YH ''l.';99 
 
 ><r(i(iKS'l'EI) TAXATKJN 01 WAIi-TIME 
 ^o"/^ INCREASES or WEALTH. 
 
 _^^ UC-NRLF 
 
 fl 
 
 MEMORANDA 
 
 suBMirrKu ur thk 
 
 150AKD OF INLAND UKVENUE 
 
 TO THE 
 
 SELECT COMMITTEE OF THE HOUSE OF COMMONS 
 
 ox 
 
 INCREASES OF WEALTH 
 
 (WAK). 
 
 PrcsenN to Parliament bv Command of His IDaietty. 
 
 LONDON: 
 
 PKIXTED AND PUBLISHED BY 
 
 HIS MAJESTY'S STATIONERY OFFICE, 
 
 To be purchased throngh any Bookseller or directly from 
 
 H.M. STATIONERY OFFICE at the following addresses : 
 
 Imperial House, Ktxgsway, London, W.C. 2, and 28, Abingdon Stkeet, London, S.W. l ; 
 
 37, Peter Street, Manchester ; 1, St. Andrew's Crescent, Cardiff ; 
 
 23, Forth Strekt, Edinbuugh ; 
 
 or from E. PONSONBY, Ltd., 116, Grafton Street, Dublin. 
 
 1920. 
 
 [Cnid. o9L] Price 6d. Net. 
 
^^^ (y { Board op Iki^a wp Rkvenur, 
 
 SoMRRgRT House, 
 
 November, 1919. 
 
 Memorandum by the Board of Inland Revenue on the 
 practicability of levying a Duty on War-time Wealth with 
 suggestions as to the form which such a Duty might take. 
 
 1. This Memorandum does not purport to discuss the question whether, on 
 
 feneral principles, it is or is not desirable to impose a duty on war-time wealth. 
 t deals with questions of principle only so far as necessary to the discussion of the 
 matters which the title of the Memorandum indicates. 
 
 2. The enquiry which the Board of Inland Revenue have recently instituted 
 into the practicability of a duty on war-time wealth is still proceeding. A first 
 survey of the field has been made but the investigation is not yet complete. The 
 object of this Memorandum is not to present a complete scheme, but to indicate 
 the main issues which are involved and possible methods of dealing with them. 
 Where solutions of diflBculties are suggested, these solutions should be regarded as 
 tentative and subject to modification as the Board's enquiry proceeds and new 
 factors are brought to light. 
 
 3. It is assumed that no tax of this character would be recommended to the 
 House of Commons unless it were shown that it could be effectively imposed and 
 collected. If the provisions of the Act imposing the duty were not carried out with 
 substantial success, the tax would be partial in operation and unequal in its inci- 
 dence, even though the scheme in theory appeared equitable as between one taxpayer 
 and another. 
 
 4. It is obvious that very serious practical difficulties have to be overcome 
 before such a duty can be effectively imposed and collected, and it may be well to 
 emphasise at once the peculiar difficulty which all taxes on capital present as 
 opposed to other forms of direct taxation. 
 
 5. The Income Tax and the Excess Profits Duty are both based primarily on 
 annual income or profit. Rents and salaries are paid in clearly defined sums, 
 require no elaborate calculation and leave little room for evasion. The profits of a 
 business are generally susceptible of accurate measurement, although there is more 
 room for evasion and greater scope for concealment of essential facts than in the 
 simpler case of rents and salaries. 
 
 6. On the other hand, a tax based on capital values involves the factor of 
 valuation. This factor is, of course, present in other taxes as well as that now 
 under consideration (especially in the Estate Duty), but in no other tax does it 
 create difficulties similar in degree. As to the value of some things, such as the 
 majority of securities quoted on a Stock Exchange, or standard goods for which there 
 is a regular market, there is little room for disagreement. But when it comes to 
 the valuation of, say, a landed estate, an interest under a settlement or the goodwill 
 of a private business, opinions will differ. This factor alone makes a tax based on 
 capital more difficult in its administration than a tax on profits or income. When, 
 moreover, one of two contrasted valuations made at the present time has to be 
 directed to a pre-war date, the difficulty is much increased. 
 
 7. But (after allowance for such considerations) a scheme conforming to the 
 general lines indicated in the following paragraphs, and containing the powers of 
 obtaining information and punishing fraud which are there mentioned, would, in 
 the Board's judgment, be effective, although the effort transcends in difficulty any 
 previous effort of taxation in this country. 
 
 Alternative methods of approaching the subject. 
 
 8. Before proceeding to discuss the form which a tax on war-time wealth 
 might take, it is desirable to examine in some detail the various methods of 
 approaching the subject. 
 
 (a7Beir-fl) Wt.StWl-101 30003/20H.8t-O.J AS 
 
 429045 
 
9. An "ideal tax' would, no doubt, seek to discriminate between various classes 
 of increases of wealth, e.g., 
 
 (a) Wealth obtained by dishonest practices, exorbitant charges or evasion 
 
 of direct taxation; 
 
 (b) Wealth obtained through the favourable situation of a particular class 
 
 of property owner, e.g., wealth obtained through the sale of ships 
 which were in the ownership of the individual at the outbreak of 
 war and whdch acquired an exceptional " scarcity " value, or through 
 the ownership of exceptional stocks of commodities which, owing to 
 restricted supply and abnormal demand, acquired such a value, e.g., 
 cotton, leather, timber; 
 
 (c) Increased wealth arising from increased earning power and alteration 
 
 of prices, illustrated by the increased value of land or the increased 
 value of the ordinary shares of great numbers of companies; 
 
 (d) Increased wealth arising from exceptional efforts and exceptionally 
 
 valuable services; 
 
 (e) Increased wealth derived from normal saving out of ordinary business 
 
 profits or other sources of income; 
 
 (/) Increased wealth derived from exceptional savings made by special effort 
 for the purpose of investment in War Loan and the like. 
 
 10. Specific differentiation of this character is too difficult to be within the 
 range of practical politics, even with the introduction of a degree of administrative 
 discretion which would be contrary to the traditional policy of this country in 
 matters of taxation. The different classes all merge into each other and the endless 
 variety of conditions in different cases renders individual distinction impossible. 
 
 11. Another Hne of approach is to suggest that allowances should be made 
 in certain specified cases, e.g., of normal and legitimate business profit, savings 
 due to economy and thrift, and losses of capiital due to the war (see Mr. Justice 
 Astbury's letter published in the Times on the 9th October, 1919) ; the whole balance 
 of the increase of wealth would then be taken by the State. 
 
 12. Losses of capital would naturally be a set-off against increases accruing 
 to the same individual, but it is impossible in practice to decide exactly what may 
 be normal and legitimate profits or to isolate savings due to economy and thrift from 
 other savings. 
 
 13. The mind of the public is chiefly addressed to the first two categories of 
 increase mentioned in paragraph 9. It is felt in particular that some favourably 
 situated traders have during the war made exceedingly large sums of " war profit " 
 by charging exorbitant prices for commodities sold either to the Government or 
 to fellow citizens; and it is perhaps this fund in particular which the popular 
 imagination would regard as especially fit for taxation. 
 
 14. It is true that owing to rising prices and other causes a very large amount 
 of increased profit has been made in business, but the whole profit gained has not 
 been retained; it has been reduced by Excess Profits Duty and Income Tax and, 
 in the case of wealthy traders. Super-tax; the balance remaining, even if allowance 
 be made for cases in which taxation has been evaded, must certainly be far less in 
 amount than many imagine. 
 
 15. Even if there were added to this sum the proceeds of capital realisations 
 by persons owning capital trading assets who sold them and went out of business 
 (instead of retaining them and making further profits in the future), the addition 
 could still only be a comparatively small part of the entire fund of increased wealth. 
 
 16. It would be an extremely difficult task to divide the total fund of increase 
 of wealth between the separate headings mentioned in paragraph 9, but a con- 
 siderable proportion falls under heading (c). In other words, a portion of the 
 increased wealth of individuals who have prospered is represented, not by excessive 
 profits which they have realised during the war, but by the increased money value 
 of assets which they have owned, that increase in value beting due to the anticipation 
 of increased earning power (as expressed in terms of money) in the future. 
 
a 
 
 17, For rumple, a shipowner will ordinarily have made during the war very 
 large profits which, even after taxation, will no doubt have increased his wealth, 
 but in addition the realisable capital value of his vessels, due to the anticipation 
 of a continued high earning power and to the pennanently increased cost of pro- 
 ducing similar asKets, normally increases his wealth tn a great<*r and it may be 
 to a nriuch greater extent. 
 
 1*8. A further section, and a very lar^ section, of the aggregate increase of 
 wealth must be ascribed to savings out of income. And still a further section is 
 due to the increased value of such non-income-producing assets oh furniture and the 
 like. (The question of making allowance as respects these classes of increase is 
 dealt with in paragraphs 29 to 39 lielow.) 
 
 19. The lioard think it right to emphasise the fact that a practicable duty, 
 if imposed, would not fall exclusively on " war profits " as generally conceived, but 
 woula have a wider sweep, and, indeed, unless it did so its yield would be t&r from 
 commensurate with the effort involved. 
 
 20. It may be convenient at this point to recall the fact that by no means all 
 property owners have enjoyed on account of the war an increase in the value (in 
 terms of money) of the property they owned. Generally speaking, while the owners 
 of material assets have benefited, the owners of fixed rights have sufTered severe 
 depreciation. For example, the wealth of the owner of land or profit-producing 
 assets (expressed in terms of money) has increased; the wealth (similarly expressea) 
 of the owner of ('onsols has diminished. Although the increase in the former case 
 may be regarded as to a certain extent nominal, as resulting only from the diminished 
 value of the unit of measurement (viz., money), nevertheless, when brought into 
 comparison with the depreciation of the value of fixed rights, it acquires relatively 
 a further meaning. 
 
 21. There is another method of approach which calls for passing mention. 
 The suggestion may be made that it is possible to take the various sources of war 
 wealth at the point at which they arise, to assess them there, and to follow them 
 into the hands of the present owners for the purpose of recovery of the duty. For 
 example, if a factory with its plant, &c., has been sold at a profit of £20,000 it 
 might be possible to impose the duty upon this profit at the point where it arose 
 and to follow the sum into the hands of its present owners (who may be, for example, 
 heirs of the vendor) and collect the duty from them. 
 
 22. At first sight this course may seem a short cut to the desired end. But 
 on investigation it proves impracticable. In the first place, it would attack only a 
 portion of the taxable fund. In the second place, a great deal of " war wealth " 
 has no doubt not come to the notice of the taxing authority and could only with 
 great difficulty be discovered at its source. If an attempt were made on these lines, 
 there would be danger lest on the one hand duty should be effectively imjx)sed a 
 second time upon those persons who have already paid war taxation, while on the 
 other hand those persons who have fraudulently evaded taxation, and those whose 
 profits have not come within its scope (e.g., where capital assets have been realised 
 at enhanced values), should escape again. Under this system also it would be 
 impossible effectively to set off losses sustained by a particular taxpayer against 
 war gains accruing to him. 
 
 23. Moreover, the attempt to distinguish " war-made wealth " as it passes 
 from hand to hand would give rise to insoluble problems. For example, where 
 profits have been paid out in the form of dividends, or where companies have been 
 liquidated and the assets distributed, the tracing of this wealth would often be 
 impossible. 
 
 24. Mr. J. A. Hobson in his recent book on " Taxation in the New State" 
 deals with the question of a duty on war-time wealth. He recognises the difficulty 
 of earmarking and weighing up the character of different types of increase of 
 wealth. He makes the general proposition that increases of wealth during the 
 war have an exceptional "ability to pay" and that this ability increases as 
 the ratio of the increase grows. He suggests that, the larger the ratio of increase, 
 the greater the presumption that, in part at any rate, the increase has come into the 
 hands of its owner as the result of fortuitous circumstances or even of culpable 
 practices, and he therefore advocates the exemption of small proportionate increases 
 of capital and the imposition of a progressive duty upon larger increases. 
 
 25. It is rather upon such lines as these that a practicable duty would appear 
 to be capable of construction. 
 
 27591 A 3 
 
General character of ths scheme suggested as practicable. 
 
 26. These considerations as a whole lead the Board to the view that the 
 practicable method of approach to the problem is to consider the aggregate wealth 
 of individuals* at the present time as compared with their pre-war wealth, and— 
 after making such allowances as may Appear necessary and practicable in order to 
 eliminate elements of increase which it is not desired to tax — to levy a duty (which, 
 it is suggested, should be graduated) upon the balance of the increase shown. 
 
 27. It is suggested, therefore, that the duty (if imposed) should primarily 
 be charged upon individuals, and should start from a clean comparison of two 
 aggregate capital values fixed at (say) 30th June, 1914, and 30th June, 1919.t 
 
 28. A duty so conceived might perhaps be most appropriately styled a War 
 Levy. 
 
 Nature and extent of general allowances to he granted. 
 
 29. It will probably be felt that an allowance should be made in recognition 
 of special efforts to effect economies and save money in furtherance of the War (over 
 and beyond the general recognition of saving to be made in the graduation of the 
 duty). The grant of a general allowance for this purpose presents no difficulty. 
 It would not, on the other hand, be practicable to discriminate between different 
 cases so as to adjust the allowance with precision to the merits of individual 
 cases or to withhold the allowance from taxpayers who might for any reason be 
 held unworthy of receiving it. 
 
 30. Another allied question also suggests itself. The point is sometimes 
 made that the contemplated duty would miss increased wealth which has been 
 gained but unnecessarily and even wastefully expended. It is inevitable that, in 
 part, it should be so (although much of this expenditure remains in the shape of 
 assets which will fall within the scope of the duty); it would not be practicable 
 to ascertain and add back the amount of an individual's unnecessary expenditure. 
 On the other hand, it will be recalled that this is not a feature peculiar to the 
 contemplated duty. Capital which might be, but is not, saved escapes also the 
 Estate Duty, and its potential produce escapes the Income Tax. Indeed, so far 
 as the duty may be looked upon as a substitute for a high future Income Tax, its 
 incidence in cases of this character is identical with that of the tax for which it 
 acts in substitution- 
 
 31. In any event, this question could arise only as regards expenditure prior 
 to the appointed post-war date to which the valuation is to be directed. This date, 
 as recently indicated by the Chancellor of the Exchequer {see footnote to para- 
 graph 27), would be a date which has already passed. 
 
