Inheritance Tax; gifts made by attorney on behalf of deceased under power of attorney; whether gifts validly made; construction of power of attorney; whether strict construction applicable; effect on value of taxpayer’s estate if gifts invalid and reducible but not reduced by date of death or thereafter; relevance of surrounding circumstances; relevance of Prescription and Limitation (Scotland) Act 1973; whether certain gifts part of normal expenditure out of income; Inheritance Tax Act 1984 sections 5, 21, 150 and 221
THE SPECIAL COMMISSIONERS

WILLIAM C McDOWALL (Decd)
JUDITH H McDOWALL, ANDREW G McDOWALL
	JAMES W McNEILL – AS EXECUTORS	Appellants

	- and -
            
	THE COMMISSIONERS OF INLAND REVENUE 	       Respondents

WILLIAM C McDOWALL (Decd)
 MISS J H McDOWALL, A G McDOWALL, MS A HA TILSLEY,
MRS K L McNEILL, R W McDOWALL –  AS DONEES
JUDITH H McDOWALL, ANDREW G McDOWALL
	JAMES W McNEILL – AS EXECUTORS	
MRS A. H TILSLEY, MRS K L McNEILL, ROBERT W McDOWALL, 
D. HENDERSON – AS TRUSTEES OF THE McDOWALL TRUST FOR 
GRANDCHILDREN			     Appellants

	- and -
            
	THE COMMISSIONERS OF INLAND REVENUE 	Respondents

			Special Commissioners:	 J. GORDON REID QC - CHAIR
	C. BISHOPP

Sitting in Edinburgh on 22nd and 23rd April 2003

Colin Tyre Q.C. for the Appellant

Neil Davidson Q.C. for the Respondents

NOT FOR PUBLICATION

DECISION

Introduction

We are asked to adjudicate in principle upon two sets of appeals against Notices of Determination under section 221 of the Inheritance Tax Act 1984.  All the notices relate to gifts made out of the estate of the late William Crocket McDowall within seven years of his death.  The gifts were said to have been made on his behalf under a Power of Attorney.  

The first set of appeals raises the question whether the gifts were validly made, and, if not, what are the consequences.  A separate issue arises in the second set of appeals only if the first set of appeals is determined in favour of the Appellants i.e. that the gifts were validly made or fall to be treated as validly made.  That issue is whether five cash payments of £12,000 fall within section 21 of the 1984 Act (normal expenditure out of income etc).

Following sundry procedure, a Hearing took place at Edinburgh on 22nd and 23rd April 2003.  Both sets of appeals were heard together.  Colin Tyre Q.C. appeared on behalf of the Appellants in both sets of appeals and Neil Davidson Q.C. appeared on behalf of the Respondents (the “Revenue”).  Both parties lodged bundles of productions and authorities together with written Notes of Argument.  The Appellants’ productions included affidavits by Anna Tilsley, Robert McDowall, Judith McDowall, Andrew McDowall and Katherine McNeill, the adult children of the late Mr McDowall.  The terms of these affidavits were not challenged.  The authenticity and, where appropriate, the transmission and receipt of the documents contained in the bundles were not in dispute.

Facts

1.	William Crocket McDowall (“WCM”) was born in 1917.  He died on 7th April 1998 aged eighty.  WCM was a highly intelligent man who had a successful career throughout his working life.  He worked in Sudan for a number of years.  After the War he read for the Bar in England but did not practise.  He embarked upon a career in industry.  Latterly, he was Director of Personnel with ICI world wide.  His marriage to Margery Haswell McDowall, who died on 12/1/96, produced five children who survived him.

2.	WCM’s earnings during his working life were substantial.  He had a passion for Scottish Paintings and oriental rugs, which he collected from time to time.  When his children grew up, and no doubt before then too, he was in the habit of making regular small gifts to them of cash.  From time to time he made larger gifts or loans (which were never called up) to assist financially with some particular transaction or event such as the deposit on a flat, the payment of solicitors’ fees, the cost of furnishings for a house, paintings, contributing to the cost of the purchase of a motor car, the cost of car repairs, and property alterations.  These larger gifts were sporadic and were triggered by an underlying event or need.  During his lifetime, there was no conscious decision on the part of WCM to assess his income and expenditure and make gifts amounting to the sum by which his income exceeded his expenditure.

3.	WCM retired in about 1986.  He had a substantial pension from ICI, a government pension from his service overseas and income from various investments acquired over the years.  Throughout the period between his retirement and his death WCM’s income substantially exceeded his expenditure.  Following his retirement, WCM and his wife sold the family home at the Old Mill, Dunlop, Ayrshire and moved to Crossloan, Comrie, Perthshire, which had been Mrs McDowall’s family home.  The net proceeds of sale of the Old Mill were in the order of £100,000.  Once they moved to Comrie,  WCM’s physical and mental condition began to deteriorate slowly.  Mrs McDowall assumed a greater role in the management of their joint affairs.

