on the occasion when the Will was executed, the Deceased specifically mentioned to the original executor and trustee his worldwide assets including those in the UK.  It was then suggested to the Deceased that he might want to consult his tax advisor on the dispositions that he had made by the Will, to which he responded as follows:

“He said that since his wife died in about 1987, his accountant completed the tax return for him every year. I told him that completing income tax return every year was different from estate duty planning. However, [the Deceased] said that he has no child and no wife. His beneficiaries are his next of kin and charities. As such, he did not think that he would require the tax planning.”

(2)  Although the Deceased had declined to seek estate duty planning advice, he was well aware of the prospect of UK IHT being levied on his estate.  In this regard, at a further meeting with the original executor and trustee on 14 November 2006 (which was about a year before the Codicil), the Deceased said he was aware that “if live in UK over 17 years, inheritance tax very expensive”.  By then, he had lived in the UK for more than 17 years since his relocation back there in 1980.

70. I disagree with Mr Chan that the Deceased’s refusal to take estate duty planning advice shows that the Deceased did not care about estate duty or how such duty might impact upon or affect whom or which of the Beneficiaries.  Rather, I understand the Deceased to be saying merely that it was unnecessary for him to take steps to mitigate his estate’s liability for estate duty thereby maximising the overall amount available for distribution to the Beneficiaries, because of who the Beneficiaries were to him.  This, I think, is in fact more consistent with an intention for estate duty to be paid.  Indeed, the Deceased would have had no cause to lament about the high rate of the UK IHT if he had intended that it should not be paid.

71. With this knowledge and consistent with this mindset, by Clause 4 of the Will, the Deceased devised “all my estate … wheresoever situate” to the Executor upon trust to administer the Estate in 3 distinct stages, one after the other:

(1)  to sell call in and convert into money such estate (Clause 4(a));

(2)  to pay from the net of proceeds of sale and conversion and ready money all debts funeral and testamentary expenses and estate duty (Clause 4(b)); and

(3)  to divide what remains into 20 parts and to distribute them to each of the Beneficiaries a specified number of parts (Clause 4(c), sub‑clauses (i) and (iii) of which were subsequently revised by the Codicil).

72. The first thing to note is that the Will expressly deals with and, must therefore be presumed to be intended to deal with, all the worldwide assets of the Deceased.  The Deceased chose to describe the estate to be called in, sold and converted into money under Clause 4(a) at the first stage in terms that would certainly embrace the UK Estate.  The UK IHT would have to be paid in order for the UK Estate to be collected.  The 1st defendant’s suggestion to the Executor to ‘abandon’ the UK Estate to save on the Estate’s outlay of the UK IHT is inconsistent with the direction in Clause 4(a).

73. Second, as in many testamentary instruments, Clause 4(b) of the Will generally directs the Executor to pay, inter alia, “all … testamentary expenses and estate duty” from the net proceeds of sale and conversion and ready money of the Estate at the second stage.  These words are capable in their ordinary and natural meanings of encompassing the UK IHT.

74. Mr Chan, however, contends that “testamentary expenses” is usually not apt to describe a tax or duty levied under the laws of other countries (In re Sebba [1959] Ch 166) and that “estate duty” as used in a Hong Kong will is confined to Hong Kong estate duty, which still existed at the time when the Will was executed[11] (In re Norbury [1939] Ch 528 and In re Sebba).

75. I am afraid one cannot generalise.  The meanings of “testamentary expenses” and “estate duty” are not matters of principle but of construction of the testator’s intention as expressed in the will in which these expressions are used.