 32. It will probably be felt that increases in the value of such non-income- 
 producing assets as furniture, pictures, &c. (and perhaps a house in the occupation 
 of the owner), if continuously held between the two affointed dates, should be 
 outside the scope of the duty.| 
 
 * The special questions affecting companies are referred to at the end of this Memorandum (see 
 paragraphs 100 to 103). 
 
 t Several practical reasons render it very desirable to fix dates coinciding with the middle or the 
 end of the calendar year. Attention may also be directed to the following Parliamentary Question and 
 Answer : — 
 
 House of Commons. Vdth November, 1919. 
 
 Colonel Burn asked the Chancellor of the Exchequer whether his attention has been called 
 to the possibility that the discussion now proceeding as to a levy on war gains, and the reference 
 of the matter to a Select Committee of the House, may induce potential taxpayers to attempt to 
 conceal or distribute their wealth, and that the institution of new business enterprises may be 
 hampered by the fear of this new taxation falling upon them ; and whether he proposes to take 
 any steps to deal with these matters ? 
 
 Mr. Chamberlain : If a duty be imposed upon war -time increases of wealth I should propose 
 that the amount of the duty should be computed as at a date which is now past, and by reference 
 to the circumstances then existing. Devices of the kind alluded to by my hou. and gallant Friend 
 would be ineffectual to circumvent a duty so constructed, while, on the other hand, increases of 
 wealth now arising would be entirely outside its scope. There is, therefore, no reason why the 
 possibility of such a tax being imposed at some future date should interfere with the free 
 development of business enterprise at the present time. 
 
 X This would necessarily involve in some cases differentiation of treatment of persons who realised 
 rather before, and any who realised not long after, the appointed post- war day; but such a differentia- 
 tion cannot well be avoided. 
 
93. It may also be necessary to enquire what consideration (if any) should 
 be given to the fact that the increase in the exchange value ui' certain t'ornu of 
 wealth iH merely the result of the general rise in prices. 
 
 34. The efTcct of the fall in the value of money is uiuversal. It applies to 
 the income-earner as well as to the profMirty-owner, to the person chai^eable with 
 the duty iiH well as to the perHon who«c wealth has decreased. It is suggested, 
 therefore, that the change in the value (jf money affords by itself no justincation 
 for a general allowance in determining the amount of the wealtb' subject to the 
 proposed duty. 
 
 35. Pre-war material assets have an increased present value owing to the 
 increased cost of producing similar assets at the present time. But for the present 
 j)iir[)<)s<jH such assets fall into two categories, income-producing and non-incfjme- 
 |)ro(liit:ing. 
 
 3(5. In the case of income- producing assets, the increased value is represented 
 by an inci-cased earning power, and, on the [)rinciples enunciated in paragraph 30, 
 sucii increase in value appears Uj be a legitimate subject of charge to a duty on 
 war-time increase. 
 
 37. Non-income -producing assets* (such as furniture), however, though they 
 may have an increased exchange value due to the increase in costs of production 
 and to relative scarcity, afford the owner no increased benefit in enjoyment. In such 
 cases it is suf^gested as reasonable that the post-war value of the asset, if held 
 continuously since 1914, should be taken for purposes of the duty at its value in 
 1914, so as in effect to remove such asset from the scope of the duty as proix)sed in 
 paragraph 32. Similar assets acquired during the war would be valued at the post- 
 war date at their actual cost. 
 
 38. The question of granting general allowances cannot be divorced from that 
 of the graduation of the duty. If a 100 per cent, tax were imposed, a large margin 
 to cover all accretions which it may be desired to exempt from charge would probably 
 be considered appropriate and even necessary. On the other hand, if no general 
 allowance were granted and a graduated tax never reaching 100 per cent, were 
 irriposed, the State would still take part only of the increase of wealth brought into 
 charge, and the balance left in the hands of the taxpayer might be held to contain 
 and include all allowances to which he is entitled. 
 
 39. The Board think that the best solution would probably be found to lie 
 in the combination of a graduated scale of duty with a tax-free allowance for special 
 saving. This margin would need to be considered in close connection with the 
 actual rates of duty imposed, with the object of securing that in its general effects 
 the duty would conform (as closely as circumstances permit) to the general concep- 
 tions which underlie it. 
 
 Methods of Graduation and Possible Yield of the Duty. 
 
 40. While the statistics of Income Tax combined with other sources of informa- 
 tion render it possible to estimate the aggregate income of individuals with some 
 degree of accuracy, there are in present circumstances no available statistics giving 
 any comparable assistance in framing an estimate of the aggregate wealth of 
 individuals. Moreover the principles adopted for the measurement of income do 
 not evoke a tithe of the contentions which centre round the assumptions on which 
 the measurement of capital proceeds. It is not too much to say that any enquiry 
 into movements of capital values during the period of the war, especially when 
 directed to the wealth in the hands of individuals, passes inevitably — upon some 
 fundamental ix)ints — into the region of conjecture. 
 
 41. In the " Economic Journal " of September, 1918, Dr. J. C. Stamp published 
 a non-official estimate of increase of wealth, which, though sometimes regarded as 
 conservative, gained a large measure of acceptance. He gave the figure of 
 £5,250,000,000 as his estimate of the amount which should be added to the aggregate 
 pre-war we<ilth of individuals as a whole in order to arrive at the aggr^ate wealth 
 of individuals which would be subject to, and likely to be revealed for the purposes 
 of, any general Capital Levy which might be imposed at the termination of the war. 
 
 42. This estimate, however, was made some eighteen months ago when the 
 war was still in progress, its duration uncertain, and the level of post-war values 
 speculative; In these circumstances, and seeing that the question of the possible 
 yield of the proposed War Levy is of the essence of the problem, the Board felt it 
 
 • It is not intended to include in this term such assets as trading stocks, shares in companieB 
 that are not at the moment paying dividends, hind not used for ihe purposes of production and the like 
 
 27391 • A i 
 
right to make an official investigation, and their enquiry, though approaching a 
 conclusion, is not yet complete. The present indications are, however, that the 
 figure of £5,250,000,000 is above, not below, the mark. 
 
 43. It is important to realise exactly what this figure connotes. Dr. Stamp 
 estimated first the value (expressed in terms of money) of all the property owned 
 by individuals as a whole which would have been returned for a general Capital 
 Levy just before the outbreak of war; this figure he put in the neighbourhood 
 of £11,000,000,000. Secondly, working on certain assumptions as to post-war con- 
 ditions, he suggested the increase or decrease of value which he thought might result 
 from the war, and might be reflected in returns for a general Capital Levy at the 
 termination of the war, in various classes of wealth owned by individuals; he dealt 
 separately for example with Government securities, real property, &c. As a result 
 of these adjustments he arrived at the increase of £5,250,000,000 referred to above. 
 The amount so arrived at may be described as a net figure of increase. It represents 
 the aggregate increases appertaining to those individuals whose capital wealth has 
 increased in value during the war, diminished by the fall in value of the capital 
 of those whose capital wealth has decreased. The proposed War Levy would, of 
 course, apply to individuals whose wealth has increased without taking account of 
 individuals whose wealth has decreased. Consequently a larger sum than the 
 amount representing the net increase of wealth in the hands of individuals as a whole 
 should fall potentially within the scope of the duty. 
 
 44. A further point should be mentioned. Dr. Stamp's figure relates to the 
 increase of wealth of all individuals, including the very numerous persons whose 
 wealth, being comparatively small, would probably fall below the limit below which it 
 may be decided to grant exemption from the duty. Appropriate allowance for this 
 important fact must be made in considering estimates of the actual yield which the 
 duty, if imposed, would be capable of producing. 
 
 45. It will be appreciated therefore that, before the yield of the proposed duty 
 can be estimated, it is necessary not merely to conduct an enquiry into the amount 
 of the net increase in the capital of individuals as a whole, but to estimate the 
 aggregate increase enjoyed by individuals whose capital has increased in value 
 during the war, and to arrive at conclusions as to the distribution of this increase 
 amongst individuals falling in different ranges of wealth. 
 
 46. The Board's enquiry — ^so far as an enquiry is possible in this region of 
 conjecture — extends to these questions as a whole, and estimates (subject to the 
 uncertainty of the factors involved) are being framed. These the Board hope to 
 lay before the Select Committee at an early date. 
 
 47. The possible methods giving effect to the graduation of the proposed duty 
 cannot well be approached until the basic figures of increase of wealth and of it^ 
 distribution have been estimated, and the Board would prefer to postpone their 
 suggestions upon this question until they are in a position to place their estimates 
 before the Committee. 
 
 Assessment of Married Persons. ' 
 
 48. Husband and wife must, of course, each be permitted to make separate 
 returns of their separate properties, and each to pay their separate proportions 
 of duty. 
 
 49. The question, however, arises whether, when determining the rate of the 
 duty which is to be charged upon an increase of wealth, the amount of the increases 
 enjoyed by the husband and the wife respectively should be looked at separately, 
 or whether the two increases (or it may be the increase in the one case and the 
 decrease in the other) should be looked at together. 
 
 50. The same question arises in regard to Income Tax and has in that 
 connection recently been the subject of much discussion in Parliament and elsewhere. 
 The view that, for purposes of Income Tax, it is right to aggregate the income of 
 husband and wife for the purpose of ascertaining the rate at which the tax should 
 be charged, Avas discussed and confirmed during the passage of the last Finance 
 Act through the House of Commons. The supporters of the existing provisions 
 of the law have felt that income enjoyed in common by husband and wife should 
 be regarded as a unit for determining the amount of tax payable. 
 
 51. On the other hand, for purposes of Estate Duty the property of the 
 husband and the property of the wife are looked at separately. 
 
 For Estate Duty purposes this principle is no doubt right, as on the death 
 of one of the spouses the property of the two spouses ceases to be enjoyed in common 
 and often devolves upon different lines. 
 
9 
 
 62. In the case of an exceptional war impost of the kind now under disciusion 
 (which may perhaps be looked upon from one point of view a« an alternative to a 
 heavier rate of Income Tax) these laHt-named conHideration* are not in point. The 
 duty is not levied upon the property of the huxband and of the wife a«'8ucb, but 
 is levied upon an accretion arising during the war, the inooroe from which is being 
 (in the normal case) applied to the common purposes of the family. 
 
 53. Moreover, ir the increases are looked at separately, there would be many 
 cases in which the husband enjoys an increase in the value of his wealth while tl»e 
 property of the wife (whowi investments are often of the gilt-cdffed type) has 
 depreciated. Hard.ship would arise if the increased wealth of the nusband were 
 charged in full without taking account of the decreased wealth of the wife. 
 
 54. The Board therefore incline to the view that, for the purposes of deter- 
 mining the rate at which the contemplat«»(l duty should l)e charged, tl)e increase of 
 wealth of husband and wife should l)e aggr^ated. 
 
 55. Tn nil probability cases in which taxpayers would benefit by the suggested 
 principle would greatly exceed in number cases in which they would l)e adversely 
 affected. 
 
 56. The question will also arise of making allowances from the assessment in 
 the case of persons who are married and who have dependent children. It would 
 seem that these allowances should be unvarying in amount, as in the case of Income 
 Tax, and in the case of children should be dependent on tlip children's ages. It is 
 suggested al.so that they need not extend to the wealthiest taxpayers. 
 
 Exem'ption Limit. 
 
 57. A very large proportion of the owners of capital own amounts less than 
 £5,000, and although in the aggregate a substantial part of the inciease in the 
 capital wealth of individuals is in the hands of these {lersons. the increase in a single 
 case is small, and the amount of duty which could be collected on a graduated scale 
 in these cases is accordingly limited. The Board do not think it would be practicable 
 to carry the effective exemption limit below £5,000. An important consideration 
 is that many of the very numerous persons in the lowest ranges of wealth are 
 owners of small businesses, the valuation of which presents grave practical problems. 
 
 Inheritances, Gifts and other specutl points. 
 
 58. The Board propose to deal in a separate memorandum with the question 
 of wealth which has devolved on death since the appointed pre-war date. 
 
 59. The question of gifts made during the war by taxpayers now living to 
 relatives and other persons also needs consideration. It is not improbable that 
 some, perhaps many, such gifts may have been made in large amounts in the hope 
 of avoiding taxation. 
 
 60. In general the matter might be dealt with as follows. Small gifts might 
 be ignored. Big gifts, on the other hand, should be added back to the capital of the 
 donor, the duty applicable to the portion of the capital given being recoverable 
 from the donee. 
 
 61. Various points of detail would produce difficulties in this connection 
 and would need consideration. Provision must be made as respects charitable 
 gifts, as respects sums given outright to the Exchequer for purposes connected 
 with the war, and as respects gifts made by the taxpayer between the post-war 
 appointed day to which the valuation is to be directed and the passing of the Act. 
 
 62. Apart from the questions above referred to (paragraphs 58 to 61), it will 
 be necessary to provide for a number of special matters if a satisfactory duty is to 
 be constructed. 
 
 63. The whole field has not yet been fully surveyed, but the following illu.stra 
 tions indicate .some of the pointvS to be dealt with : — 
 
 Treatment of men and dependants of men who have fought in the war. 
 
 War gratuities. 
 
 Cases in which rights to future pensions have been capitalised during 
 the war. 
 
 Cases in which liability to the duty practically synchronises with 
 liability to Estate Duty. 
 
 Protection of existing charges on property. 
 
 Reactions of the duty upon Income Tax requiring special modification 
 of Income Tax Law. 
 
 Reactions of the duty upon Increment Value I")uty and Reversion Duty. 
 