4.	On 25/8/87, WCM executed a Trust Disposition and Settlement under which he appointed two of his children, Andrew and Judith, and his son-in-law, James W McNeill Q.C. to be his Trustees.  The Trust Disposition and Settlement was not produced.

5.	WCM’s habit of making gifts to his children continued until about 1991, when he began to suffer from dementia.  Due to his condition, he did not after some point in 1991 write any further cheques.

6.	On 5/8/93, WCM granted a deed conferring a Power of Attorney on his wife, whom failing, Mr McNeill.  The deed (the “Power of Attorney”) provided as follows

“I WILLAM CROCKET McDOWALL, residing at Crossloan, South Crieff Road, Comrie Perthshire, PH6 2HJ CONSIDERING THAT I am in advancing years DO HEREBY APPOINT my wife MRS. MARGERY HASWELL McDOWALL, residing with me at Crossloan, South Crieff Road, Comrie, aforesaid whom failing by reason of her predecease my son-in-law JAMES McNEIL, residing at Twenty eight Kinsburgh Road, Edinburgh, EH12 6DZ as my Attorney from the date hereof with the powers specified in the Schedule annexed and signed as relative hereto, to be exercised in her name as my Attorney on my behalf DECLARING that all acts of and deeds granted by the said Mrs. Margery Haswell McDowall, whom failing the said James McNeil as my Attorney in exercise of the powers shall be binding on me as if they were my acts or deeds granted by me: IN WITNESS WHEREOF…………….

SCHEDULE of POWERS

1	To open, operate and overdraw any account in my name at any Bank.
2	To execute and deliver deeds and documents relating to all assets belonging to me both heritable and movable.
3	To maintain and to pay any expense in connection with my property.
4	To deposit for safe custody in any Bank or any other depository any property or document and to withdraw any property or document deposited by me or on my account.
5	To effect, pay the premiums on, alter or surrender any insurance policy.
6	To take possession of and complete my title to any interest in property.
7	To make, settle, compromise, discharge and refer to arbitration and raise, defend, compromise and settle any court action and enforce any Decree in respect of any claim.
8	To make tax returns and settle, adjust and compromise any claim for tax.
9	To attend and vote, in person or by proxy, at any meeting of any company or corporation in respect of any investment and to exercise any right arising from it.
10	To appoint a Solicitor, Accountant and other professional advisers.
11	To buy, lease, sell and otherwise deal with any interest in any property both heritable and moveable.
12	To make, vary and dispose of investments.
13	To borrow and grant securities for any sum including securities over heritable property owned by me.”

7.	At or about the same time, WCM’s wife granted a similar Power of Attorney in his favour.  This deed was not, however, produced.

8.	By about 1993, WCM had an annual income of almost £66,000.  By about 1997/1998, this had risen to almost £94,000 per annum.  In  about 1995, WCM moved to a residential nursing home, known as Bonnington House, 205-207 Ferry Road, Edinburgh, where he resided until his death.  The annual fees charged by the Nursing Home were about £40,000.  WCM also incurred miscellaneous charges of about £2,000 to £3,000 each year.  According to the Inventory of WCM’s estate (referred to below) Mrs McDowall made gifts on his behalf as his attorney, namely a cash payment on or about 28/3/95 to each of their children of £1200.

9.	By about 1996, WCM’s condition had deteriorated and he was no longer capable of managing his own affairs.  Following the sudden and unexpected death of WCM’s wife on 12/1/96, Mr McNeill assumed responsibility for the management of WCM’s financial affairs.  He began to acquaint himself with WCM’s financial circumstances.  He kept a careful account of his intromissions with WCM’s estate as set out in R/6 which is in Mr McNeill’s own hand.  At that stage, there were in WCM’s name two accounts with the Bank of Scotland.  One was an interest bearing cheque account, styled “Chequeplus Account”.  The other was an interest bearing deposit account styled “Premier Investment Account”.  These accounts had been in operation since at least 1993.  Until her death, they were in the joint names of WCM and his wife.  From time to time, funds were transferred from one account to the other, generally from the current account to the deposit account.  The details of the inter account transfers are set forth in R/2-5.