76. In In re Norbury, the testator bequeathed a sum, free of duty, to a legatee who was domiciled in Germany and who was thereby liable under German law to pay an inheritance tax on such legacy.  The legatee claimed that the expression “free of duty” in the gift of the legacy to her included freedom from the German inheritance tax.  Bennett J dismissed such claim in a very short judgment:

“An English testator must be presumed to know something about the duties the English law imposes both upon his estate and upon beneficiaries under his will when he dies; but not many of them, I suppose, know much if anything about death duties imposed by the laws of foreign countries.  Nor, I suppose, would many of them contemplate some additional burden being imposed upon their estates by a change of residence on the part of a person to whom a legacy had been given.  In the absence of authority, I hold that, where an English testator by an English will gives a pecuniary legacy “free of duty”, the only duties payable are duties imposed by English law, unless there are words in the will which make it clear that duties imposed by the law of a foreign country are to be paid thereout.” (emphases added)

77. It seems clear to me from reading the last sentence that In re Norbury turned on the court’s finding of the testator’s intention as expressed in his will, albeit the court arrived at such a construction by assuming, in the absence of evidence to the contrary, the testator’s lack of awareness of the German inheritance tax.  In this regard, there was nothing in In re Norbury to suggest that the testator had any connection with Germany; nor left any asset in Germany.  The tax in question did not arise as a result of the testator’s domicile (which appeared to be England); it was not charged on his estate or imposed against the executor. Rather, it was in the nature of a tax on the inheritor, arising as a result of the German domicile of the legatee and charged only on the gift to her.

78. In re Norbury was distinguished in In re Quirk[1941]Ch 46 which concerned the will of a British subject who stated that his domicile was in England, but who was ordinarily resident in Turkey, and who died in Switzerland leaving certain immovable property in France. ‌The question was whether a demise of that immovable property in France “free of all death duties” resulted in the French “mutation” duty payable in respect of the French property being payable out of the estate and not by the devisee   . 

79. Morton J, though expressly agreeing with Bennett J’s judgment, distinguished In re Norbury and ordered the French “mutation” duty payable in respect of the French property to be paid out of the estate on several grounds, one of which was that the testator in In re Quirk, being a man who was ordinarily resident in Turkey and owned real property in France, was more likely to have in mind duties payable in a foreign country than a testator who was resident in England and owned no property abroad.  Though this was a somewhat small indication of intention, his Lordship considered it worth mentioning.

80. In In re Cunliffe‑Owen [1951] Ch 964, the court had to construe whether a provision in an English will that directed “so much of the death duties payable … in respect of all legacies … shall be paid and discharged out of my residuary estate” extended to Union of South Africa succession duty and Province of Quebec and Dominion of Canada succession duties, all of which were imposed on the successor/beneficiary and, if paid by the executors, recoverable by them from the successor (see 975 and 978).

81. On the facts, the court determined that the taxes should fall on the legatees.  While the testator had been concerned in obtaining advice as to how to minimise the incidence of death duties on his widespread foreign interests, had he desired to exonerate the beneficiaries and throw the burden of foreign death duties on the residue, nothing would have been simpler than for him to have expressed words inserted in his will to deal with this matter (at 971).  More importantly, the testator actually went on to deal with specific types of duties, and in the specific context of that will, those specific types of duties were the only duties that the testator had in mind should be paid (at 971 to 972).

82. However, what is important for present purpose is that, after considering cases including In re Norbury and In re Quirk, Wynn‑Parry J expressed the view (at 969 to 970) that a bequest “free from death duty” 

“… may, in appropriate circumstances, be given a wide scope rather than a narrower scope by reason of the attendant circumstances, if they are sufficiently compelling, and even in the absence of express words in the will referring to duties imposed by the law of foreign countries.” (emphasis added)

83. In re Norbury and In re Cunliffe‑Owen are, in my view, clearly distinguishable on the facts.  Unlike the testator in In re Norbury who was presumed to be ignorant of the German inheritable tax imposed on the legacy to the German legatee, the Deceased was well aware of the incidence of the UK IHT due to his prolonged resident in the UK.  Unlike the testator in In re Cunliffe‑Owen, the Deceased did not implicitly exclude the UK IHT by specifically stipulating which particular duty/tax (such as Hong Kong estate duty) ought to be paid from the Estate.  Given the Deceased’s clear awareness of his estate’s liability for the UK IHT and his refusal to take estate duty planning advice to mitigate such liability, there is a strong case that his choice of the same expressions (“testamentary expenses” and “estate duty”) were intended to take on a broader meaning to include such foreign tax.