 87591 * A 5 
 
10 
 
 Valuation of wealth. 
 64 It will be recalled that the property to be valued for purposes of the duty 
 does not necessarily consist of material assets. The property owned by individuals 
 in a modern society consists sometimes of material assets, e.g., a house, sometimes 
 of rights, e.g., a lease of a house, a share in a public company, a life-tenancy under 
 a settlement, a share in the estate of a deceased person, or a current life policy. 
 
 65. It is only in the minority of cases that the process of valuation is limited 
 to the ascertainment of the value of a material asset, e.g., a house or a piece of 
 machinery : more generally it is the proprietary right of an individual — less than 
 or distinct from the absolute ownership of a material asset— the value of which 
 has to be ascertained. 
 
 Thus, for example, it will be necessary to value the assets of a private business 
 owned by an individual liable to the duty, but not the assets of a public company, 
 unless it should be decided to bring public companies as such within the scope of 
 the duty {see paragraphs 100-103 below). 
 
 It will be necessary to value interests in land owned by such individuals, but 
 not factories owned by such companies, and so on. 
 
 66. Many of the questions raised by the valuation are of obvious difficulty, 
 but war gains will seldom exist in the form of cash, and valuations of the assets 
 of taxpayers, in whatever form they may be, is an inevitable corollary of the 
 imposition of the duty. 
 
 It is not of course by any means the case that the property of all individuals 
 will require to be valued. In many cases it will be apparent without exact examina- 
 tion that no liability to duty exists. 
 
 67. Eeturns of value, as well as of sources, of wealth would require to be made 
 by the taxpayer. The Board are convinced that if the duty of the taxpayer were 
 limited to supplying information, and the onus of valuation were placed upon the 
 Board, the difficulties of working the duty would be so gravely magnified as to 
 involve the risk of a complete breakdown; in any event the collection would be 
 seriously delayed. It is imperative that — following the uniform analogy of the 
 procedure under other direct taxes including Estate Duty — the taxpayer should 
 be under obligation to make a return not merely of the sources of his wealth, but 
 also of its pre-war and post-war value. 
 
 68. It would be necessary also — -in order that assessment and collection may 
 proceed with reasonable expedition — that the taxpayer should be under obligation 
 to make payment (subject to subsequent adjustment) on the basis of his return and 
 to submit to a further assessment at a later date if his return after examination is 
 found inadequate, or in the converse case to receive repayment. It would probably 
 be felt right to charge a heavy rat« of interest on additional assessments, where the 
 original return is found to be inexcusably inadequate. 
 
 69. The value would be taken to be the price which the property would have 
 fetched if sold by a willing seller in the open market on the appointed pre-war 
 and post-war days, without any reduction on account of the assumption that the 
 whole property is to be placed on the market at one and the same time. 
 
 70. The amount of duty chargeable would depend, not on a single valuation, 
 but upon a comparison of two valuations, one in 1914 and one in 1919. It is of 
 importance to observe that in many cases a comparatively small over-valuation at 
 the first date combined with a similar under-valuation at the second date may suffice 
 to eliminate the whole taxable increase. Unless therefore the duty is to be a mere 
 subscription list, accurate checking of the valuations in all important cases is 
 essential, and this check must in the nature of things be an operation of great 
 magnitude and difficulty. 
 
 71. As regards this check a survey has been made of the ground to be covered. 
 Some of the difficulties are serious but it is believed that within adequate limits they 
 can be surmounted. The following observations are intended to deal only with some 
 of the main considerations which arise. 
 
 72. Land, Buildings, Minerals, and interests therein. — The technical staff of 
 the Land Valuation Office is available to check valuations as may be necessary. 
 
 73. There is at the present time latent in the value of dwelling houses a special 
 " scarcity " value which can be exacted by a vendor selling with vacant possession, 
 and which results only from the necessity of homeless people to secure, at any cost, a 
 home. This " scarcity " value, which is only transitory and only realisable in certain 
 conditions, should not, it is suggested, be included in the scope of the duty unless 
 
11 
 
 it has been realised. Beyond this special element of value there U, of course. aliM) a 
 genera] increase of value (which should fall within the scope of the duty), due to the 
 anticipated increase of earning jxjwer in the future. 
 
 74. It would probably be a convenience in cases of dispute as to the value of 
 land, buildings or minerals if either party had the right On ap|H»al to bring in any 
 valuation made or acquiesced in by any party interested for purposes of taxation 
 since 1000, as admissible evidence of the value at that time. 
 
 75. Farming Capital.- -If the exemption limit is fixed at or above £5,000, aa 
 has been suggested (paragraph 57), onlv the larger farmers could, in any ordinary 
 circumstances, be within the scope of tne duty. The valuation of farming capital 
 does not readily lend itself to any simple or stereotyped rules. The operation is 
 one of difTiculty, and in those cases in which it is necessary it will nee<l to be con- 
 ducted on broad lines. The Appeal Tribunal would require to include members 
 well acquainted with this industry and fitted to deal with any disputes which might 
 arise. 
 
 76. Industrial CUipital, Tntdintj (y'a/»ititl, Good-will, <fr. ; Private Firms. — 
 As has been mentioned, valuation would be necessary only in the case of private 
 businesses, unless it is decided to bring public companies, as such, within the scope 
 of the duty (see paragra|)h8 100 to 103 below). Small private businesses would 
 usually be outside the scope of the duty altogether. Many other businesses would 
 be in the ownership of persons whose wealth plainly has not increased. The valua- 
 tion of the remaining cases admittedly presents great difficulties and refpiires to be 
 dealt with on broad lines, but the difficulties can, it is considered, be surmounted. 
 
 77. Industrial Capital, Trading Capital, Goodwill, &c. ; Private Companies. — 
 The problem which arises in the case of private companies is analogous in all 
 material respects with that arising in the case of private firms, as no independent 
 criterion with regard to the value of individual holdings exists as in the case of 
 most public companies, i.e., quotation of shares on the Stock Exchange. 
 
 78. For all important cases an organisation would, in the Board's judgment, 
 be necessary for arriving in a single operation at the value of the undertaking and 
 the apportionment of that value between the respective classes of shares. It would 
 be unsatisfactory in many cases merely to attempt to agree with individual share- 
 holders, acting separately, the value of their shares; tney would often be unable 
 to furnish the information requisite to arrive at a reliable judgment. It is 
 probably unnecessary to describe in detail the required organisation; a return 
 would be called for from the company as such, and the value settled with the com- 
 pany in such conditions as to enable the several classes of shareholders to secure 
 that their individual interests were fairly dealt with. 
 
 70. Shares in Public Companies. — In the case of public companies, no diffi- 
 culty would ordinarily arise in arriving at the value of the shares forming part of 
 the wealth of individuals. The Stock Exchange quotations on the two appointed 
 days would govern the question. But in exceptional cases — e.g., of public com- 
 panies for the shares of which no effective market existed or the quotation was 
 artificial — a procedure similar to that adopted in the case of private companies 
 would be necessary, lest injustice should arise. 
 
 80. Loans, Debentures and Deposits. — These could, in certain cases, be taken 
 at face value when fully secured. Debentures quoted on a Stock Exchange would 
 be governed by the quoted price, and some other debentures and loans would require 
 analogous treatment. In principle, of course, the ultimate test would be market 
 value in each case. 
 
 81. Government and Corporation Stocks. — Normally there is a market 
 quotation for these stocks, and this quotation would govern the value. 
 
 82. Life Insurance Policies. — Surrender value would appear to be the most 
 convenient value to adopt. In the majority of cases the increase in the surrender 
 value of an ordinary life insurance policy over a period of five years is comparatively 
 small, and if all such policies still current at the appointed post-war date were 
 disregarded where the aggregate premiums paid by the individual do not exceed, 
 say. £100, taxpayers would he saved much trouble without any appreciable loss of 
 revenue. It would be necessary to require insurance companies to estimate 
 surrender values or to furnish the necessary information from which to deduce 
 those values in cases in which the value of the policy is material. Where i)olicie8 
 
 27691 A 6 
 
12 
 
 have matured between the two appointed dates, it would be disadvantageous to the 
 taxpayer to adopt surrender vahie at the pre-war date, and selling value might 
 appropriately be substituted at his option. 
 
 83. Save as respects life tenancies, reversionary interests and the like, which 
 are alluded to below, questions affecting other forms of wealth do not appear to 
 call for special mention. 
 
 Limited Interests under Settlements, &c. 
 
 84. It has been estimated that about one-seventh of the property owned by 
 individuals in this country is tied up in settlements, trusts and other legal con- 
 volutions. In these cases the wealth of individuals is represented by life tenancies, 
 vested remainders, contingent remainders and other similar interests. 
 
 85. These limited interests introduce serious practical difficulties into the 
 administration of the contemplated duty. 
 
 86. The value of interests dependent on life is largely determined by mortality 
 tables, which constitute in the nature of things an imperfect instrument of valuation 
 when applied to an individual case. The question, for example, arises how duty 
 charged by reference to such a valuation can be made to fall with reasonable fair- 
 ness if a life tenant dies earlier than mortality tables presume. 
 
 87. The Board have the whole of this question under investigation, and propose 
 to furnish a separate memorandum upon it. 
 
 Method of Payment. 
 
 88. In any ordinary tax the process of collection (as opposed to assessment) 
 presents few problems. In the duty now under consideration the question of pay- 
 ment is a matter of prime importance. 
 
 89. There are two possible extreme views : — 
 
 (I) That the duty should be always paid by instalments over a period not 
 exceeding, say, ten years. The idea underlying this would no doubt be to obtain 
 payment out of income wherever possible, and to secure for the State cash for the 
 reaemption of short-term obligations, &c., at convenient times. 
 
 There are, however, difficulties in this course. For example, when it is con- 
 sidered that heavy rates of duty may be payable by wealthy persons paying Income 
 Tax and Super-Tax at a rate approaching 10s. %d. in the £, the extent to which 
 the duty could be paid out of income is doubtful. Again, it would be difficult 
 under a general ten years instalment system to refuse claims for adjustment in cases 
 where the value of the property assessed is depreciating while the instalments are 
 still falling due; the question would then also arise whether the duty should be 
 increased where values rise. Complications might occur where persons die or give 
 their property away. Unless adequate security is given there would be serious 
 risk of loss of duty. There would certainly be a concurrent demand for the taxation 
 of various kinds of increased income enjoyed during the same period. 
 
 90. (II) The second extreme alternative is to require payment in every case 
 by lump sums. Such payment would have to be taken in kind in such forms as were 
 available, and this method, if applied indiscriminately and without relaxation, 
 would result in the State becoming owner of property of all kinds much of which 
 it would be difficult to unload. The requirement of payment in a single lump sum 
 would also be likely seriously to embarrass some owners of private businesses who 
 require as much capital as possible for financing their trade. 
 
 91. It is sometimes alleged that the collection of the duty would involve 
 realisations and borrowings on an immense scale with a consequent slump in values 
 or increase in the existing inflation, or that it would involve the State in the owner- 
 ship on a large scale of assets which it could put to no use. It is essential that the 
 provisions for collection should be so framed as to avoid injurious consequences 
 of this kind. 
 
 92. It appears desirable that the lump sum method should be used in combina- 
 tion with the instalment method where necessary, the statute prescribing the length 
 of the instalments (not exceeding ten years), and the interest thereon, and requirimr 
 the deposit of satisfactory security. So far as possible the State should retain control 
 of the method of payment and the right to pay by instalments should, it is suggested, 
 be conditional on the permission of the Board or'(on appeal) of the Board of Referees 
 referred to below. 
 
18 
 
 93. Payment would be accepted iu catjli, War Securities (at a certain pit-mium 
 above market price or at issue price, when offered for lump sum payment, provided 
 they had l>een held by the taxpayer for a i>eriod to be Hpe<ified;, trustee Becunties, 
 and such other securities as the Treasury might prescribe. 
 
 94. Some disamnt might Ix; offered for j)ronipt lump sum payment- The 
 extent of this discount would depend primarily on the question how far it is 
 considered in the public interest to secure lump sum payment, as opposed to payment 
 by instalments. The effect on the money market (owing to FM)rrowing and realisa- 
 tions) would need to be very carefully considered and profxr siifeguards ororidecL 
 
 95. It may be found desirable that the first instalment in instalment caaat 
 should be larger than the others. 
 
 96. In some cases— especially where the taxpayer is the owner of a private 
 business the taxpayer, while needing to pay by instalments, may not be in a 
 position to offer adequate security of a normal kind. To meet exceptional cases 
 of this character it would seem necessary to give the State the right to taJce powers 
 analogous to thofie of a limited partner or, in the alternative, to take a floating charge 
 on the taxpayer's assets. , 
 
 Allocation of the proceedn of the duty. 
 
 97. The proceeds of the duty would presumably be specifically earmarked for 
 redemption of debt. 
 
 A ppenls. 
 
 98. Income Ta.\ appeals are heard by the District and Si>ecial Commissioners 
 of Income Tax and it would appear desirable that these bodies Klumid deal with' 
 some classes of appeals {e.g., as to the value of individual local assets not of greater 
 value than a figure to be prescribed). 
 
 99. But many of the questions involved in assessments to the contemplated 
 duty will be most important and complex and the sums at stake extremely large. 
 In the Board's judgment it is essential that to deal with all but minor issues of 
 the kind mentioned in the previous paragraph there should be established a Board 
 of Referees of the highest standing, with a legal Chairman and with members 
 possessing qualifications or experience of various kinds (e.g., business men, valuers, 
 accountants). It would be imperative that this tribunal should be so composed as 
 to possess in the fullest degree the confidence of the public. As in the case of other 
 direct taxes an appeal should lie to the Courts on points of law. 
 
 Public Companies. 
 
 100. So far this memorandum has related solely to the case of individuals. 
 There are, of course, accumulations of war-time profits in the reserve funds of 
 public companies and the question arises of extending the duty thereto. 
 
 101. So far as these accumulations are reflected in the market value of public 
 companies' shares the increase comes out in the returns of the individual share- 
 holders, and any further duty upon the companies would be a double charge. 
 