10.	When he began acting under the Power of Attorney, Mr McNeill was conscious of the IHT Regime.  He was concerned to do what was best for WCM and WCM’s family.  He was asked by the family to consider what, if anything, should be done with WCM’s property.  There was a considerable quantity of valuable oriental rugs, jewellery and paintings at Crossloan.  For various reasons, it was desirable that these items be moved.  A family meeting took place in Birmingham in April 1996.  Mr McNeill brought some of these various items to the meeting and they were, by agreement, distributed among WCM’s children.  The paintings were also similarly distributed among the five branches of the family.  A further family meeting was held at Edinburgh in June 1996.

11.	By April 1996, Mr McNeill had formed the view that significant amounts of surplus cash had been building up over the previous 3-5 years.  In a Memorandum dated April 1996, he stated I intend to reinstate the systematic approach which Billy and Margery had to small gift payments to children, spouses and grandchildren.   He was at all times concerned to be scrupulously fair to all and was meticulous in his approach to the management of WCM’s estate.  He formed the view that it was inconceivable that WCM would ever require all the income he was then receiving.  He took the decision to reinstate the system of making small gifts to family members at Christmas and birthdays.  He proceeded on the basis that by virtue of the Power of Attorney, he was being put into the position WCM would have been in had he been capable of managing his own affairs.  He also considered that a larger cash gift could be made to each of the five branches of the family.  He had examined bank statements in relation to the above mentioned accounts.  He correctly took the view that the deposit account had been growing steadily over the years being fed partly by surplus cash from income receipts in the current account.  In a letter dated 6/1/97, Mr McNeill stated inter alia  Having now had a year to observe his financial affairs, it is perfectly clear that, over the years since his mental health started to decline, even with his pension alone, there must have been a very significant imbalance of income over expenditure, which I am sure, had he been more active, he would have passed on to the children.  In broad terms, if one deducts Bonnington charges and reinstates a moderate amount for living expenses, household maintenance etc the amount presently at credit of the Premier Bonus Account probably represents in the main that imbalance.  I am now in the process of distributing a significant part of that account whilst leaving a meaningful balance against unexpected eventualities.

12.	Mr McNeill, as attorney, made a commitment regarding future expenditure, namely to distribute a substantial part of the excess of WCM’s income over the amount required for his maintenance (making due allowance for unforeseen circumstances) equally among WCM’s five children.  Between about January 1997 and March 1997 a payment of £12,000 was made by Mr McNeill, by cheque drawn on the current account, to each of WCM’s five children.  Mr McNeill, who by this time was very familiar with WCM’s financial circumstances, was then and subsequently of the view that these payments were made out of retained income which had not yet been invested elsewhere.  These payments were subsequently recorded in the Inventory of his Estate as being paid out of income.  After allowing for these and all other gifts, WCM was left with more than sufficient income to maintain his usual standard of living.  The gifts listed in the second column of the list attached to the Inventory Form A3(A/2) referred to below were regarded  by Mr McNeill as having been made by him as attorney out of WCM’s income, taking one year with another.  The payments of £12,000 to each of the five children in 1997 demonstrated that the commitment was being implemented.

13.	WCM died on 7/4/98. On 6/10/98, Messrs Miller Hendry, Solicitors, Perth, submitted an Inventory (Form A3) (production A/2) of the deceased’s estate to the Capital Taxes Office, Edinburgh.  The Inventory disclosed that WCM’s total estate for the purposes of confirmation was £360,519.14.  The Inventory further disclosed that WCM made gifts within the period of seven years prior to his death totalling £752,495.  Exemptions were claimed in respect of five annual payments of £3000 each, a £2000 charitable gift, and gifts out of income amounting in total to £130,850.  The remaining gifts (most of which had also been made by Mr McNeill) amounting to £604,645 were accepted to have constituted chargeable transfers and inheritance tax was calculated and paid accordingly.

14. The Capital Taxes Office issued a Notice of Determination to each of the                    Executors on 9/6/00 determining that the gifts made by the Attorneys acting under the Power of Attorney are not deductible from WCM’s estate in determining the Inheritance Tax thereon.  The Capital Taxes Office also issued Notices of Determination to each of the Executors, to the recipients of the five gifts of £12,000 referred to in paragraph 13 above and to the trustees of the McDowall Trust for Grandchildren on 25/2/02, that the said five gifts were not exempt transfers within the meaning of section 21 of the Inheritance Tax Act 1984.  At no time has any person interested in WCM’s estate challenged the validity of the gifts made by Mr McNeill as Attorney.  At the time of WCM’s death, there was no reason to believe that any person interested in his estate might take action to have any of the gifts set aside on grounds that the attorney did not have power to make them.  WCM, had he been fully capable of managing his affairs, could competently have made any and all of these gifts.  He did not, however, by reason of his physical and mental condition, ratify the making of any of them.  

