Lau Yiu-sum v. Commissioner of Inland Revenue

HCMP000001/1983

Estate Duty Ordinance (Cap. 111), section 10A: Exemption of matrimonial home from estate duty where residence "devised or bequeathed by the deceased, on otherwise passes on his death, to or for the benefit of his spouse": Exemption held not applicable where deceased died intestate survived by a wife, concubine and eight children by the concubine.

IN THE HIGH COURT OF JUSTICE

BETWEEN

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Coram: Mr. Justice Clough in Court

Date: 18th October 1983

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JUDGMENT

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1. The appeal is under section 22 of the Estate Duty Ordinance (Cap. 111) against the assessment dated the 9th June 1983 which the Appellant objects to because it includes estate duty in respect of the deceased's residence at 92 Wellington Street, 1st Floor, Hong Kong which the Appellant claims should be exempt under the provisions of section 10A of the Estate Duty Ordinance.

2. It is desirable that I should say something about the circumstances of this case and the standing of the Appellant and therefore for that purpose I refer briefly to the background of the case.

3. The deceased was a gentleman called Mr. Lau Min who died on the 16th July 1982 intestate, survived by his wife and a concubine and 8 children of whom the Appellant is one, the 8 children being the issue of the concubine.

4. On the 3rd August 1982 the Appellant made the usual revenue affirmation preparatory to obtaining a grant of Letters of Administration in which he alleged that the wife and the concubine and the 8 children were entitled to distribution of the assets comprised in the deceased's estate. Today he suggested initially that the concubine was not recognised by the wife of the deceased and that likewise her children were not recognised as the children of an accepted concubinage. But eventually when he was pressed about this he stood by what he had said in his affirmation dated the 3rd August 1982 and I have dealt with this matter on the footing that the facts are as alleged in the affirmation.

5. The Appellant having intermeddled in the affairs of the deceased's estate although he has not yet in fact obtained a grant of Letters of Administration, is to be treated as an executor within the definition of that term in section 3(1) of the Estate Duty Ordinance and so I acceded to the application of counsel for the Commissioner that I should continue with this appeal on the basis that, for the reasons I have given above, the Appellant has sufficient standing in this matter although he may not in fact have all the powers of a duly constituted personal representative.

6. There is no issue between the parties regarding the application of s.10A(1)(a) of the Ordinance. The Commissioner concedes that the property in question was a residence owned by the deceased and otherwise within the requirements of that provision. S.10A(1)(b) is the crucial provision. It is preceded by the word "and" and so is an additional requirement for the purposes of the section. It starts with the word "which". That word is clearly referable to the property referred to in subsection (1)(a) of the section. In the circumstances of this case it is not necessary to go into any of the provisions in section 10A other than subsection (1).

7. Counsel for the Commissioner has helpfully drawn my attention to some of the definitions in the Ordinance enrich might be relevant. One of them is the very wide definition of "property" in section 3(1) as including movable and immovable property and the proceeds of sale thereof and various other descriptions of assets and also the definition of "property passing on the death" as including property passing either immediately on the death or after any interval and so on. He has rightly stressed that these definitions are, in the usual way, expressed to be applicable unless the context otherwise requires.

8. The Appellant appears in person and both counsel for the Commissioner and the court have done their best to assist him. The first five grounds of appeal are all conceded by counsel for the Commissioner and they are as follows:

Those first five grounds are all undisputed by the Commissioner for understandable reasons.

9. I understand that ground, which is really the substance of the argument advanced by the Appellant, to be in relation to this exemption, that if the relevant spouse is given or inherits on intestacy or otherwise on the death of the deceased any interest however minor or fractional in the residence of the deceased and his spouse, then the requirements of section 10A (1)(b) are met because the words in that provision include the words "or otherwise passes on his death to or for the benefit of his spouse'". My understanding of the argument is that in this particular case the wife and the concubine because they have an interest in the estate on the intestacy of the deceased are therefore in a position where they can say that the property or an interest in the property has passed on his death either to them or for their benefit.

10. The argument for the Revenue put very briefly is that nothing has passed here on the death of the intestate to or for the benefit of the spouse or the concubine. The substance of their argument is that because, of the law and the machinery of administration at the time of the death of the deceased, which is the vital time for the purposes of this provision, neither of these ladies could point to any ascertainable interest in any specific asset in the estate let alone the residence with which we are concerned. That to put it as briefly as I can is my understanding of the Commissioner's argument.

11. I have been reminded by counsel for the Commissioner of the dictum of Singleton L.J. in Littman v Barron (1951) 2 All E.R. 393 at p.398 to the effect that the principle that in the case of ambiguity a taxing statute should be construed in favour of a taxpayer does not apply to a provision giving a taxpayer relief in certain cases from a section clearly imposing liability.