 102. It is probable, however, that the whole of the value of the assets of a 
 company is not always reflected in the market value of its shares, and there may 
 thus be a residuum of increased value which, if it could be reached, should come 
 within the scope of the tax. 
 
 103. Investigcitions are now being made with a view to estimating what may 
 be the extent of the residuum, and, if desired, a further memorandum will be 
 furnished upon this subject. 
 
 Measures Necessary to Secure the Due Enforcement of the Duty. 
 
 104. The Board of Inland Revenue feel strongly that if a duty of the character 
 now in contemplation is attempted, it ought to' be imposed effectively, and all 
 possible measures should be taken to prevent any serious amount of evasion. As 
 already mentioned, there is a danger lest the tax. unless it be effectively administered, 
 may prove an additional burden upon those persons who have \^a,\d war taxation, 
 while missing those who have secured war fortunes without paj'ing duty upon them- 
 
 27391 
 
 A I 
 
14 
 
 105. Two essential conditions to the successful administration of the duty are 
 proper staffing arrangements and the imposition of drastic penalties for evasion. 
 
 106. The Board have already emphasised the unprecedented nature of the 
 effort which the proposed tax would involve, and it is unnecessary to refer to the 
 strain on their already over-taxed staff that must in any case result. They have, 
 however, assumed throughout their consideratdon of this problem that they would 
 be enabled to relieve and to supplement their present resources as might be found 
 necessary. . 
 
 107. But even if the organisation for managing the duty were as efficient as 
 circumstances permitted, the Board are clear that drastic penalties would still be 
 needed to prevent serious evasion. 
 
 108. It is often said that very large fortunes have been acquired by persons 
 who have evaded war taxation by definitely fraudulent means, such as the elimina- 
 tion of particular transactions from the books of their trade and the keeping of 
 double banking accounts. Eumours of this kind are probably much exaggerated, 
 but that they contain a substantial measure of truth is beyond doubt. It would 
 be more than unfortunate if gains of this character, which have escaped existing 
 taxation, should escape the contemplated duty as well. 
 
 109. The Board therefore suggest that the detection of wilful evasion should 
 result not merely in the recovery of the duty due and of heavy money penalties, 
 but in imprisonment as well. 
 
 110. It would also be desirable to provide that, where evasion is discovered 
 upon the death of the taxpayer, the duty claimed should be recoverable from the 
 executors with a heavy rate of interest. 
 
 111. Though the Board of Inland Revenue could rio doubt ascertain from 
 various sources the names and addresses of nearly all persons liable to the contem- 
 plated duty, a residuum would be likely to escape unless special steps were taken. 
 It is suggested that every liable taxpayer should be placed under obligation (unless 
 within a specified time he has been called on for a return) to give notice of liability, 
 that the obligation should be widely and effectively advertised, and that failure 
 to comply with the obligation should be punished in the same manner as deliberate 
 evasion on the part of a person who has been called upon to make a return. 
 
 112. Further, every taxpayer should be under obligation, under like 
 penalty, to disclose particulars of any artificial transaction by which he has con- 
 cealed his wealth, and a comprehensive clause should be enacted to enable such 
 transactions to be disregarded in the computation of duty. 
 
 113. The return form should contain in a prominent place specific questions 
 in regard to categories of wealth which would readily lend themselves to conceal- 
 ment, and the return when made should be required to be attested in a formal 
 manner. 
 
 114. Apart from information in the Estate Duty Office and the Land Valuation 
 Office, the Board possess no satisfactory collected information in regard to the 
 capital of individuals. The information to be collected from returns and assess- 
 ments for purposes of Income Tax and Super-Tax would, for a variety of reasons, 
 be incomplete for the present purpose. 
 
 115. In these circumstances it would be important (for purposes of checking) 
 that returns should be made of capital holdings from varieties of sources. For 
 example, companies should be asked to supplement the returns which they already 
 file under the Joint Stock Companies Acts in regard to their shareholders by making 
 returns of their debenture holders ; returns should be made by statutory companies, 
 insurance companies and, within such limits as may be practicable, by banks. 
 Returns by banks would in many cases be of paramount value. 
 
 116. The Board, in conclusion, desire to submit one further consideration. 
 No tax of this magnitude could be effectively imposed unless it were accepted by 
 the great majority of taxpayers as a fair though onerous burden. If this proved 
 not to be the case and taxpayers as a whole resented the charge and were anxious 
 to raise not merely all legitimate objections of substance, but also all the points of 
 technical legal detail by which the execution of so complicated a duty could be 
 clogged and delayed, the successful administration of the duty would be gravely 
 endangered. 
 
16 
 
 II. 
 
 buAKU OK Ihlasu Ukvkmuk, 
 
 SOMKIUiKT HoUilB, 
 
 January, 1920. 
 
 Memorandum by the Board of Inland Revenue on methods of 
 graduation of a duty on war-time wealth and the possible 
 yield of such a duty. 
 
 I.— ESTIMATK OF InCKEASK OK WkALTB IS TIIK HaNOK OK lifDIVIDUAli. 
 
 1. Ab was [K)intc(l out in the lk>anl'H memorandutn u[x>n the practicability of 
 imposing; a duty oti war-titnc wealth (|)araf^ph 40), although the Btatintics of Income 
 Tax combined with other sources of int'urmation render itpos»iblc to estimate the aggregite 
 income of individuals with some degree of accuracy, there are in present circumstances 
 
 no available statistics giving any comparable assistance in framing an estimate of their 
 aggregate; wealth. Moreover the princii)lcs adopted for the measurement of iiifjome do 
 not evoke those contentions which centre round the assumptions on which the measure' 
 ment of capital proceeds. It was pointed out therefore that any enquiry into movements 
 of cajjital values during the period of the war, esi)eeially if direct«<l t<^ the wealth in the 
 hands of individuals, passes inevitably — upon some fundamental points — into the region 
 of conjecture. 
 
 2. In tlie Economic Journal of September, 1918, Dr. J. C, Stamp published a 
 non-official estimate of increase of wealth, He gave the figure of £5,250,000,000 as bb 
 estimate of the amount which should be added to the aggregate pre-war wealth of indi- 
 viduals as a whole in order to arrive at the aggregate wealth of individuals which would 
 be subject to, and likely to be revealed for the purposes of any general capital levy which 
 might be iin[K)sed at the termination of the war. Dr. Stamp estimate! fiint the value 
 (expressed in terms of money) of all the property owned by individuals as a whole which 
 would have been returned for a genenil Capital Levy just before the outbreak of war ; this 
 figure he put in the neighbourhood of £11,000,000,000. Secondly, working on certain 
 assumptions as to post-war conditions, he suggested the increase or decrease of value 
 that he thought might result from the war and might be reflected in returns for a general 
 Capital Levy at the termination of the war, in various classes of wealth owned by, 
 individuals. As a result of these adjustments he arrived at the increase of 
 £5,250,000,000 above referred to. 
 
 3. This amount may be described as a net figure of increase ; it represents the 
 aggregate increases appertaining to those individuals whose capital wealth has increased 
 in value during the war, diminished by the fall in value of the capital of those whose 
 capital wealth has decreased. 
 
 4. The Board have not made any renewed investigation into the amount of the 
 property owned by individuals as a whole just before the outbreak of war. The figure of 
 about £11,000,000,000 is one which they believe will command a very general measure 
 of acceptance, and they have not felt that any further investigation made by them would 
 be likely to lead to any substantially different result. In any event the precise amount of 
 capital owned by individuals prior to the war is not the primary question for the purposes 
 of a War Levy. It is the increase in the value of capital during the war with which such 
 a levy is primarily concerned. 
 
 5. On the other hand the Board felt it right to make an official investigation into 
 the critical figure of the increase during the war on the value of capital owned by 
 individuals. Dr. Stamp's estimate (£5,250,000,000) was made some eighteen months 
 ago when the war was still in progress and its duration uncertain. The Board's inves- 
 tigation, made in the light of later events, has led them to the view that Dr. Stamp's 
 estimate is considerably above the mark. 
 
 6. The Table which follows specifies the amount of increase or decrease in various 
 categories of wealth held by individuals and likely to be revealed in returns for purposes 
 of a duty such as that in contemplation (1) as estimated by Dr. Stamp in 1918 and (2) 
 as now estimated by the Board of Inland Revenue. Dr. Stamp's estimate was directed to 
 some indeterminate date just after the termination of the war ; the Board's estimate is 
 directed to the date, 30th June, 1919. 
 
 7. The estimate at which the Board have arrived is less than the amount which 
 they anticipated at the outset of their enquiry and is probably less than the amount 
 which would generally be anticipated. In framing this estimate, however, the Board 
 have not aimed at arriving at a conservative figure which is certain to be realised. The 
 object they set before themselves was to collect such data as were available and to form 
 the best judgment they could upon them. The estimate is, of course, in the nature of 
 things, subject to a considerable margin of error, but so far as the Boahi can judge there 
 is no greater reason for anticipating tliat it will prove inadequate than for anticipating 
 that it will prove excessive. 
 
 27691 AS 
 
16 
 
 8. The estimate is not one of intrinsic increase of value (in terms of money) but an 
 estimate of the increase (in terms of money) that is likely to be revealed and established 
 in connection with the assessment and collection of a War Levy. It excludes, unless 
 realised, (as suggested in paragraph 73 of the Board's Memorandum on the practicability 
 of levying a duty on war-time weiilth), the special " scarcity " value which can be exacted 
 at the present time by a vendor selling houses with "vacant possession, a value which 
 results only firom the necessity of homeless people to secure, at any cost, a home, and 
 which is only transitory and only realisable in certain conditions. In addition an allow- 
 ance has been made in certain instances on account of the improbability that a full 
 estimate of value will be reached in practice in cases where the valuation of property 
 presents peculiar diflSculties. On the other hand the estimate contains no allowance on 
 account of the possibility of the duty being evaded, this question being dealt with below, 
 
 9. As regards the estimated extent of the increase it may be well to recall that the 
 general rate of interest has risen very greatly during the war. This fact tends to diminish 
 the value of all fixed-interest-bearing securities. For example, on 30th June, 1919, 2^ 
 percent Consols (which on 30th June, 1914, were quoted at 75) stood at 53J and even the 
 5 per cent. War Loan (issued at 95) stood at 94. It is moreover the case, though the 
 feet is not so generally appreciated, that the rise in the rate of interest tends also to 
 diminish the value of other classes of property as well as fixed-interest-bearing securities. 
 For example, it tends to diminish the value of ordinary shares in Companies ; in that 
 connection, although the anticipation of increase in the future earning power of a business 
 competes with the adverse influence of the rise in the rate of interest and on the whole 
 outweighs it, this influence is a |X)tent factor in restricting the expansion of value of 
 securities such as ordinary shares. 
 
 10. It may also be recalled that, owing to the existence of Government restrictions 
 or controls or to other causes, some classes of assets have as yet shown only a small 
 increase of value or no increase at all, although many competent judges might hold that 
 they contain a suppressed potential increase of value, unrealisable at the post-war appointed 
 date, which will only emerge when true economic values are revealed by the ultimate 
 removal of such restrictions and controls. Dwelling houses affected by the Rent Restric- 
 tion Acts will at once occur to the mind as a clear instance of this class. 
 
 TABLE L 
 
 In this Table the fiirures represent millions of pviunds sterling. 
 
 Class of Property. 
 
 Dr. Stamp's estimate of 
 movements of value.* 
 
 Board's estimate of 
 
 movements of value for 
 
 a War Levy at 30th June, 
 
 1919.» 
 
 
 Increase. 
 
 Decrease. 
 
 Increase. 
 
 Decrease. 
 
 Landd 
 
 Buildings 
 
 Other profits assessed to Income Tax Schedale A 
 
 Fanners capital, including goodwill 
 
 United Kingdom National Debt, &c 
 
 Rank Deposits 
 
 Railways — United Kingdom 
 
 Railways — out of United Kingdom 
 
 Coal and other mines 
 
 Iitm Works 
 
 Gasworks, waterworks, docks, &c 
 
 Businesses not otherwise detailed 
 
 Foreign and colonial securities, &c. (whether 
 
 assessed to Income Tax under Schedule G 
 or Schedule D). 
 Property owned by individuals not liable to 
 
 Income Tax. 
 
 Moveable property 
 
 Life insurance policies 
 
 Municipal Debt 
 
 2:)0 
 • 450 1 
 
 150 
 5,000 
 
 50 
 400 
 
 — 
 
 200 
 800 
 
 150 
 
 280 
 
 290 
 
 2,650 
 
 400 
 
 830 
 
 50 
 
 400 
 15 
 
 260 
 •220 
 
 nil 
 
 50 
 
 445 
 
 100 
 
 Less decreases ^ 
 
 6,300 
 1,«W) 
 
 1,000 
 
 5,065 
 1,075 
 
 1,075 
 
 .\ggregate Net Increase of value in hand-< of 
 individuals. 
 
 "...■•■Oft 
 
 
 :191H» 
 say 4,000 
 
 
 For some of the individual classes of property the two estimates are not strictly comparable, as 
 there are some differences in the methods of classification adopted in the two investigations. But 
 this factor will not affect the estimates of the aggregate ret increase. 
 
17 
 
 11. Ab indicated above, the estimate of («ay) £4,000,000,000 (arrived at upon the 
 same general principles as tboKc followed by Dr. Stamp) i» a net figure cf iDcreaM It 
 represents the estimatcl aggregate increases of value apfKTtaining u> thoae individuals 
 whose capital wealth ha^ increased in valae during the war, diinirii»hed by the fall in 
 value of the capital of those whose capital wealw has decreased. The proposed War 
 Levy would, of c^Minie, apply to individuals whose wealth has increMed without taking 
 account of itidividualH whose wealth has decreased. In these ctrcoinstMioes a further 
 investigsition ia necessary to ascertain by what amount the figure of £4,000,000,000 must 
 be incrcaHc^l in ordf^r to arrive at the groHB figure rcpreucntin^ the estimsted aggreote 
 increascH appertaining only to those individuaJH whose capitnl wealth has incWBfn in 
 value during the war. It is this gross figure which comes potentially within the scope of 
 a War Levy. For the purpose of this investigation only scanty data are available and a 
 considerable element of ctjnjecture necessarily enters into the estimate. 
 