Discussion of Evidence

We found Mr McNeill to be a wholly credible and reliable witness.  It is within our knowledge that he is a distinguished practitioner at the Bar in Scotland, well versed in Tax and Trust Law.  It was obvious to us that throughout his tenure as attorney he took great care in his administration of WCM’s affairs and was scrupulously fair in his distribution of funds to members of WCM’s family.  It was plain that during his period of administration he was well aware of the detail of WCM’s finances, his capital, income, and needs.  He gave a great deal of thought to the matter and formed the view that the gifts he made were made out of income, and that he was reinstituting the pattern of making gifts which WCM had adopted before he granted the Power of Attorney.  We attach considerable weight to these views, and cannot reject them lightly.  

With reference to finding-in-fact 12, we have noted Mr McNeill as stating in his examination in chief, with reference to the five payments of £12,000 that he intended these to be the last large gifts; and that thereafter there would be small gifts at birthdays and Christmas.  At a later stage in his evidence he stated that if income was left over he would have divided it five ways, though leaving a balance for contingencies; and that he would have continued to monitor income building up.  In cross, he accepted that, in the past, the larger gifts made by WCM had been sporadic and for a particular purpose.  He was not asked about the £12,000 payments in cross; he was not re-examined.  Although it is not entirely clear, we think that the thrust of Mr McNeill’s evidence was that he did not intend to let WCM’s surplus income build up again as it had done in the past, and that when he was completely satisfied that there was a substantial excess of income over expenditure, he would distribute this excess or a substantial part of it among WCM’s five children, although he did not think that these distributions would be as large as the payments of £12,000.  

We should also record that we have incorporated the parties’ Statement of Agreed Facts into our own factual findings.  Mr Tyre proposed a number of additional findings of fact.  Most of these were not challenged and we have taken account of these in our narrative of the facts.

Submissions

Mr Tyre submitted that whether the gifts were validly made did not matter because they were reducible and not void as WCM could have ratified them.  He cited Alexander Ward & Co Ltd v Samyang Navigation Co Ltd 1975 SC(HL) 26 at 47, 51-52, Callendar v Callendar 1975 SC 183 at 191,195, 201,205 and 210, Colquhoun’s Trs. v Marchioness of Lorne’s Tr. 1990 SLT 34, Morgan Guaranty Trust Co v Lothian Regional Council 1995 SLT299 at 304K and 309C and General Property Investment Co Ltd v Matheson’s Trs 1888 16R 282 at 290.  As they had not been reduced, and it was no longer open, due to the elapse of more than five years, to challenge the validity of the gifts, they must therefore be regarded as validly made.  The subject matter of the gifts had become part of the estates of the donees.  They were not part of WCM’s estate.  He also relied on section 150 of the 1984 Act.  If it were necessary to consider the validity of the gifts, then the Power of Attorney, clause 11, properly construed in the light of the non commercial factual background, gave the attorneys power to make gifts.  He referred us to Reardon Smith Line Ltd v Yngvar Hansen-Tangen 1976 1 WLR 989 at 997 C, Investors Compensation Scheme Ltd v West Bromwich BS 1998 1 WLR 896 at 912H, Reckitt v Barnett Pembroke & Slater Ltd 1929 AC 176 at 182, Bryant Powis & Bryant v La Banque du Peuple 1893 AC 170 at 177D’s Curator Bonis, Noter 1998 SLT 2 at 4K-5B, IRC v McMillan’s CB 1956 SC 142 (some of these authorities were on Mr Davidson’s list and Mr Tyre referred us to them to distinguish them) and Burn’s CB v Burns’ Trs 1961 SLT 166.  He submitted that there was an analogy between the powers of a curator bonis and the powers of attorney.  Bryant was not or was no longer good law.  The five cash gifts fell within section 21 of the 1984 Act.  He adopted the analysis of Lightman J in Bennet v IRC 1995 STC 54.  The evidence disclosed an established pattern of gifts out of income for many years.  Finally, Mr Tyre reminded us that when WCM became incapable of managing his own affairs, the Power of Attorney continued to have effect by reason of section 71 of the Law Reform (Miscellaneous Provisions) (Scotland) Act 1990.