84. Thirdly and most importantly, the Deceased divided the residuary Estate, after payment of all debts, funeral and testamentary expenses and estate duty, into 20 parts for distribution to the Beneficiaries at the third and final stage.  Although he did not expressly qualify the 20 parts with the word ‘equal’, that they should be so is readily apparent to me.  While the Deceased did differentiate between the Beneficiaries, he did so only by giving them different number of parts.  I cannot discern any facts or circumstances that justify an inference that the Deceased contemplated, let alone intended, that each such part could vary in sizes and amounts in the hands of different beneficiaries as a result of the non‑payment of the UK IHT by the Estate and the location of some but not all of the Beneficiaries within the jurisdiction of HMRC.

85. In this connection, I have already set out in paragraphs 22 and 23 above the burden that would be passed to the Irish Beneficiaries if the UK IHT were not paid out of the Estate.  In that eventuality, the share that each of the Irish Beneficiaries would receive would be more than halved because they would be compelled to absorb the tax levied on the parts distributed to the 1^st and 8^th defendants. As in Re Hollins, there is nothing here to suggest that the Deceased had intended that the bequests to the Irish Beneficiaries would be partly confiscated to pay for other beneficiaries’ shares of the UK IHT.  It is particularly unlikely that the Deceased would have intended the 8^th defendant, a charity and a minor beneficiary of the Estate, to receive a windfall at the expense of the Irish Beneficiaries who are family and jointly entitled to about one‑third of the Estate.

86. For these reasons, I find it clear that the Will, construed according to the principles set out in paragraph 67 above, indicates the Deceased’s intention that the UK IHT should be paid out of the Estate.

APPORTIONMENT ISSUE

87. The key to the Apportionment Issue lies in the proper characterisation of the UK IHT. ‌And it follows from the above discussion on the Deceased’s intention with respect to the UK IHT that the tax should logically be regarded as part of the costs of getting in the overall Estate and, as such, falling on the residue generally.  That is to say, the 20 parts to be distributed to the Beneficiaries are to be divided from the residuary Estate only after payment of the UK IHT in accordance with the order of administration mandated by Clause 4 of the Will.

88. This characterisation appears to be supported by authorities.

89. In re Sebba is an instance in which foreign duties (even those imposed not on the estate or the executor but on the successors/legatees) were held to be payable out of the residuary estate as part of the expenses of getting in foreign assets and therefore within the expression “testamentary expenses”.

90. There the testator died domiciled in England.  His personal estate included shares in companies situate in Ontario, Canada, South Africa and the USA, which were part of his residuary estate.  British estate duty was payable on the estate; and Dominion succession duty and Ontario succession duty were leviable on the Canadian assets; and South African estate duty and US federal estate tax on the South African and American assets.

91. The will contained no specific directions in respect of the payment of death duties.  The South African and American duties were agreed to be payable out of the residuary estate, these being of a character resembling English estate duty (see p 173).

92. The Canadian duties were, however, succession duties imposed not on the estate or the executor, but rather only on the successors/legatees, and would thus by implication not be payable from the estate (at 173 to 175)

93. Danckwerts J started by referring to In re Norbury and In re Cunliffe‑Owen and noting that words exempting from death duties in an English will were normally confined to the duties imposed by English legislation, and did not extend to duties imposed by the laws of other countries (at 172).

94. The court further initially observed (also at 172) that it would appear from In re Cunliffe‑Owen that "testamentary expenses" was not an apt phrase to describe duties leviable under the laws of other countries but later noted (at 175) that the argument that the foreign duty ought to be treated as an expense of collecting in the assets of the estate, as raised (though not decided) by Jenkins LJ in In re Goetze [1953] Ch 96 at 111‑112 and supported by Peter v Stirling (1878) 10 Ch D 279 and In re Maurice (1896) 75 LT 415; 18 TLR 36, was not considered in In Re Cunliffe‑Owen.

95. Danckwerts J drew a distinction between a duty that is levied on the subject matter of a specific bequest and one that is imposed on an asset that falls into the general residuary estate.  None of the assets in Ontario had been specifically bequeathed but were part of the general residuary estate.  It was necessary for the executor to pay the Canadian duties in order to free the assets of the estate situate in Ontario and collect them for the purposes of administration of the estate.  Both duties were thus expenses of getting in the testator’s estate, and not expenses of getting in any asset that was the subject of a specific bequest.  It was held that the Canadian duties were payable out of the general residuary estate as part of the expenses of getting in the assets there.  ‌See 177–178.