 12. The figure of £4,000,000,000 increase given above may be regarded from two 
 points of view, (1) as the estimated aggregate increases of value apjiertainirig to those 
 individuals whose capital wealth luis increased in value during the war, diminished by 
 the fall in value of those whose capital wealth ha:4 decreased and (2) &« the excess of the 
 aggregate increases in value of all items of property which have increased in value during 
 the war over the aggregjite decreases in value of all items of property which have fallen 
 in value, irrespective of the distribution of such items of property showing increases and 
 decreases among the two claases of individuals above-mentioned, viz. : (a) those whose 
 total capital wealth has increase<l and (6) those whose total capital wealth has decreased. 
 
 13. For example, if there were six items of property, owned by two individuals 
 A and li, showing increases and decreases in value as follows : — 
 
 
 Item. 
 
 Increase. 
 
 Decrease. 
 
 Owner. 
 
 
 
 
 £ 
 
 V 
 
 
 
 
 1 
 
 100 
 
 — 
 
 A 
 
 
 
 2 
 
 50 
 
 — 
 
 . B 
 
 
 
 a 
 
 ~ 
 
 100 
 
 • B 
 
 
 
 4 
 
 80 
 
 — 
 
 A 
 
 
 
 5 
 
 — 
 
 40 
 
 A 
 
 
 
 6 
 
 150 
 
 380 
 
 140 
 
 A 
 
 
 
 Lees decreases 
 
 140 
 
 
 
 
 
 Net increase 
 
 240 
 
 
 • 
 
 
 then the net increase would be £240 ; this may regarded as £290, the net increase 
 api>erttining to A (£100 plus £80 plus £150 less £40) diminished by £50, the net 
 decrease of B (£50 less £100), or it may be r^arded as the difference between the 
 aggregate increases, £380 (£100 plus £50 plus £80 plus £150) and the aggregate 
 decreases £140 (£100 plus £40), irrespective of the distribution of the respective 
 increases and decreases between A and B. 
 
 14. After consideration of the separate increaises and decreases of value of 
 individual items of property which go to make up the net increiises and decreases in 
 the various categories of wealth set out in Table I., the Board are of opinion that tlie 
 net increase of £4,000,000,000 may be regarded approximately a& the difference between 
 £5,525,000,000 representing the aggregate increases in value of all individual items of 
 property which have increased in value, and £1,525.000,000 representing the aggr^ate 
 decreases in value of all individual items of property which have decreased in value 
 during the war. 
 
 15. Now if it could be assumed that all items of property which have increased 
 in value were held by one set of individuals, and that all items which have decreased 
 in value were held by another set of individuals, then the increase of wealth &lling 
 within the scope of the War Levy would be simply the total of all the increases in 
 value, that is £5,525,000,000. In the example above for instance (paragraph 13) if 
 A owned the four items showing the increase of £380, and B owned the two 
 items showing the decrease of £140, then A alone would be liable to the levy and 
 he would be liable in the sum of £380. 
 
 16. It is clear however that such an assumption would not be true. Much of 
 the pro|>erty which has decreased in value is held by individuals whose wealth as a 
 
 J7591 
 
 ▲ » 
 
18 
 
 whole has increased. The decreases in these cases reduce the total increase of wealth 
 of the individual and thus reduce the aggregate increase coming within the ncnpe of 
 the War Levy. This may be illustrated {see paragraph 13) by the reduction of A's 
 total increases of £330 by the £40 item of decrease to £290 as his net increase of 
 wealth. The balance of the property which has decreased in value is held by 
 individuals (such as B in the example) whose total wealth has decreased, and the 
 decreases in these cases have no effect upon the War Levy. 
 
 17. It is therefore necessary to estimate how the aggregate of all items of property 
 showing a decrease in value (estimated above at £1,525,000,000) is distributed between 
 (a) individuals whose personal increases of wealth outweigh their personal decreases 
 as in the case of A and (b) individuals whose personal decreases equal or outweigh 
 their personal increases as in the case of B. 
 
 18. The Board estimate that out of the £1,525,000,000, £500,000,000 represents 
 decreases of value of property held by individuals whose total wealth has decreased and 
 that £l,0i!5,000,000 represents decreases of value of property held by individuals whose 
 total wealth has increased. The sum of £1,025,000,000 therefore must be deducted 
 from the sum of £5,525,000,000 mentioned in paragraph 14 in arriving at the gross 
 figure of increase which will fall within the scope of the War Levy giving a figure 
 of £4,5U0,000,000. 
 
 19. The Board suggested in their Memorandum on the practicability of imposing 
 a duty on war-time wealth (paragraphs 32 and 37) that increases in value of furniture 
 and other non-income producing assets (including perhaps houses in the occupation of 
 the owner) if held continuously between the two appointed dates should be excluded from 
 the scope of the duty. If this view be adopted a deduction of £320,000,000* would 
 need to be made from the figure of £4,500,000,000 named in the preceding paragraph, 
 leaving a final resultant figure of £4,180,000,000 as the increase of wealth which (subject 
 of course to any exemption given to persons of small wealth and subject to any successful 
 evasion) would come within the scope of the proposed duty. 
 
 20. The next question which arises is that of the classification of this aggregate 
 increase in individual ranges of total capital. The following tuble, based largely upon 
 Estate Duty Statistics supplemented by examination of super-tax samples, sets forth the 
 Board's estimate of this division : — 
 
 TABLE IL 
 
 Classification, in individual ranges of Total Wealth, of the Aggregate 
 Increase in Wealth, of Individuals whose Total Wealth has Increased, 
 WITH Numbers of Individuals and Total Post-War Wealth. 
 
 Ranges of Total Wealth. 
 
 
 
 
 
 
 Numbers 
 of 
 
 Increase 
 of 
 
 Total 
 
 
 
 Post-War 
 
 Exceeding 
 
 Not Exceeding 
 
 Individuals. 
 
 "Wealth. 
 
 Wealth. 
 
 1. 
 
 2. 
 
 3. 
 
 4. 
 
 5. 
 
 £ 
 
 £ 
 
 
 £ 
 
 £ 
 
 — 
 
 5,000 
 
 — 
 
 1,334,000,000 
 
 3,948,000,000 
 
 5,000 
 
 10,000 
 
 146,500 
 
 288,000,000 
 
 1,054,000,000 
 
 10,000 
 
 25,000 
 
 120,000 
 
 549,000,000 
 
 1,909,000,000 
 
 25,000 
 
 50,000 
 
 42,310 
 
 432,000,000 
 
 1,500,000,000 
 
 50,000 
 
 100,000 
 
 17,870 
 
 401,000,000 
 
 1,241,000,000 
 
 100,000 
 
 250,000 
 
 9,700 
 
 469.000,000 
 
 1,400,000,000 
 
 250,000 
 
 500,000 
 
 2,575 
 
 314,000,000 
 
 884,000,000 
 
 500,000 
 
 750,000 
 
 565 
 
 129,000,000 
 
 351,000,000 
 
 750,000 
 
 1,000,000 
 
 200 
 
 64,000,000 
 
 169,000,000 
 
 1,000,000 
 
 — 
 
 280 
 
 200,000,000 
 
 590,000,000 
 
 Totals 
 
 
 340,000 
 
 4,180,000,000 
 
 13,046,000,000 
 
 Or, if houses in the occupation of the owner are not excluded, £300,000,000. 
 
19 
 
 II. l*(>«HIBr,K MkTIIODH ok <^irRAIHfATIOM OF TIIK Dcmf. 
 
 21. Before ua eotimate can l>e iriiwle of th'j yield which would refultfron the 
 imposition of a duty upon the taxable increanc of wealth it liecoines neccHHary to cont»ider 
 the varioiiH mctlKKlK by whicli the duty mij(ht be iinpo»ed and the question of the Hum 
 which Hhould \m: fixed an the limit of exemption. 
 
 22. In tluH latter connection it will be recalled that the lioard in their Memorandum 
 on the practicability of itniMtHin^ a duty on War-time Wealth (paragraph' 57) stated their 
 opinion tliiit it would not im practiciblc to carry the effective exemotion limit Vjelow the 
 (post-wur) level of £5,000. It would probably not l>e Hugge«tea tiiat a higlier Hmit 
 should be adopted. 
 
 23. It would of course be {K>HHible to levy the duty at a uniform rate in all canes 
 but it would appear that the intro<luctiou of the principle of gradaic on into the metliod 
 of chiirge to duty would command more general acceptance. That principle, batied u|x>n 
 the relative ability of the taxpayer Ui pay, is in force for the Income Tax and the Flntate 
 Duty. The Excess Profits Duty was levied at a flat rate but in connection with that 
 duty rather different considerations arise. 
 
 24. The subject matter of taxation in a War Levy woidd be the amount of the 
 increase in capital enjoyed by the particular taxpayer between the ap|)ointe<l pre-war and 
 post-war dates, (jrraduation might in the first place be effected solely by reference to the 
 amount of this increase. Tliat increase may be regarde<l from two points of view. It 
 may be looked at either as a simple "absolute" increase, or as a "relative" increase 
 compared with the total capital wealth of the taxpayer. 
 
 25. From the " absolute " point of view, it might be considered, fi^r example, that 
 all taxpayers whose capital has increased by £100,000 should pay duty on the increase 
 at a higher rate than any taxpayers whose capital has increased by £50,000, and that 
 those in turn should pay at a higher rate than any whose capital has increased by 
 £10,000 only. 
 
 26. From the "relative" point of view, it might be considered that taxpayers 
 whose capital has increased by 50 per cent, (computed either by reference u) the amount 
 of pre-war or post-war capital), should pay duty at a higher rate than any taxpayers 
 whose capital has increased by 25 per cent. ; and again, that those should pay at a higher 
 rate than any whoje capital has increased by 10 per cent. only. 
 
 27. It might however occur if in the graduation of the duty, regard were paid 
 solely to the amount of the increase or to the ratio of the increase, that other material con- 
 siderations would be overlooked. It will be recalled that graduation in the Income Tax 
 depends primarily upon the total income of the taxpayer from all sources. In the Estate 
 Duty the graduation depends in a somewhat similar manner upon the aggregate value of 
 the property passing on a death. These analo'gies suggest that the amount of the total 
 resources of the taxpayer cannot be entirely disregarded in determining the graduation of 
 a War Levy, 
 
 28. It might therefore be considered appropriate when fixing a graduated scale of 
 rates for a War Levy by reference to the amount of increase of capital enjoyed during 
 the war, whether based on the " absolute " or " relative " amount of increase, to provide 
 further that some addition should be made to the rates thus determined in their applica- 
 tion to any taxpayer whose total resources (either at the pre-war date or at the post-war 
 date, as may be considered more appropriate) exceed certain specified limits. 
 
 29. To take a very simple example : It might be provided that the rate of duty 
 should be 40 per cent, when the increase of capital does not exceed £50,000 and that the 
 rate of duty should be (JO per cent, when the increase of capital passes beyond this limit ; 
 but that these basic rates of duty, 40 and 60 per cent., respectively should be increased, 
 e.g., to 45 per cent, and 65 per cent, when the total resources of the taxpayer exceed 
 (say) £250,000 at the post-war date and to still higher percentages for taxpayers whose 
 total resources exceed correspondingly higher amounts. 
 
 Or again, if the alternative method be adopted, it might be provided that the rate of 
 duty should be 40 per cent, when the increase of capital does not exceed 50 per cent, of 
 the tax-payer's pre-war capital and that the rate of duty should be 60 per cent, when the 
 increase of capital exceeds this ratio ; but that these basic rates of duty, 40 per cent, and 
 60 per cent, respectively, should be increased to (say) 45 per cent, and 65 per cent, when 
 the total pre-war resources of the taxpayer exceeded (say) £200,000, and to still higher 
 percentages for taxpayers whose total pre-war resources exceeded correspondingly higher 
 amounts. 
 
 27691 A 10 
 
20 
 
 30. It will be observed that in the foregoing paragraphs, reference is nude to four 
 factors, which may be employed in fixing a graduated scale. They fall into two divisions 
 as follows : — 
 
 A, the amount of increase of capital : — 
 
 (1) absolute 
 or (2) relative 
 
 B, the amount of the total resources : — 
 
 (3) at the pre-war date 
 or (4) at the post-war date. 
 Consideration of these four factors leads the Board to suggest that the absolute 
 amount of increase of capital enjoyed by a taxpayer during the war-period might be 
 joined with the amount of his total resources at the post-war date in order to frame one 
 possible scale of graduation, and that a possible alternative scale of graduation 
 might be found in the conjunction of the relative- (or percentage) amount of 
 increase of capital enjoyed by a taxpayer during the war period, with the 
 amount of his total pre-war resources. The first of these suggested methods seeks to 
 evaluate the taxpayers's liability to pay by considering the following questions : (a) by 
 how much has the taxpayer's wealth increased during the war ? (b) how much wealth has 
 the taxpayer now ? The second seeks to evaluate the taxpayer's ability by considering tlie 
 following questions : (a) what is the ratio between the taxpayer's increase of wealth during 
 the war and his total pre-war wealth ? (b) what was the amount of his pre-war wealth 
 which has thus increased ? The Board offer the following observations on these two 
 possible methods of graduation. 
 
 31. A scale based upon (a) the actual absolute amount of increase of capital and 
 (b) the actual total amount of the taxpayer's resources at the post-war date would, by 
 means of the first factor, conduce to the taxation at the heaviest rates of those increases 
 which were the largest. It would thus meet one of the objects of the War Levy, if 
 imposed, namely to correct by taxation abnormal increases of wealth which have 
 occurred during the war. Further, the taxpayer enjoying a large increase would in 
 general be expected to have a larger ability to pay than the taxpayer whose wealth had 
 increased by a lesser amount. 
 