Mr Davidson, on behalf of the Revenue, submitted that a Power of Attorney should be strictly construed.  He referred us to Reckitt  in the Court of Appeal 1928 2 KB 244 at 268 and 269 as well as the House of Lords Report at 183 and 195, Bryant at 177, Bowstead on Agency 17th Edition at section 3.010, and to BCCI v Ali 2001 1 AER 961 at 975, Bank of Scotland v Dunedin Property Investment Co Ltd 1998 SC 657. There was no express provision for gifts.  The eiusdem generis rule should be applied; there was thus no basis for reading into the words otherwise deal a power to make gifts however large or small.  The Power of Attorney read as a whole was concerned with the deceased’s normal business affairs, not his whole affairs.  The gifts made by the attorneys were all invalid and therefore immediately before his death WCM had an unanswerable claim for repayment of all the gifts.  Such a right was part of WCM’s property to which he was beneficially entitled immediately before his death -1984 Act section 5(1) and section 272.  It did not matter that nobody had actually challenged or would challenge the gifts.  Moreover, the Appellants had not discharged the onus of establishing a settled pattern of large gifts to bring the five gifts of £12000 within section 21 of the 1984 Act.  Making gifts at Christmas and birthdays was something most people did.  The analysis of section 21 in the 1984 Act in Bennett was accepted.  However, the larger gifts had no pattern but were sporadic and always had some special event or transaction as the underlying basis for making the gift.

Decision

Proper Construction of the Power of Attorney.

In our opinion, a power of attorney falls to be strictly construed (Reckitt at 1928 2KB 269)  This is presumably because the powers delegated by the principal are assumed to be no greater than necessary for his purposes, and that the powers a principal needs to grant will be the subject of express statement or necessary implication.  Reckitt concerned the question whether a power of attorney included a power to draw cheques on the principal’s bank account in order to pay his own debts.  The Court of Appeal by a majority, Russell J dissenting, held that it did having regard to the terms of a letter written by the principal to his bankers.  The House of Lords reversed the decision and adopted the reasoning of Russell J (see 1929 AC at pages 183, and 195).  In the course of his judgement, Russell J said that the primary object of a power of attorney is to enable the attorney to act in the management of his principal’s affairs.  An attorney cannot in the absence of a clear power to do so, make presents to himself or to others of his principal’s property (at 268).  These words are echoed in Hamilton v Dixon 1873 1R 72, (a case with somewhat unusual facts concerning an alleged obligation to deliver pig iron) where at page 78 Lord Justice Clerk Moncrieff observed that it was too plain to require argument that in order to authorise an  agent to give away his employer’s goods without consideration, direct and immediate sanction to the individual transaction would be necessary.  Russell J was of the view that powers of attorney are to be construed strictly citing Bryant and went on to observe that where authority to do an act purporting to be done under a power of attorney is challenged, it is necessary to show that on a fair construction of the whole instrument the authority in question is to be found within the four corners of the instrument either in express terms or by necessary implication (at 269).  Bryant was a decision of the Privy Council on appeal from the Canadian Courts.  The advice of the Board was delivered by Lord Macnaghten.  The context of the case was commercial and the details of the facts are not important for present purposes.  His Lordship noted, at page 177, that it was not disputed that powers of attorney are to be construed strictly.  Bowstead on Agency 17th Edition 2001, states at paragraph 3-010 that powers of attorney are construed strictly citing Bryant.  It is also there stated that where authority is given to do particular acts, followed by general words, the general words are restricted to what is necessary for the proper performance of the particular acts; and that General words do not confer general powers, but are limited to the purpose for which the authority is given, and are construed as enlarging the special powers only when necessary for that purpose.  The words otherwise deal are general words which follow the granting of authority to buy lease or sell.  At paragraph 3-011 it is noted that although well established, the rule of strict construction is inconsistent with the doctrine of apparent authority.  However, the point is made that in non-commercial situations such as absence abroad or illness or debility, it may be right to place a duty of inquiry on the third party.  No Scottish authority was cited to us to show that Scots law has taken a different approach to construction of deeds granting powers of attorney and we therefore proceed on the basis that Scots and English law are at one on this topic.  We do not consider that Lord Hoffman (in Investors Compensation Scheme Ltd), or Lord Wilberforce (in Reardon Smith Line) had deeds granting powers of attorney in mind when laying down guiding principles for the proper construction of contracts.

Each power of attorney will be framed to meet the particular needs of the principal’s circumstances.  Many clauses may be common to most powers of attorney.  The only words in clause 11 relied upon are and otherwise deal with.  The list of powers in this clause contains the words buy, lease and sell.  Applying the eiusdem generis rule would exclude gifts.  In any event, we consider it difficult to construe a gift making power out of the word deal which to us connotes an arm’s length activity.  This seems to us to be entirely consistent with every other power which generally deals with what might be described as an individual’s business affairs.  Clause 2 of the Schedule gives the attorney power to execute and deliver deeds and documents.  Could it be said that this unqualified clause confers gift making powers?  The argument seems to us to be no weaker than the clause 11 argument.  There is here no express power within the four corners of the deed authorising the attorneys to make gifts.  It is not necessary to imply such a power.  If a general power to make gifts can be implied, it must follow that the power would be wide enough to make a gift of any value to any person including the attorney.  Implying a more restricted power raises all sorts of difficulties such as the class of donee e.g. members of WCM’s family, the nurses looking after him at the Nursing Home, close friends etc, and the amount; should the amount be restricted in some way and if so how; should it be restricted to a specific amount such as £12,000, or the excess of annual income over expenditure from time to time?  We find it impossible to imply anything of this sort into Clause 11 of the Schedule of Powers.