96. Applying In re Sebba, the UK IHT is levied on the Estate.  The assets to be freed by the payment of such tax form part of the general residuary Estate.  The tax can and should therefore be regarded as an expense of getting in the Estate in compliance with Clause 4(a) of the Will and, as such, to be deducted pursuant to Clause 4(b) first before what is left is divided into 20 parts to be distributed according to Clause 4(c) of the Will as revised by the Codicil.

97. This way, all the Beneficiaries would share the UK IHT in proportion to their respective shares in the Estate.  I see no or no rational basis for limiting the Beneficiaries’ shares of the tax to their respective interests in the UK Estate, as suggested by the 1^st defendant.

98. In opposing the apportionment of the UK IHT to them, the UK Charities make the following points:

(1)  The Estate should be administered in accordance with UK law, the Deceased being domiciled in the UK at the time of his death for succession purposes.

(2)  UK law includes ss 23 and 41(b) of the IHTA, under which a charity based in the UK is exempt from the UK IHT.

(3)  The negotiation for the reduction of the UK IHT to £1,615,000 was conducted on the basis of the Executor’s assurances to HMRC that the UK Charities would not be charged with the tax, which binds the Executor.

99. Along similar line, by a letter dated 22 July 2015 to the Executor’s UK solicitors, HMRC:

(1)  stated that had the Estate been administered under the laws of the UK, s 41(b) of the IHTA would have applied and that HMRC had assumed that it was the intention that no part of the proposed payment in settlement of the Executor’s liability for the UK IHT was to be taken against the share of the Estate passing to the UK Charities; and

(2)  asked that this court be made aware that it is HMRC’s view that the share of the Estate attributable to the UK Charities should not directly or indirectly bear any UK IHT in view of section 41(b), regardless of how the tax debt is treated (or is capable of being treated) under the laws of Hong Kong.

100. I shall first deal with the question of fact as to whether the Executor has bound itself in the negotiation with HMRC not to apportion any part of the UK IHT to the UK Charities.  The evidence with which Mr Harris makes this point is the aforesaid letters dated 3 December 2013 and 22 July 2015 to HMRC by which the Executor gave HMRC the breakdown of the proposed settlement figure of £1,615,000 (see paragraph 13 above).  Mr Harris relies on the fact that there was no mention in this breakdown of any liability on the parts of the UK Charities.  The purpose of the Executor’s breakdown was to show HMRC where the proposed discount would come from.  As the UK Charities are exempt under s 23 of the IHTA, it is not at all surprising that they did not feature in the breakdown.  I am unable to see how one could turn such a breakdown into an assurance by the Executor to HMRC as to how it would allocate the UK IHT as between the Beneficiaries. Indeed, it will be seen shortly that the Apportionment Issue depends on the Deceased’s intention as expressly or impliedly communicated by the Will, to be ascertained by applying Hong Kong law.  The Executor would have no right to give any assurance regarding the administration of the Estate that is inconsistent with the Deceased’s intention.

101. That leaves the question whether this court is bound to apply IHTA s 41(b) to the administration of the Estate.

102. The issue of how an exemption from UK IHT should be treated as between exempt and non‑exempt beneficiaries was considered outside the UK by the High Court of New Zealand in McGowan v Hamblett [2007] NZLR 120 which was concerned with the exemption in favour of a spouse under s 18 of the IHTA.

103. In that case, the testator died domiciled in New Zealand.  His will stipulated that it was to be administered according to the laws of New Zealand.  There were 4 beneficiaries, the testator’s widow and 3 children from a previous marriage.  The testator had an immovable property in the UK, to which the UK IHT applied but with the widow’s share exempted.

104. The following reasoning led Asher J to the conclusion that the spouse’s exemption should not be enjoyed by the widow alone, but should be shared by the entire estate thereby also benefiting the other 3 beneficiaries:

(1)  The testator intended for his will to be construed according to the law of New Zealand ([28] & [38]).