 32. The second factor (the actual total amount of the taxpayer's resources at 
 the post-war date) is the one' which, it might be presumed, would be adojited as that 
 appropriate for framing a graduated scale if a general duty on capital — and not a 
 War Levy — had been under consideration. Important distinctions exist between the 
 conceptions of a general duty on capital and of a War Levy. In any scheme for a 
 general duty on capital, the taxable -subject by reference to which the tax would be 
 primarily imposed would clearly be the total amount of capital owned by the taxpayer 
 at the date of the imposition of such a duty. For a War Levy, it is equally clear that 
 the taxable subject by reference to which* the tax would be primarily imposed is the 
 abnormal increase in wealth. To the extent therefore to which weight is given to the 
 factor of the total resources of the taxpayer at the post-war date in framing a scale 
 of graduation for a War Levy, so far would such a Levy embrace a primary characteristic 
 of a general duty on capital. For this reason, if a scale of graduation based upon the 
 two factors under consideration (viz., the absolute amount of increase and the totjil post- 
 war resources of the taxpayer) is adopted for a War Levy, the Board would suggest 
 that it would be appropriate that only subsidiary weight should be attached to the factor 
 of the taxpayer's total resources at the post-war date. 
 
 33. The alternative scale of graduation, based upon (a) the relative or percentage 
 amount of increase of capital enjoyed by the taxpayer during the war period and (b) the 
 tt)tal amount of the taxpayer's resources at the pre-war date would not conduce in the 
 same degree to the taxation at the heaviest rates of the largest absolute amounts of 
 increase. But such a scale by paying regard to the amount of increase in coni2)arison 
 with the amount of the pre-war resources, might be thought to recognise in a desirable 
 way the element of saving. It will be appreciated that, if two individuals one owning 
 iil,000,()00 and the other <El,000 each save annually a sum equivalent to 2 per cent, 
 of their capital, the saving of the former will be one thousand times as great as the saving 
 of the latt< r, though the rates of saving will be the same in each case. The niore jiiagiii- 
 tude of a taxpayer's pre-war resources, which of itself may by natural saving produce an 
 increase of capital, absolutely large but relatively reasonable, does not under this method 
 of graduation, render the taxpayer liable to increased duty to the same extent as the 
 alternative discussed in paragraphs 31 and 32. Where however the pre-war resources ot 
 a taxpayer have increased in an abnormal ratio, this method of graduation would impose 
 
21 
 
 the highcHt rutcH of duty. Su far an Hucb abnormal incroaMs are attributable to specula- 
 tion, (ixorbitant cliarf^uH, evasion of direct taxation and the like, the high rates tbun imitoHetl 
 would no doubt \)C hohl juMtified. 
 
 'M. This nietlKxl of graduation ha« one marked diKa^lvantoge, for which Kpocial 
 I roviHion would In; nucoHsary if it were adopted. If a man posMSHe<i only a nominal 
 uniount of ciipital Ixifore the war, an increase which might abtKilutely not be brge — auch 
 iiH CI 0,1)00 — would be n huih very many timcH excecHling the pre-war capital, and would 
 thus in every Huch case be chargeable with duly ut the iiigh<'.Mt rule iii)|*o»M^I. It may 
 perhiipH Im: Haiil on the one han<l, where a pre-war cu{)iud of (uay) £1,000 iiax grown into 
 a i)08t-war aipital of (nay) £10,000, that in many caaes the increase will ix: largely due 
 to cauHCH which would not win public approval. On the other hand there will be caiieit 
 where an abnormal increaHC from a Hinall pre-war capital will have arisen in quite different 
 ways. To avoid obvious niiornuiieH in the ca8<! of tiixjKiyerH whos<; pre-war weilth wag 
 very sinall it would seem necessary (if this metlunl of gnwluation is adoptorl) to pn<vide 
 that their pre-war capital for purposes of the graduation should Ix; presumed to lie not 
 IcHH than Home defined ainoutit, which might be tixed as an absolute sum or {Kwsibly an a 
 I>ercentuge {e.'j. o jKjr cent, or 10 per cent.) of the tax|>ayer'H total |K>Bt-war resources. 
 
 35. The second factor in such a scale would be the amount of the actual totid 
 pre-war resourccH of the faix payer. By the application of this factor, the Iwsit; rates 
 determined by the ratio of iucrejise of capitiil, would Ik; increased in those i-ases where the 
 pre-war resources exceeded certain limits. The weight of the factor would rcfjuire to Ije 
 of subsidiary effect only, for the reasons discussed in paragraph 32. 
 
 3G. Whichever Bclicme of gniduation is ad<jpted, a further question arises as to the 
 fonn in which an allowiiiice should be made in the duty on account of savings. In the 
 Hoard's general Memorandum on the practicability of imposing a iluty on NVar-tirae 
 Wealth (paragraphs 12 and 2^) it was pointed out that savings in different cases arc of 
 differing character and that it is im|M)ssibla in practice accurately to distinguish those 
 savings which are sometimes described as " meritorious " from those which art more 
 automatic and involve little or no personal sacrifice. The allowance therefore needs t<i be 
 made on general lines. It was further suggested that any 8|)ecific allowance in the duty 
 on account of savings should be limited to "meritorious" savings, and that appropriate 
 lelief in respect of savings of a more automatic character might l»e made by suitable 
 mitigations of the graduated scale of duty. 
 
 37. It is suggested that it would be consistent with the first method of graduation 
 above discussed (based upon the absolute amount of increase and the post-war resources 
 of the taxpayer) if a uniform allowance (e.7., £2,000) were granted to all taxpayers 
 (alike to the millionaire and the small trader) to cover special savings, and if regard were 
 paid to the natural accumulation of large estates (the whole income of which is not 
 normally spent) by securing that the rate of duty falling upon normal accumulations of 
 tliis chaz'acter is moderate in amount. 
 
 38. If the alternative method of graduation were adopted (based upon the relative 
 amount of increase of capital and the total pre-war resources) it would appear consistent 
 with it if the allowance for special savings were fixed not at an absolute and unvarying 
 amount but at a certain fixed percentage (e.g. 10 per cent.) of the pre-war capital. In 
 this connection, it would be necessary to provide some arbitrary minimum amount of 
 allowance in cases in which the taxpayer possessed little pre-war capital or none at all (cf. 
 paragraph 34 above.) It will be observed also that a percentage allowance of this character 
 would involve extremely large allowances to individuals with the largest pre-war wealth 
 and might in effect allow the automatic accumulation of their estates, so far as it arose 
 from normal causes, to be unchecked by any charge of duty under a War Levy. The 
 matter is one upon which differing opinions may be held. Some would contend that such 
 a provision is equitable ; others that the magnitude of the allowance is unjustifiable. The 
 latter objection, if weight be attached to it, might be met by a provision that the 
 percentiige allowance for savings should diminish gradually above a certain limit of 
 pre-war resources, and that at some other and higher limit of such resources, it should 
 cease to be granted. It will be recalled that certain allowances in the Income Tax cease 
 to apply, somewhat similarly, in the case of wealthy taxpayers. 
 
 39. Without desiring to prejudge which of the above alternative proposals for a 
 scale of graduation is most appropriate for the levy, or whetlier some different scheme 
 might more appropriately be adopted, the Board have drawn up the following illustrative 
 scales. Tables III to \1, as examples of the principles under discussion. 
 
 37691 A II . 
 
22 
 
 40, Owing to the fact that the duty will be payable in part in instalments some ten 
 years must elapse before the full yield is received. Subject to this it is estimated : — 
 
 (a) Upon the assumption that increase of wealth enjoyed by persons now 
 
 deceased will be dealt with as suggested in paragraphs 9 et seq. of the 
 Board's memorandum relating to property which has passed on deatii, and 
 that the duty follows the outlines and is supported by the powers which 
 have been indicated, and 
 
 (b) After making allowance for duty that will be evaded or will become 
 
 irrecoverable owing to changes in taxpayers' circumstances or otherwise, 
 that the first illustrative scale (Tables III and IV) would ultimately yield some 
 J^900,000,000 and the second (Tables V and VI) some £1,000,000,000. 
 
 TABLE III. 
 
 Illustrative Scale of Graduation by reference to (a) Absolute Amount 
 OF Increase of Wealth and (b) Amount of Post-war Wealth of the 
 Taxpayer. 
 
 Tabi.e showing Possible Rates of Duty on Sections 
 OF Increased Wealth. 
 
 
 Sectional Rates of Dutj 
 
 whi re Total Amount of Post-war Wealth lies between : — 
 
 Section of Increase 
 
 
 
 
 
 
 
 
 
 
 to whicli 
 
 * 
 
 
 
 
 
 
 
 
 
 the Rates Apply. 
 
 £5,000 
 
 £10,000 
 
 £25,000 
 
 £50,000 
 
 £100,000 
 
 £250,000 
 
 £500.000 
 
 £750,000 
 
 £1,000,000 
 
 
 and 
 
 and 
 
 and 
 
 and 
 
 and 
 
 and 
 
 and 
 
 and 
 
 and 
 
 
 £10,000. 
 
 £25,000. 
 
 £50,000. 
 
 £100,000. 
 
 £250,000. 
 
 £500,000. 
 
 £760,000. 
 
 £1,000,000. 
 
 over. 
 
 1. 
 
 2. 
 
 3. 
 
 4. 
 
 5. 
 
 6. 
 
 7. 
 
 8. 
 
 9. 
 
 10. 
 
 
 % 
 
 % 
 
 % 
 
 % 
 
 ■ % 
 
 % 
 
 % 
 
 % 
 
 % 
 
 First £ 2,000 ( -£ 2,000) 
 
 
 
 
 
 
 
 — 
 
 — 
 
 — 
 
 Next£ 3,000 (£ 2,000-£ 5,000) 
 
 30 
 
 32 
 
 34 
 
 36 
 
 38 
 
 40 
 
 42 
 
 42 
 
 42 
 
 „ £ 5,000 (£ 5,000-£ 10,000) 
 
 40 
 
 40 
 
 40 
 
 42 
 
 43 
 
 44 
 
 45 
 
 45 
 
 45 
 
 „ £ 15,000 (£ 10,000-£ 25,000; 
 
 
 46 
 
 46 
 
 47 
 
 48 
 
 49 
 
 49 
 
 50 
 
 50 
 
 „ £ 25,000 (£ 25,000-£ 50,000) 
 
 
 
 52 
 
 53 
 
 54 
 
 55 
 
 55 
 
 55 
 
 56 
 
 „ £ 50,000 (£ 50,000-£100,000) 
 
 
 
 
 58 
 
 59 
 
 60 
 
 61 
 
 61 
 
 61 
 
 „ £150,000 (£100,000-£2.iO,000) 
 
 
 
 
 
 64 
 
 65 
 
 65 
 
 66 
 
 67 
 
 „ £250.000 (£250,000-£500,000) 
 
 
 
 
 
 
 70 
 
 7] 
 
 72 
 
 72 
 
 „ £250,000 (£500,000-£750,000) 
 
 
 
 
 
 
 
 72 
 
 74 
 
 76 
 
 Balance 
 
 
 
 
 
 
 
 
 75 
 
 80 
 
 * It is assumed for the purpose of the Table that persons whose post-war wealth is less than 
 £5,000 would be exempt from duty. 
 
 Note. — The following are the outstanding features of the above Table. Firstly, in order that 
 there may be a continuous graduation in the rate of duty, increasing rates are applied to successive 
 sections or slices of the increased wealth. Secondly, these rates vary according to the total post-war 
 wealth of the taxpayer. For instance, a taxpayer whose total post-war wealth is £200,000 (column 6 
 above), of which £70,000 has been amassed during the war, would pay duty as follows : — 
 
 
 
 
 £ 
 
 On the first £2,000 of the 
 
 increase 
 
 ... ... ... 
 
 Nil 
 
 „ „ next £3,000 
 
 
 38 per cent. = 
 
 1,140 
 
 ,, „ „ £5,000 
 
 
 43 „ = 
 
 2,150 
 
 „ „ „ £15.000 
 
 
 48 „ = 
 
 7,200 
 
 „ „ „ £25,000 
 
 
 54 „ = 
 
 13,500 
 
 » „ „ £20,000 
 
 
 59 „ = 
 
 11,800 
 
 £3.5,790 
 
 The total duty payable would thus be £35,790, and the mean or effective rate of duty on the 
 
 35 790 
 total increase of £70,000 would be-^^^^, which, expressed as a percentage, is practically equivalent to 
 
 51 per cent. The following Table indicates by way of illustration the amounts of duty payable and 
 effective rates of duty under the above scale on specified increases of wealth amassed by taxpayers 
 with total wealth of the amounts shown : — 
 
23 
 
 CQ 
 < 
 
 K 
 
 < 
 
 C 
 
 Si 
 o 
 
 t-H 
 
 ^-' o 
 
 PS c 
 
 Q 
 
 D 
 
 o 
 
 00 
 
 H 
 
 < 
 
 
 Q 
 
 -< 
 H 
 PO 
 
 CO 
 (A 
 
 •«! 
 
 O 
 
 c 
 
 O £ 
 
 o 
 
 00 
 
 H 
 
 »;; 
 P 
 
 o 
 
 o 
 a 
 
 GO 
 
 ■J 
 n 
 
 < 
 
 GO 
 
 o 
 
 
 
 04 
 
 3 
 
 o 
 
 £ 
 « 
 
 O 
 
 I 
 
 to 
 W 
 
 a 
 
 03 
 
 
 
 B 
 o 
 
 a 
 < 
 
 
 
 I 
 
 
 e8i 
 
 
 «H 
 
 a 
 
 e8< 
 
 |« 
 
 Serf 
 
 a, 
 a. 
 
