HONGKONG BANK TRUSTEE LTD v. JOHANEES HAREEIK AND OTHERS

1983, No. 294

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

MISCELLANEOUS PROCEEDINGS

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JUDGEMENT

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1. The plaintiff is the sole executor and trustee of the will of ERNEST AUGUST PETER CARL HARNEIK who died a resident of Hong Kong on 3rd December 1980. The will contains a number of specific legacies expressed to be "free of all duties and expenses whatsoever and wheresoever payable". By paragraph 6 of the will, the testator devised, bequeathed and appointed, the residue of his estate, which was substantial, to the plaintiff upon trust to sell, call in and convert the same into money and after payment of "all debts estate duty and executorship expenses" to hold the balance in trust for the ten defendants in equal shares. Three of the defendants are citizens of West Germany and resident there. Under German law, each of them is liable to pay inheritance tax on his legacy as a citizen of West Germany at the time of the testator's death. As the evidence of Dr. Joachim von Falkenhauser makes plain the beneficiary is the debtor of this tax and it appears from the translation of the German law that the obligation arises as a consequence of their German citizenship. A considerable portion of the residue of the estate in the form of stock and currency was held in West Germany at the date of the testator's death, but no liability for tax comes about under German law by reason of that circumstance. However, under the German law, the trustee is liable for the tax up to the time of distribution, which I take to mean that the tax may be recovered directly from the trustee, and there would have been considerable practical difficulties in the way of bringing in that part of the estate held in Germany without first discharging the liability of the German beneficiaries. In the event the plaintiff has paid the tax directly to the West German fiscal authority.

2. Naturally enough, the German beneficiaries, who are the 1st, 4th and 5th defendants, would like to see the tax deducted before distribution of the residuary estate, so that the burden might be shared equally between all beneficiaries. The other defendants have not been represented but Mr. WONG Hon-biu and Mr. YAM Kwok-wah, the 3rd and 6th defendants respectively, have appeared in person. I have had also an affidavit from Timothy LEUNG, the 7th defendant. The attitude of all three was, and I have no doubt remains, that it would be quite unfair for their shares of the residuary estate to be reduced simply because one or more the other beneficiaries happens to be a citizen of a country where inheritance tax is imposed. After all, they do not enjoy the advantages which arise from German citizenship and which are funded, in part at least, from German taxes. The contrary view is that whilst it is conceded on authority that the tax can be neither a debt nor duty it is an executorship expense and therefore falls to be deducted from the residuary estate before distribution. The proposition, which seems to put some strain upon the language used by the testator, has been supported by Mrs. Clough in a clear and persuasive argument which had the additional merit of bringing to my notice the relevant authorities on both sides of the question. That question, I have neglected to mention up to now, is to be decided according to the Law of Hong Kong.

3. It is said that the cases which come close to the point are to the effect that the payment of foreign tax or duty is to be treated as an expense of getting in the estate, an exception being where the foreign impost is levied upon specific chattels as In re Scott ⁽¹⁾. The more reason to do so, it is said, if the tax cannot be avoided by the trustee or executor because there are assets within the foreign jurisdiction, as in the present case, which cannot be recovered unless the tax is paid. But in none of the cases cited did the tax arise as an incident of citizenship or residence, nor was it expressed to be the debt of the legatee. In Peter v Stirlin ⁽²⁾ the tax or duty was payable by reason of assets being within the jurisdiction and was deemed to be the debt of the testator. The same was true of In re Maurice ⁽³⁾. The observations of Jenkins L.J. In re Goetze ⁽⁴⁾ derive from these earlier decisions and pertain to circumstances in which Canadian duty was levied upon assets situate in Canada. In any event his remarks were obiter not leading to any firm expression of opinion. But to my mind it is important to note that they were not intended to apply either to the case of a specific gift of property or to "a gift to a legatee domiciled or resident abroad which attracts duty in the hands of the legatee under the law of his or her domicile or place of residence" ⁽⁴⁾. In re Sebba ⁽⁵⁾ was another case in which the tax or duty was incidental to the physical presence of the assets within the foreign jurisdiction, as was In re Blake Deceased ⁽⁶⁾. In the latter decision Dixon J was also at pains to point out that he was not dealing with a personal tax payable by the beneficiary on succession by reason of his nationality.

4. Save for one I do not intend to review the other authorities cited which, had she made good her argument in other respects, I would have accepted that Mrs. Clough was able to distinguish. The case to which I do refer is In re Norbury (Deceased) ⁽⁷⁾. In that case the beneficiary was a German national resident in Berlin who became liable under German law to pay an inheritance tax. It does not appear that the executor was liable up to distribution; nor was it the case that any assets were in Germany. It was not argued that the tax was a testamentary expense. Even so the short judgment of Bennett J seems apt to the present circumstances. I cite it in its entirety.

"          I am told that there is no direct authority upon the question raised for decision by the summons now before me. The point is not covered by the decision of the Court of Appeal in In re Scott ⁽¹⁾. 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 out of his estate in respect of the legacy 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."

5. For my part I can find nothing in the authorities which would compel or ever persuade me that it would be right to attribute to the testator an intention which does not appear from the language he employed and which would fly in the face of common sense. On the contrary such indications as there are point to the conclusion that a tax which falls upon a legatee by reason of residence or nationality is not to be treated as an executorship expense. That the tax is recoverable at source and circumstances permit of its enforcement are, to my mind, irrelevant considerations. My answer to the question posed is, therefore, that the tax should be borne by the 1st, 4th and 5th defendants in the proportions already calculated. Following the decision in In re Buckton ⁽⁸⁾ I make an order nisi for costs to be taxed on a common fund basis and paid out of the estate.

(1) [1915] 1 Ch. 592

(2) (1878) 10 Ch. D. 279

(3) (1896) 75 L.T. 415

(4) [1953] 1 Ch. 96

(4) [1953] 1 Ch. 96 at 111

(5) [1959] Ch. 166

(6) [1955] Irish Reports 89

(7) [1939] 1 Ch. 528

(8) [1907] 2 Ch. 406