12. In this case clearly the Appellant must bring himself within the exemption and if there is ambiguity or doubt regarding the application of these provisions as a question of construction there is no principle that requires the court to give him the benefit of the doubt regarding that ambiguity. Having said that I emphasise that in this particular situation I have not felt that there is ambiguity in regard to these particular circumstances.

13. In order to consider the effect of the interpretation of this provision I have to examine the rights of the spouse and the concubine in this case on the death of the intestate.

14. Before doing that I should mention that because there has not yet been any grant the effect of section 10 of the Probate and Administration Ordinance (Cap. 10) is to vest the estate in the Official Administrator. However, for the reasons I have already given I accept that the Appellant has sufficient standing for the purposes of this appeal.

15. Section 62 of the Probate and Administration Ordinance imposes a trust for sale in the case of both immovable and movable property on the death of an intestate, and gives a power to postpone sale to the personal representatives. Section 62(2) goes on to provide that out of the proceeds of sale the personal representatives are to pay all funeral and testamentary and administration expenses and debts and other liabilities.

16. The other relevant provision of the Probate and Administration Ordinance is section 68 which follows section 23 of the Administration of Estates Act 1925 and confers a power of appropriation, with the usual consents where appropriate, on personal representatives in relation to the assets of any deceased, whether he has died intestate or not. For the purposes of this case it suffices to say that the personal representative of the deceased when duly constituted will have power, on the face of it, to appropriate the residence of the deceased to one or other of either the wife or the concubine or both in the course of administration.

17. I have been told that the value of the residence is in the neighbourhood of $450,000 and the estate has been sworn at a value in the region of 1½ million dollars.

18. I now come to the relevant provisions of the Intestates' Estates Ordinance (Cap. 73) which are applicable in addition to the above provisions of the Probate and Administration Ordinance. Section 4(3) of the Intestates' Estates Ordinance provides that if the intestate leaves a husband or wife and issue, as in this case, then the residuary estate is to stand charged with the payment of the statutory legacy, which is now $50,000, to the surviving spouse and subject thereto the residuary estate is to be held as to one-half in trust for the surviving spouse absolutely and as to the other half on the statutory trusts for the issue of the intestate. The statutory trusts are contained in section 5 of the Ordinance. I need say little about them except that for the purposes of this case, where all the children of the deceased are of full age, the result is that the combined effect of section 4(3) and 5 gives them a beneficial interest in half of the residuary estate of the deceased in equal shares.

19. In conjunction with section 4(3) section 13 and the Schedule of the Intestates' Estates Ordinance are relevant. I think it is clear from the relevant operative date of the Marriage Reform Ordinance referred to in section 13, which is the 7th October 1971, and from the date of death of the testator and the apparent ages of his children that these provisions apply. The relevant provision in the Schedule is paragraph 4(3) which provides that:

"Where the intestate is at the time of his death a party to one union of concubinage and the residuary estate is held as to one half on trust for the surviving wife absolutely in accordance with subsection (3) of section 4, one third of the said half shall be held on trust to pay the income therefrom to the tsip of that union of concubinage during her lifetime."

That effectively gives the concubine a life interest in the income of one sixth of the estate which effectively comes of the half share which is given to the wife.

20. The combined effect of these provisions, on the facts before me, is that the wife and the concubine both have a beneficial interest in the proceeds of sale of the residuary estate of the deceased's estate and they are also in a position where there is a power to postpone sale conferred on the personal representatives and a power to appropriate, so that it is at least within the bounds of possibility that there might be an appropriation, certainly in favour of the wife in this case or in favour of both the wife and the concubine in respect of the residence.

21. The final and important point in relation to the Intestates' Estates Ordinance is that under section 7 of that Ordinance there is a right conferred on the surviving spouse to have chattels appropriated to her in satisfaction of the statutory legacy conferred on her by section 4(3) of the Ordinance. In passing I would mention that if my copy of the Ordinance is correct, that section does not seem to have been brought up to date in relation to the amount of the statutory legacy.

22. The importance of this provision lies in the fact that the Ordinance does not include provisions similar to section 5 and the Second Schedule of the Intestates' Estates Act 1952 giving the surviving spouse a right to require appropriation of the matrimonial home towards hex, statutory legacy. There is no such right under Hong Kong law.

23. Those then are the statutory provisions in the relevant Ordinances which enable the court to ascertain the rights of the spouse and the concubine in this case and in that context the court has to answer the question whether the wife and the concubine or one or other of them have come within the exemption conferred by section 10A of the Estate Duty Ordinance.