In our view, whether reading these clauses in isolation or in the context of the whole deed, neither clause by necessary implication confers gift making powers on the attorney.  It would have been very easy expressly to confer gift making power on the attorneys e.g. to make gifts up to a specific amount for tax planning purposes to members of WCM’s family.  Moreover, it does not assist the Appellants’ case to distinguish the authorities on the construction of powers of attorney by reference to their commercial context.  As Bowstead has, in effect, pointed out, in a non commercial context it is less important to protect the donee than a third party transacting with the attorney in good faith and for value.

Even if a more benign construction were to be adopted having regard to all the background circumstances which would reasonably have been known at the time the Power of Attorney was granted, we do not consider that this enables us to construe a gift making power out of Clause 11.  In particular, it must be remembered that when the Power of Attorney was granted Mrs McDowall became the attorney.  The cheque and deposit accounts were already in the joint names of WCM and his wife.  She could, quite independently of the Power of Attorney, transfer funds between the accounts and make gifts to family members by drawing cheques on the current account.  There was therefore no obvious need in 1993 when the Power of Attorney was executed to give the attorney gift making powers.  The fact that in the past WCM had made regular birthday and Christmas gifts to members of his family and larger gifts where there was some underlying need or reason does not persuade us that he intended to confer on his attorneys unlimited power to make gifts out of his estate of unlimited amounts, to an indeterminate class including the attorney, under any circumstances.  In our view, therefore, all the gifts listed in the Schedule to the Inventory of WCM’s estate (A/2) made by his attorneys were ultra vires.

We should add that we did not find the analogy drawn between agency and curatory to be helpful for present purposes.  We are quite prepared to accept Lord Nimmo Smith’s careful analysis in D’s Curator Bonis based upon dicta in earlier cases such as McMillan’s CB and Burn’s CB which were also cited to us.  However, in D’s Curator Bonis, Lord Nimmo Smith granted special power to the Noter to enter into a tax planning arrangement by making gifts to relatives of the ward.  This was a special power which the curator bonis would not otherwise possess.  The significance of these cases might have been different had the Court refused the Note as unnecessary.

Consequences of Invalidity

Mr Tyre argues that if the attorneys had no power to make the gifts, they were reducible and not void.  We agree.  As Mr Tyre submitted, by asking whether the principal could have ratified the invalid act of the attorney, it can be determined whether the gifts were void ab initio or voidable.  In the present circumstances, WCM could competently have ratified the making of the gifts had he been capable of doing so.  The act of the attorney or agent is void if the principal could not validly perform the act or carry out the transaction himself.  Here, there is no doubt that it would have been within the power of WCM to make the gifts which the attorneys made.  The making of the gifts cannot be void transactions but voidable ones.  The authorities cited by Mr Tyre, namely Ward, Callendar, Colquhoun, Morgan and General Property, support this conclusion.

The position therefore is that, immediately before his death, WCM had the right to recover these gifts because they were made by his attorneys acting outwith their powers.  Tax is charged on the death of any person as if, immediately before his death, he had made a transfer of value and the value transferred by it had been equal to the value of his estate immediately before his death (1984 Act section 4(1)).  A person’s estate is the aggregate of all the property to which he is beneficially entitled (section 5(1)).  Property includes rights and interests of any description (section 272).  WCM’s right to recover these gifts was part of the property to which he was beneficially entitled immediately before his death.  That right had not prescribed immediately before his death, and the fact that no steps have been taken by the executors to recover these gifts within the ensuing five years seems to us to be irrelevant.  We can, in any event, envisage difficulties over the operation of prescription as there may be persons interested in the residue of the estate who have not yet reached the age of full legal capacity.  WCM’s Trust Disposition and Settlement was not before us but it is a real possibility that part of the estate was left to grandchildren who would have an interest to challenge the gifts.  There was some general evidence from Mr McNeill that there were grandchildren who were still relatively young, although we have not found it necessary to make a finding-in-fact about the matter.