 «»1 
 
 
 73 
 
 2«rt 
 
 
 
 a 
 
 a 
 o 
 
 S 
 
 a 
 a 
 o 
 
 a 
 
 15 
 
 s 
 
 i 
 
 ? 
 
 o 
 S 
 -«1 
 
 is 
 
 a 
 
 
 
 o 
 
 a 
 
 ll 
 
 w 
 
 
 
 o 
 
 a 
 
 -0 
 
 > 
 
 II 
 
 
 
 o 
 
 a 
 
 |l 
 
 
 
 o 
 
 a 
 
 
 
 -=^::arf^ggg 
 
 •I -N o •« ec I- w. ♦!•- 
 
 5*^ irt "(< ^. Jj "^ 'i ff. i 
 
 
 Scooooc o 
 f-H <S I— I •-< ^H ^H -H 
 
 ^ cc tf -<«" rff »f cT o 
 
 ©OOOirtoC -f 
 
 ^ 3! ?3 ^ '^ <5 •'» 
 M CO '4< '^ in S <e 
 
 ^ e<5 o'-lf -f e>f r-T 
 
 i-i »l lA O »l 
 
 XOiOCiAOO 
 
 o^'j'i w 04 oo « a> 
 
 ^J f-^ W ■** Ci M* "1* 
 
 i-neo O e<5e<f cT 
 
 rH 0>ll«'«< 
 
 to oooo o 
 
 ^»H i-H C t- <M 
 
 ooooo 
 
 3O0OCCO0 30 
 r-l (M lO 
 
 T»< (M r- 00 
 
 W CO cc ■»»< 
 
 oooo 
 -^■ccoi"!?*" 
 
 \p • • " 
 
 ooo 
 
 «o%o (O 
 ^0> O* QO 
 
 csfoT 
 
 i-IM 
 
 88 
 
 Cl) 9) c^ 
 
 *** i«0 O Q o c' o cT 
 r-t M ^ C o o •-: 
 
 t-H M ».- I - 
 
 27691 
 
24 
 
 TABLE y. 
 
 Tablk showing rossiBLio Ratios ov Dutyon skotions ok Increaskd Wkalth, thk 
 
 SECTIONS BKING FkACTIONAL PaUTS (bKI'HESENTED BY PERCENTAGES) OF THE 
 
 Total Pkk-VVar Wkaltii. 
 
 
 
 Sectional rates of duty where total amount of pre-war wealth lies between : — 
 
 Sections of inorcaee 
 
 
 
 
 
 
 
 
 
 to which 
 
 
 
 
 
 
 
 
 
 
 the Rati s apply. 
 
 
 •£5,000 
 
 £10,000 
 
 £25,000 
 
 £50,000 
 
 £100,000 
 
 £250,000 
 
 £500,000 
 
 £750,000 
 
 £1,000,000 
 
 
 
 and 
 
 and 
 
 and 
 
 and 
 
 and 
 
 and 
 
 and 
 
 and 
 
 and 
 
 
 
 £10,000. 
 
 £25,000. 
 
 £50,000. 
 
 £100,000. 
 
 £250,000. 
 
 £500,000 
 
 £750,000. 
 
 £1,000,000 
 
 over. 
 
 1. 
 
 
 2. 
 
 3. 
 
 4. 
 
 5. 
 
 6. 
 
 7. 
 
 8. 
 
 9. 
 
 10. 
 
 
 
 % 
 
 % 
 
 % 
 
 %■ 
 
 % 
 
 /o .^ 
 
 % 
 
 % 
 
 % 
 
 From to 10 per cent, of total 
 
 
 
 
 
 
 
 
 
 
 pre-war 
 
 wealth 
 
 — 
 
 — 
 
 — 
 
 — 
 
 — 
 
 
 
 — 
 
 — 
 
 10 to 15 
 
 1) 
 
 28 
 
 30 
 
 31 
 
 33 
 
 34 
 
 36 
 
 37 
 
 38 
 
 40 
 
 15 to 20 
 
 
 36 
 
 38 
 
 40 
 
 42 
 
 43 
 
 45 
 
 46 
 
 48 
 
 50 
 
 20 to m 
 
 
 44 
 
 46 
 
 48 
 
 50 
 
 5-2 
 
 54 
 
 56 
 
 58 
 
 60 
 
 30 to 50 
 
 
 52 
 
 54 
 
 56 
 
 59 
 
 61 
 
 64 
 
 66 
 
 68 
 
 70 
 
 50 to 70 
 
 
 GO 
 
 62 
 
 64 
 
 67 
 
 70 
 
 72 
 
 75 
 
 78 
 
 80 
 
 T.ttoIOO 
 
 
 65 
 
 67 
 
 70 
 
 73 
 
 75 
 
 77 
 
 80 
 
 80 
 
 80 
 
 „ 100 to 150 
 
 
 70 
 
 72 
 
 75 
 
 78 
 
 80 
 
 80 
 
 80 
 
 80 
 
 80 
 
 . „ 150 to 200 
 
 
 75 
 
 77 
 
 SO 
 
 80 
 
 80 
 
 80 
 
 80 
 
 ' 80 
 
 80 
 
 Over 200 
 
 
 80 
 
 80 
 
 80 
 
 80 
 
 80 
 
 80 
 
 80 
 
 80 
 
 80 
 
 Where the total amount of pre-war wealth does not e.Kceed £200,000, the duty 
 charged shall not exceed the duty charged at the following effective rates on the whole of 
 the increased wealth : — 
 
 Total amount of pre-war wealth. 
 
 Not exceeding £10,000 
 
 Exceeding £10,000 and not exceeding £ 25,000 
 
 25,000 „ „ 50,000 
 
 50,000 „ „ 100,000 
 
 100,000 „ „ 200,000 
 
 EfiFective Rate 
 of Duty. 
 
 70 per cent. 
 
 72 „ 
 74 „ 
 76 „ 
 78 „ 
 
 * For the purpose of determining the percentage which the increased wealth bears to the pro- war 
 wealth, it is assumed that each taxpayer shall be deemed to have possessed at least £5,000 before 
 the war. 
 
 Note.— The rates in the above Table, as in those of Table III, are applied to sections or slices of 
 the increased wealth. There is this difiference, however ; in Table III the sections are fixed amounts, 
 ill Table V they are represented by percentajjres of the total pre-war wealth. The secondary graduation 
 in Table V is by reference to the amount of the pre-war wealth. The following example shows the 
 method of calculation of the duty. The taxpayer is as.'^amed to have possessed £150,000 before r.he 
 war and to liavo amassed a further £100,000 during the war (see column 6 of above Table). 
 
 First 
 
 Next 
 
 10 per 
 
 cent. 
 
 of 
 
 increase 
 
 (over pre-war wealth) £10,000 
 
 Duty 
 
 Nil. 
 
 5 
 
 
 
 
 5,000 
 
 
 at 34 per cent. £ 1,700 
 
 
 
 
 
 
 5,000 
 
 
 43 „ 2,150 
 
 10 
 
 
 
 
 „ 10,000 
 
 
 52 „ 5,200 
 
 20 
 
 
 
 
 „ 20,000 
 
 
 61 „ 12,200 
 
 20 
 
 
 
 
 20,000 
 
 
 70 „ 14,000 
 
 30 
 
 
 
 
 „ „ 30,000 
 
 
 75 „ 22,500 
 
 ■ 
 
 
 
 
 £100,000 
 
 
 Total duty ... £57,750 
 
 The total duty being £57,750 on a total increase of £100,000, the mean or oflfective rate of duty is 
 57,750 
 100 OOtf °''' '"'^Pi'^^ssod as a percentage, 57| per cent. Where the total amount of pro-war wealth does 
 
 not oxcei^d £200,000, the offoctive rates will be subject to the limits set out in the second part of the 
 Table. The following Table (Table VI) indicates by way of illustration the amounts of duty payable 
 and effective rates of duty on different degrees of increase.l 
 
25 
 
 
 iS 
 
 
 
 w 
 
 
 
 « 
 
 
 
 ^ 
 
 
 
 Q 
 
 
 
 1 
 
 
 
 u 
 
 
 
 bu 
 
 
 
 k. 
 
 
 
 v4 
 
 
 
 Q 
 
 m 
 
 
 § 
 
 M 
 
 
 ,^v. 
 
 ^ 
 
 
 > 
 
 « 
 
 
 
 6: 
 
 
 
 • 
 
 w 
 
 Oh 
 
 
 s 
 
 ■J 
 •< 
 
 
 
 H 
 O 
 
 
 c/l 
 
 H 
 
 
 u 
 
 En 
 
 
 ^ 
 
 
 
 o 
 
 
 
 
 >5 
 
 
 ta 
 
 o 
 
 S3 
 
 <3 
 
 
 o: 
 
 
 
 u> 
 
 H 
 
 
 a 
 
 y. 
 
 
 vs 
 
 U 
 
 
 ^ 
 
 
 t—t 
 
 
 EX4 
 
 >■ 
 
 :3 
 
 
 
 Q 
 
 N— « 
 
 w 
 
 
 K 
 
 J 
 
 o 
 
 H 
 
 23 
 
 5s 
 
 H 
 
 
 
 
 P3 
 
 
 
 u 
 
 
 
 ^ 
 
 X 
 
 
 H 
 
 ■< 
 
 
 O 
 
 C-l 
 
 
 U 
 
 
 
 b. 
 
 \f* 
 
 
 W 
 
 Q 
 
 
 A 
 
 u 
 
 
 < 
 
 as 
 
 < 
 
 
 u 
 ij 
 
 
 
 n 
 
 
 
 <! 
 
 a 
 
 
 
 H 
 
 
 ■< 
 
 1-1 
 
 
 "^ , 
 
 ■< 
 
 
 
 » 
 
 
 > 
 
 rs- 
 
 
 H 
 
 
 
 Q 
 
 A 
 
 00 
 
 
 b 
 
 ■< 
 
 
 o 
 
 »>4 
 
 
 M) 
 
 o 
 
 
 H 
 
 <5 
 
 
 >5 
 
 H^ 
 
 
 U 
 
 
 
 O 
 
 h. 
 
 
 :; 
 
 - 
 
 
 <3 
 
 
 
 o 
 
 
 
 K 
 
 
 
 NN 
 
 
 
 ^ 
 
 
 
 c 
 
 
 
 a 
 
 
 
 » 
 
 
 
 &2 
 
 
 
 >J 
 
 
 
 C3 
 
 
 
 < 
 
 
 
 H 
 
 
 I 
 s 
 
 a 
 
 5 
 
 cu 
 
 2 
 
 ^ 
 
 •/tOQ JO 
 
 tnuomy 
 
 J* 
 lanooiY 
 
 
 I 
 
 u 
 
 ■a 
 
 9 
 
 a 
 
 3 
 Q 
 
 a 
 
 9 
 
 o 
 
 a 
 
 •s 
 
 1 
 
 o 
 a 
 o 
 
 a 
 
 
 8 
 
 8 
 
 O 
 00 
 
 •i|B<I JO 
 
 "MMJOUI 
 
 tmony 
 
 •«>ini 
 
 •i»Il<I JO 
 
 lanomv 
 
 JO 
 
 vxwaay 
 
 •»iv»8jja 
 
 •i?na JO 
 timojny 
 
 JO 
 ^anomy 
 
 ■*»«H 
 
 •ii»n(r JO 
 lanomy 
 
 'asBMoaj 
 
 JO 
 
 ^anomy 
 
 Mpoajjg 
 
 •^inQ JO 
 ^anoiny 
 
 'atreejon] 
 
 JO 
 ^anomy 
 
 aAi!)oos3 
 
 Ana JO 
 taoomy 
 
 'ssneioai 
 
 JO 
 
 tnnonry 
 
 «^ 
 
 
 * •« >• 
 
 8 & 3 8 e s 
 
 ^Jsa&SSSs::: 
 
 I I I 
 
 i i l 
 
 1*1 ^- 
 i i I 
 
 -• -• »f 
 
 vO? 
 
 »• 
 
 to 
 
 • 
 
 M 
 
 e 
 
 e 
 
 e 
 
 o 
 
 lU 
 
 s 
 
 8 
 
 S 
 
 2 
 
 8 
 
 s 
 
 i> 
 
 
 8 
 
 1 
 
 1 
 
 I 
 
 s" 
 
 1 
 
 1 
 
 •> 
 
 1 
 
 s 
 
 % 
 
 s 
 
 § 
 
 1 
 
 '^ S" I I f I I I 
 
 « 
 
 M s « 
 
 •O » 91 
 
 8 8 r 
 
 A \ 
 
 
 S g g 
 
 '8- S J- |- I 
 
 i I 
 
 i I 
 
 *- 
 
 3 s 
 
 M S) to 
 
 S « Co 
 
 8 S 
 
 
 I 8 i 
 
 Z lO 2 
 
 •s le IS* 
 
 » t* n 
 
 
 I 
 
 5 S S S I 
 
 o 
 
 * -• lO 
 
 to c: 
 
 o o o 
 
 -f <e 00 
 -r ^ « 
 
 »^ eo t* 
 
 S 3 
 
 -< ot 
 
 CO 
 
 r» » ^ 
 
 (O ■•■ 
 
 8 te 
 
 <li ID 
 
 
 o o o 
 et -^ 9 
 
 00 S> Vi 
 
 o o c 
 tQ_ «^ e^ 
 
 8 to S 
 
 
 OA!!)0«Jja 
 
 •Ana JO 
 lanomy 
 
 2' g 
 
 >R= 
 
 S; S S S 8 8 
 
 s s 
 
 CO to 
 
 ■anMonj 
 
 »o 
 tanomy 
 
 8 3 3 
 
 t^ 04 M 
 
 — — g| 
 
 8 
 
 i I" 
 g 8' 
 
 MivMjja 
 
 •Ana JO 
 lanomy 
 
 •amajoni 
 
 JO 
 
 lanomy 
 
 as 
 
 ^Ro> 
 
 
 
 00 o as 
 S « » 
 
 N 5 5 
 ?t — — 
 
 V to c 
 
 
 5 * 
 5 5 
 
 M « e< 
 
 s i i 
 
 t- c* •2" 
 
 iiu&-»jj MAO q41tw.\v 
 
 "8 8 
 
 ;:£ ;: ii 
 
 .S *" ^ S J * 
 
 S 
 
 o 
 
 
 « « J- 
 
 K 
 
 "^ ^ 2 •- '^ 
 
 S 
 
 _ „ _ 8 
 
 5 o c » c-^ 
 
 c *^ * a 9 rt 
 
 -§8 1 ^-sl ^ 
 a 5 00 *^ « « 
 
 aJa <" St* 
 
 
 = - ^^^ 
 
 
 2 <" g 53 
 
 „ '3 « c « >» >■ 
 
 .SO)*'"— 
 
 2 o 
 s 
 
 > ^ 
 
 ^'T'S >> = , 
 
 U4 o —^ *r" 
 
 g « J. 
 
 te - > •r .- 
 
 « „ ■" >^ p "S — 
 Oj I— I «c ^ — 
 
 S « o - ^ =rt 2 
 
 « ^"^ S § S 
 
 13 £j g ? :5 ^ ~ 
 
 — ■ ^ o 
 != = — — ^ I. o 
 
 ■" i s fe ? o 
 ^ « Be S 5^ 
 
2G 
 
 III. 
 