24. On behalf of the Commissioner reliance has been placed on the settled principle that before the administration is completed the beneficiaries or the statutory next of kin in the case of intestacy have no right to any specific asset and counsel for the Commissioner very helpfully endeavoured to cite a number of cases to me but in the end I persuaded him to accept that the law is accurately and succinctly stated in the current edition of Snell's Principles of Equity at p.337.

25. It will suffice if I cite briefly what is stated there which I apprehend to be an accurate statement of the law and is as follows:

"the general rule is that no beneficiary can assert that he has any legal or equitable interest in any of the assets which are still unadministered; for the whole right of property in them is vested in the personal representatives. The beneficiary has merely a right to require the deceased's estate to be duly administered, though this is a chose in an action which may be transmissible by will."

Certainly this right does not give rise to an interest in a specific asset.

26. The Editor of Snell points out that this rule is clearly established in the case of a person entitled to residue, which is the situation here, or to a share of residue under a will or to some or all of the estate of an intestate, but the rule does not apply to a specific bequest or devise. In the case of a specific bequest or devise the property is vested in law in the personal representatives and they can resort to it for the payment of debts but subject to this, in equity the property is in the legatee as soon as the testator dies.

27. Certainly, until the administration is completed the spouse and the concubine in this case are not in a position to assert a right to a beneficial interest in the deceased's residence. That of course, as counsel for the Commissioner has acknowledged, is not really the answer in this case because every administration, however long delayed, has to be completed at some stage and the question arises, what is the right of the wife or the widow and the concubine on the completion of the administration?

28. When I emphasise that I should also emphasise that the provisions of section 10A (1)(b) provide for the devise or bequest by the deceased or any other form of passing on his death "to or for the benefit" of the relevant spouse.

29. It is not sufficient to rely solely on the normal principles of administration to establish the proposition that a spouse has, for the purposes of this provision, no interest in a specific item of property. Looking beyond the completion of the administration, I accept that this is a situation in which the spouse or the concubine or both of them might well end up by having the residence appropriated to them. In particular the wife, having regard to the amount of her absolute interest, could well finish up by having the residence appropriated to her.

30. But the question that I have to decide is whether as at the date of death of the intestate it can be said that the residence passed "to" the wife and/or the concubine or passed "for the benefit of" the wife or the concubine? I have no difficulty when construing this provision in concluding that, on the facts before me, it cannot be said that the wife or the concubine as at the date of death of the intestate were in a position where the residence passed to one or other of them or for their benefit.

31. The intestacy legislation is such that at the date of death of the intestate the interest which was conferred upon the wife and the concubine was an interest in the proceeds of sale of the estate and they had no entitlement to the specific asset, the residence. At the very most they were at the mercy of the personal representative's discretion in exercising his power of appropriation under the Probate and Administration Ordinance and they were not in a position to compel him to vest the property in one or other of them.

32. It is quite clear in my view that the property certainly did not pass to them or either of them as it would have done in equity if it had been devised or bequeathed by the will of the deceased. Whilst I consider it would be strongly arguable that if they had been the objects of a trust of residue created by the will of the deceased, if he had made one, then the residence might have been, held for their benefit as at the death of the intestate, I find it impossible in the present circumstances to conclude that they have any interest at law or in equity which they can enforce as of right other than an interest in the proceeds of sale of the residuary estate.

33. These are fundamental principles and in my judgment they indicate that the provisions of section 10A (1)(b) are intended to apply where there is shown to be an absolute entitlement by the relevant spouse either to hold the property absolutely or to have an absolute right to the benefit of the property as the object of a trust.

34. When construing a section of this nature it is always desirable, if possible, to construe it in such a manner that all its provisions have some effect. In this section the words "or otherwise passes on his death" are clearly intended to have some operation beyond a devise or bequest by the deceased.

35. In my judgment one situation where these words would operate is on an intestacy where one spouse survives the other and there are no issue of any degree and no other person mentioned in section 4(2)(b) of the Intestates' Estates Ordinance so that for the purposes of the intestacy legislation the surviving spouse becomes absolutely entitled to the proceeds of sale of the deceased's estate. In that situation it is strongly arguable that the property is from the deceased's death held as part of his estate "for the benefit of" the surviving spouse. In my judgment that is one situation in which this provision could operate. I do not think that it is pertinent that I should explore others but it is quite clear in my view that the situation which has arisen in this case is outside the provisions of this exemption.

Representation:

Mr. LAU Yiu-sum, Appellant in person

Mr. I. Wingfield, Senior Crown Counsel for the Respondent, Commissioner for Estate Duty