What then was the value of this right?  Mr Tyre submits that the right has no value because it plainly would never have been exercised by WCM and has not been exercised by the executors.  We cannot accept that argument.  It is rather like saying that a vintage motor car owned by a deceased has no value for inheritance tax purposes because the deceased would never have sold it as it had sentimental value; or that a loan granted by the deceased and outstanding at his death, should have no value for Inheritance Tax purposes as it would not have been called up by the deceased because it was made by him to an old friend.  Valuation of a deceased’s assets does not depend upon what he might have chosen to do with them.  We agree with Mr Davidson that immediately before his death WCM had an unanswerable claim to recover the gifts specified in the Schedule to the Inventory of WCM’s estate.  That being so, the value of WCM’s claim for recovery of the gifts must equal the value of the gifts themselves.  Section 150 of the 1984 Act does not assist the Appellants.  That section essentially deals with any chargeable transfer which the taxpayer claims has been set aside as void.  It enables tax paid to be repaid.  It is not concerned with the value of the right to have a transaction set aside.

In these circumstances, both sets of appeals fall to be rejected and it is not necessary to deal with the separate argument advanced in relation to the second set of appeals.  However, lest we be wrong to reject the first set of appeals, we shall give our views on the merits of the second set of appeals as follows.

Section 21 of the 1984 Act (Normal expenditure out of income etc)

For the avoidance of doubt, we confirm that our findings-in-fact apply to both sets of appeals.  We refer, in particular, to finding-in-fact 12 above.  Section 21(1) provides as follows:-

“Normal expenditure out of income
	21. – (1)  A transfer of value is an exempt transfer if, or to the extent that, it is shown –
(a)  that it was made as part of the normal expenditure of the transferor
and
(b)  that (taking one year with another) it was made out of his income
and
(c)  that, after allowing for all transfers of value forming part of his normal expenditure, the transferor was left with sufficient income to maintain his usual standard of living.”

Mr Tyre submitted that when money was transferred from the current account to the deposit account, it retained its character as income.  Mr Davidson submitted that it lost its character as income.  Neither counsel was able to produce authority to support their respective arguments on how income retains or loses its character as income.  Both counsel  referred us to some of the bank statements relating to the Chequeplus Account and the Premier Investment Account (R/2-5) to support their respective contentions.  These bank statements were not, however, analysed in detail in evidence or submissions. It appears to us, from our own consideration of these statements, that (i) between about August 1993 and January 1995, the amounts paid into the current account each month substantially exceeded the amounts withdrawn therefrom; all income, which was principally WCM’s monthly pension and some share dividends, appeared to be paid into the current account; (ii) during that period, the credit balance gradually increased from about £25,235 to £64,572; (iii) in January 1995, £60,000 was transferred from the current account to the deposit account; the balance in the deposit account increased from £30,043 in July 1993 to £35,788 in January 1995, due solely to the accrual of interest, and, with the addition of the £60,000, amounted to £95,788; various withdrawals and transfers back to the current account took place during that month; (iv) over the ensuing few months, sums of between £3,000 and £5,000 were regularly transferred from the current to the deposit account; (v) by March/April 1996 the current account balance varied between about £2,900 and £7,566; (vi) by the beginning of May 1996, the deposit account balance had increased to just over £106,000; (vii) between June and August 1996, various inter account transfers took place, which enabled some £30,000 to be paid out of the current account to family members, leaving the current account with a credit balance at the end of August of some £6,455 and the deposit account with a balance of £99,127; part of the deposit account balance had been enhanced by a payment in August 1996 by Drysdale Anderson of £18,000 which was lodged in the current account and immediately transferred to the deposit account; (viii) by the end of the year the current account balance was £5,448 and the deposit account stood at £102,639, (ix) on 3/1/97, £75,000 was transferred from the deposit to the current account; this was presumably, in part, to enable the five payments of £12,000 to be made; these were made from the current account between January and March 1997.  In May 1997 a further £75,000 was transferred from the deposit account to the current account; and a payment of £15,000 was made to each of the five children of WCM.  The source of that sum of £75,000 or at least £69,297 of it was the, or the balance of the, net free proceeds of the estate of Margery McDowall paid into the deposit account on 13/5/97 by the solicitors winding up her estate.  It is accepted by the Appellants that these payments of £15,000 came out of capital.  Whether the Appellants were correct to concede that all of the £75,000 was paid out of capital we need not dwell upon.  It can be seen from our analysis that the source of the five payments of £12,000 was in large measure the income paid into the current account and transferred to the deposit account from time to time, where interest accrued thereon.  

Our inclination is to conclude that the payments were made out of retained income which remained income in character rather than capital; it was identifiably money which was essentially unspent income and which had been placed on deposit, but not invested in any more formal sense.  Mr McNeill had carefully considered matters at the time and took the view that the five payments were being made out of accrued income.  It seems to us that that is a reasonable and justifiable view in the circumstances and one which we are prepared to accept.  Section 21(1)(b) is therefore satisfied.