(2)  UK law would govern the administration of the estate as it related to the UK real property but this would not include the sourcing of the payment of UK tax or the ultimate distribution to beneficiaries of the net estate after the UK asset had been realised which would be governed by New Zealand law ([37] & [41]).

(3)  The testator’s clear intention was that all expenses of any sort, including duties and taxes including UK IHT, were to be paid before division of the net residuary estate and that there should be a net equal division of the residuary estate between all 4 beneficiaries after the payment of all taxes including UK IHT.  There was no basis for inferring a qualification that in the event of a taxation exemption attaching as a matter of law to just one residuary beneficiary’s share, the exempt beneficiary’s share should itself be solely exempt form the payment of tax ([48], [50] & [54]).

(4)  As for IHTA s 41(b):

“[73] … Section 41 does not create a restraint or limitation on dispositions. It creates a rule of construction. If the will had to be construed in accordance with United Kingdom law, this New Zealand Court would be obliged to recognise the rule of construction contained with s 41 and apply it to this will. …

[74] However, a New Zealand Court approaching this will from the perspective of New Zealand law does not have to take into account s 41 of the [IHTA] as part of the factual matrix that led to the drafting of the will. There is nothing to indicate that those drafting the will had it in mind, and the plain words of cl 5 of the will require an equal division of the residue. This can only be achieved by any tax coming out of the whole of the residue.

…

[80] Under New Zealand law s 41(b) does not operate to override the clear intention of the testator. The result the English Court was bound to reach in Re Ratcliffe (deceased) is not the result that a New Zealand Court is bound to reach, s 41(b) not being part of our law. New Zealand’s general rules of construction apply, and all the residuary beneficiaries can share equally in the spouse’s exemption. This may, as Mr Patterson has pointed out, give rise to difficulties in the United Kingdom for those who administer the estate there. It may mean that more inheritance tax has to be paid out of the residue than would have been necessary if the exemption was applied only to Mrs Hamblett’s share. No doubt the United Kingdom administrators will deal with that issue in a proper and efficient manner. It does not change the interpretation of the will. The plain words prevail. All taxes are to be paid before the equal division is made, and if this involves the payment of some extra tax in the United Kingdom, that is simply a consequence of meeting the testator’s intention.” (emphases added)

105. Hamblett is indistinguishable from the present case and I respectfully adopt Asher J’s reasoning therein.

106. As in Hamblett, UK law does not govern the interpretation of the Will.  The Deceased expressly declared in Clause 3 of the Will that it should be construed in accordance with Hong Kong law, of which s 41(b) of the IHTA is not a part.

107. Clause 5 of the will in Hamblett from which Asher J inferred the testator’s intention that there should be a net equal division between all 4 beneficiaries after payment of all taxes including UK IHT read as follows:

“I GIVE the rest of my estate to my Trustees UPON TRUST to pay my debts and funeral expenses my Trustees administration expenses and any other death duties and to hold the balance UPON TRUST to divide as follows:

(a) a one quarter share for my said wife …

(b) a one quarter share for my daughter ...

(c) a one quarter share for my son …

(d) a one quarter share for my said son …”

In the present case, the effect of Clauses 4(b) and 4(c) of the Will is similarly to have the net residuary Estate divided between and distributed to the Beneficiaries only after payment of all testamentary expenses and estate duty including the UK IHT.

108. Such clear intention of the Deceased cannot be overridden by s 41(b) of the IHTA which is not part of Hong Kong law governing the interpretation of the Will.

DIRECTIONS

109. In the circumstances, I direct

(1)  the Executor to pay the UK IHT (i.e. £1,615,000 plus statutory interest thereon) out of the Estate;

(2)  the UK IHT to be borne by all the Beneficiaries in proportion to their respective shares in the residuary Estate.

110. I also order the Executor’s costs of these proceedings to be paid out of the Estate on a trustee basis and the 1^st, 2^nd and 4^th defendants’ costs to be paid out of the Estate on a common fund basis.

111. Lastly, it remains for me to thank all Counsel for their able assistance.