We have already made a finding-in-fact which satisfies the requirements of section 21(1)(c); there was no dispute about this.  This leaves section 21(1)(a).

In Bennett, (which was concerned only with section 21(1)(a)), trustees were instructed by the life tenant under the trust to distribute the trust income equally among her three sons insofar as it was surplus to her financial requirements.  Delays occurred in determining the surplus available for distribution which limited the distributions made before the life tenant’s death.  The trust income varied from year to year as did the amounts distributed to the sons.  Mr Justice Lightman, sitting in the Chancery Division of the High Court, observed that there was no authority on the meaning of section 21.  He considered that “normal expenditure” connotes expenditure which at the time it took place accorded with the settled pattern of expenditure adopted by the transferor (at 58g).  He gave as examples of such a settled pattern a payment each year of 20% of all income to charity, or the assumption of a commitment regarding future expenditure, such as a deed of covenant, or supporting aged parents; there was no fixed minimum period over which the expenditure should occur (58h-j); a single payment might be sufficient if the prior commitment could be shown.  It must be established that the pattern was intended to remain in place for more than a nominal period and for a sufficient period (barring unforeseen circumstances) in order for any payment fairly to be regarded as a regular feature of the transferor’s annual expenditure.  The amount of the expenditure need not be fixed nor need the individual recipient be the same; a formula would suffice (59b).  He concluded that the evidence should manifest the substantial conformity of each payment with an established pattern of expenditure by the individual concerned (59d).  On the facts of the case before him, he concluded that the life tenant did adopt a pattern of expenditure in respect of surplus and the payments to the sons were in accordance with that pattern and were accordingly part of her normal expenditure within the meaning of section 21.  In Bennett, Lightman J held that the life tenant made a considered determination to give all her surplus income from the trust beyond what she reasonably required for maintenance to her sons; this was implemented; a pattern was thus adopted in respect of surplus income; the payments were part of her normal expenditure within the meaning of section 21.

Both parties accepted the guidance given by Lightman J in Bennett.  In our view, the pattern of payment of small gifts at birthdays and Christmas is readily distinguishable from the larger payments of £12,000 and can provide no support for establishing a pattern of payment of larger sums; nor do we consider the deceased’s habit of making gifts, including those disguised as loans, on sporadic occasions of need can help the Appellants.  However, we consider that the evidence is just sufficient to enable us to conclude that Mr McNeill, as attorney, made a commitment regarding future expenditure, namely to distribute a substantial part of the excess of WCM’s income over the amount required for his maintenance (making due allowance for unforeseen circumstances) equally among WCM’s five children.  The payments of £12,000 to each of the five children in 1997 demonstrated that the commitment was being implemented, and we are satisfied from his evidence that, but for WCM’s death, Mr McNeill would have continued to make similar, even if much smaller, payments.  The payments in issue were particularly substantial because of the build up of excess income in previous years.  The intention to make regular payments, as described and explained by Lightman J, has thus been established.  The settled pattern referred to by Lightman J has been established by the prior commitment.  There may not have been a clear formula, as Lightman J suggested, but in Bennett itself the arrangement was no more formally prescribed than to pay out the surplus of income over expenditure, as Mr McNeill intended here. We therefore conclude that had Mr McNeill been acting within his powers under the Power of Attorney, when he made these five payments of £12,000 they would have fallen within section 21(1).  However, the second set of appeals must also be rejected for the same reasons which give rise to the failure of the first set of appeals.

As these are decisions in principle, we shall not finally determine the appeals meantime but continue them for four weeks to enable parties to make procedural representations as to the final disposal of the appeals.

Summary

1	On a proper construction of the Power of Attorney, the attorneys had no power to make gifts.

2	Immediately before his death, there was vested in the late William McDowall the right to recover the gifts made by his attorneys which were reducible at his instance.  That right forms part of the property to which he was beneficially entitled immediately before his death.

3	The value of that right is the value of the gifts made outwith the powers conferred by the Power of Attorney.

4	No question of prescription or limitation or ratification arises.

5	Had the gifts of £12,000 been valid, they would have constituted part of the normal expenditure of Mr McDowall, acting through his attorney, within the meaning of section 21 of the 1984 Act.

6	Both sets of appeals therefore fall to be rejected.

7	In the light of our decision, the appeals will be continued for four weeks to enable parties to make any procedural representations as to the final disposal of the appeals.  If no representations are made within that period, the appeals will immediately thereafter be deemed to have been finally determined and automatically dismissed with no expenses being found due to or by either party.

J GORDON REID QC, FCIArb

COLIN BISHOPP

SPECIAL COMMISSIONERS

SC 3135/2001