 Board of Inland Revenue, 
 
 Somerset House. 
 
 January, 1920. 
 
 Memorandum Ijy the Board of Inland Revenue containing sugges- 
 tions as to the treatment, for purposes of a Duty on War-time 
 Wealth, of wealth which has devolved on death since the 
 appointed pre-war date. 
 
 1. A proportion of the individuals who enjoyed an increase of wealth during 
 the war will have died before the appointed post-war day to which the duty, if 
 imposed, would be directed. The question arises what steps, if any, should be taken 
 to levy duty upon increases of wealth which have thus devolved on death. 
 
 2. It would not be practicable to impose a charge of duty on the estates of 
 these deceased persons and to collect the duty from the Executors. In most instances 
 the estates will have been wound up and the assets distributed long before the 
 passing of the Act, and no effective means for recovering the duty out of the 
 deceased's estate could be devised. Although in a proportion of cases the estates 
 would still be open and the charge could be recovered, it would be manifestly inequit- 
 able to impose a charge, the effective recovery of which in individual cases would 
 depend upon the pure accident whether the distribution of the estate had or had 
 not been completed at the time when the charge was made. 
 
 3. This, however, does not conclude the matter. The property which has thus 
 passed on death will now be represented by assets in the ownership of the successors, 
 and the question arises whether any charge should be levied upon them in respect 
 of their inheritance. This question is a material one : it is probable that nearly 
 10 per cent, of the increased wealth in th« hands of individuals will have devolved 
 on death between the appointed pre-war date and the date of the passing of the Act. 
 
 4. It will probably be conceded that where a person has, since the appointed 
 pre-war date, inherited property which contains no element of war-time increase of 
 value (e.g., if he has inherited a block of shares which were held by the deceased 
 at the pre-war date and were of no greater value at the date of inheritance than 
 at the appointed pre-war date), the acquisition of this inheritance should not in 
 itself render him liable to the proposed duty. If the contrary view were adopted 
 and the whole value of the inheritance treated as an increase of wealth, the proposed 
 duty would become an additional Succession Duty imposed retrospectively. 
 
 5. The case is, however, different where a person has during the war inherited 
 property which contains an element of war-time increase, e.g., where he has inherited 
 a house which was of greater value at the date of inheritance than at the appointed 
 pre-war date, or where he has inherited the whole of a deceased person's estate 
 which has so increased in value. The question then arises whether the war-time 
 increase included in the inheritance should be taken into account in determining' 
 the liability of the successor to the proposed duty. 
 
 6. It may, on the one hand, be argued that death extinguishes liability to 
 taxation and that as testators now deceased had no notice of the proposed duty 
 and no opportunity of reconsidering in the light of it the arrangements of their 
 will, it would not be right now to tax in the hands of their successors war-time 
 increases which the testators enjoyed during their life and bestowed at their death 
 upon their successors in the faith that they would be left in undisturbed possession 
 of them.* 
 
 7. If this view prevails, it would follow that the net amount of any inheri- 
 tance should be added to the amount of the pre-war capital of liable individuals 
 who would then become chargeable to duty in respect of any increase in the value 
 of inherited property accruing after they received it, but not in respect of any war- 
 time increase of value which at the time of receipt the inheritance contained. 
 
 • It may be added that this view finds expression in the War Levy recently imposed in Germany. 
 
27 
 
 8. On the other hand, it may be felt to be inequitable that war-time increawt 
 of capital should escape the duty merely on account of the death of the jierson who 
 first enjoyed them, and that the value of his inheritance should lie related to the 
 appointed pre-war date and not to the date of succession when the general liability 
 01 the successor to the duty is dealt with. 
 
 9. If this baflig is adopted the selection of the best practical method of giving 
 effect to it noedH consideration. Probably any method would lie ojien to criticism 
 in some degree. The Board suggest the following procedure as that which appears 
 to them to be, on the whole, the best. 
 
 10. Successors should, it is suggested, l)e required to include in their capital at 
 the appointed post-war day the value of all their projierty, including that which 
 they have inherited since the appointed pre-war day, but they should be allowed to. 
 add to their capital at the pre-war day so much of the value of the inheritance as 
 they can show to have represented its value at that date. 
 
 11. For the actual ascertainment of the pre-war value of inheritances separate 
 rules should, it is suggested, he provid<Hl for four categories of cases, viz. : — 
 
 (a) Bequests of a sum of money (or an annuity) under a will or codicil made 
 
 before the appointed pre-war date. 
 
 (b) Bequests of small sums under a will or codicil made at any time. 
 
 (c) Bequests of specific property (such as a hou.se) held by the deceased at the 
 
 pre-war date. 
 
 (d) All other bequests than the above (including the bequest of a whole estate 
 
 or of the residue of an estate). 
 
 12. It does not appear to the Board that the first of these categories (money 
 bequests under pre-war wills or codicils) would be held to include any element of 
 war-time increase and these bequests might be added to the pre-war capital of the 
 recipient at their face value. 
 
 13. The same course might be taken with the second category (bequests of small 
 sums) without any appreciable loss of duty. 
 
 14. The recipient of a bequest of specific property (such as a house) held by the 
 deceased at the pre-war date would usually experience no greater difficulty in ascer- 
 taining its pre-war value than in ascertaining the pre-war value of any other pro- 
 perty belonging to him and that value should, it is suggested, appear in his return. 
 
 15. The fourth category presents more difficulty. It includes money bequests 
 made under wills dated since the pre-war day and bequests of residues of estates. 
 In order to determine the element of war-time increase contained in such bequests 
 it would be necessary to estimate the pre-war value of the estate of the deceased 
 (excluding assets which were held by the deceased at the pre-war date and have been 
 the subject of a specific bequest, see the preceding paragraph) and to compare that 
 value with the corresponding value at the date of death. The increase of value 
 (if any) would then be spread pro rata over the various bequests included in the 
 present category. 
 
 16. The following example illustrates the suggested procedure. A, by will 
 dated 1 January, 1915, made a specific bequest to B of a house held by him at the 
 pre-war date and a bequest of £1,000 to C (each free of duty) and bequeathed the 
 residue of his estate to D. He died on 30th June, 1915. The house was of the 
 pre-war value of £600, and at the date of death of the value of £800. B will be 
 entitled to add the sum of £600 to the value of his pre-war capital for the purpose 
 of his return; in the computation of his post-war capital he will include the post-war 
 value of the house. A's estate, exclusive of the house, was worth £6,000 at the pre- 
 war date and £8,000 at the date of death. One quarter of the value at the date of 
 death is thus a war-time increase. C received the bequest of £1,000 and D 
 received the residue, amounting after payment of death duties and expenses, to 
 £6,000. Three quarters of these respective sums would be added to the pre-war 
 capital of C and D as representing the pre-war value of their bequests so far as 
 they could respectively prove that at the appointed post-war date their estates 
 contained assets representing the property inherited. 
 
28 
 
 17. It must be expected that persons who have received a general bequest of 
 this last-named character (as opposed to a specific bequest, e.g., of a house) will 
 experience difficulty in proving its pre-war value. While, however, it is true that 
 the practical difficulties to be overcome are serious, it will be recalled that the Board 
 of Inland Revenue have records, in the Estate Duty Office, of property passing on 
 death and records of prices and values of land in the Land Valuation Office, while 
 Income Tax and Super-tax records will often provide the key to pre-war value of 
 various classes of property. Information of this character which the Board would 
 need to place at the disposal of successors* combined with other sources of informa- 
 tion to which successors could normally secure access would, it is considered, prove 
 adequate to enable them effectively to ascertain the amount of the waT-time increase 
 in inherited property. 
 
 18. The foregoing paragraphs relate primarily to wealth which has devolved 
 on death between the pre-war and the post-war date. It remains to consider the 
 question of wealth which has devolved on death between the post-war date and the 
 passing of the Act. It would be possible, as soon as a Bill is introduced {e.g., in 
 April next), to give notice that executors of all persons dying after the date of 
 introduction will be held liable to pay the duty which would have been charged 
 on the deceased had he survived. The issue would then be narrowed down to the 
 case of deaths taking place between the post-war date and the date of introduction 
 of the Bill. 
 
 19. If it be held that death extinguishes liability to the proposed duty no 
 question would arise of making a charge in these cases. If the contrary view pre- 
 vails the procedure above suggested to meet the case of deaths before the post-war 
 date might be adapted to meet these cases. Successors to property passing on such 
 deaths might be required to include its pre-war and post-war value (measured on 
 the lines indicated in paragraphs 10 to 15 above) in the respective returns of their 
 pre-war and post-war wealth. 
 
 • Legislation -would be necessary to secure this object. 
 
rv 
 
 Board or Inland Revenue, 
 
 S0MER8ET H0C8E. 
 
 January, 1920. 
 
 Memorandum by the Board of Inland Revenue on limited interests 
 arising under settlements &c., with suggestions for their 
 treatment for the purposes of a duty on war-time wealth 
 
 I. Introductorv. 
 
 1. In their memorandum on the practicability of levying a duty on war-time 
 wealth,* Ihc BrMird of Inland llovcnue pointed out that limited interest* under 
 S('tLl<;meiits, &c., iiitioduco stsrious practical dini(;ultie8 intf) the adminiHtration of 
 the contemplated duty. The object-of the present rnemoraijdum is to discuss tliese 
 difliculties and to maKc suggestions as to their solution. 
 
 II. Character of the Interests to de df.alt with. 
 
 2. The limited interests with which the memorandum is primarily concerned 
 are thos<> arising under settlements created either inter rivos {e.g., on marri^e) or 
 by will. 
 
 3. In the majority of these cases the settled fund consists principally of 
 landed estate or of stocks and shares. 
 
 4. The interests consist— in a case without complications — of the interest of 
 the life-tenant who is entitled for his life to the income of the settled property, and 
 the interest of the remainderman who is entitled to that settled property itseli upon 
 the death of the life-tenant. 
 
 5. Frequently, however, limited interests are more complicated in character. 
 For example, in lieu of an ordinary life-tenancy there may be a life-tenancy for 
 
 the joint continuation of two lives or for the longer of two lives or two life-tenancies 
 in succession, or a life-tenancy which will be defeated ujwn the happening of some 
 event, e.g., upon re-marriage. 
 
 Similarly, there may be no remainder man with a vested interest, i.e., no living 
 person with a present capacity to take possession of the settled property if the 
 possession becomes vacant by the death of the life- tenant or otherwise. The 
 remainder to the settled estate may be held for a person as yet unborn, or (as com- 
 monly occurs in settlements of personalty) for one or more persons, not yet 
 ascertainable, out of a group, e.g., for such of the children of the (deceased) settlor 
 as his widow may by her will appoint. Or again, the remainder may be held in trust 
 for the child or children of a certain person if he has issue, or in the event of his 
 dying without issue, for some third party. It is of course frequently the case also 
 that the remainder, even if vested, is divided into shares held for different 
 individuals. 
 
 6. The Appendix to this memorandum contains illustrations of settlements of 
 a character often met with. 
 
 7. Apart from the {wints arising under settlements there are further ix)ints 
 for consideration in connection with other limited interests created by will or gift, 
 e.g., annuities and jointures. These points are dealt with in Section VI. of this 
 memorandum. 
 
 III. Possibility of treating a Settled Fund as a Separ.ate Entity. 
 
 8. The Board have suggested that a duty on war-time wealth, if imposed, 
 should be charged, subject to allowances and reliefs, on the aggregate increase in the 
 value of the capital of individuals between the apjwinted pre-war and jxist-war 
 dates. t The corollary of this suggestion is that the property (both pre-war and 
 
 • Pan^raphs S4-87. 
 
 t Board's memorandnm on the practicability of impasing a duty on war-time wealth, para. 27. 
 
30 
 
 post-war) of each liable individual must be valued, w^hatever the form it may have 
 assumed,* so that the aggregate increase of value enjoyed by the individual may 
 be ascertained and duty may be charged upon him accordingly. 
 
 9. Under this principle the pre-war and post-war value of the interest of each 
 liable individual who has an interest in settled property must be separately 
 ascertained. 
 
 For example, if settled property, of which A is life-tenant and B is remainder- 
 man, has increased in value from £20,000 (pre-war) to £30,000 (post-war), it is not 
 sufficient, on the principle above indicated, to have ascertained the increase in the 
 value of the settled property; A and B are separate individuals, each of whom is 
 liable to duty on any increase in his aggregate wealth (which may consist in part 
 of his interest in the settlement and in part of other wealth) : in order that they 
 may each be properly assessed, the amount of the increase in the value of their 
 interests regarded separately must be ascertained. 
 
 Similarly, when each individual has been assessed, payment ought to be re- 
 covered in such a way that the burden of A's duty falls upon A, and the burden of 
 B's duty falls upon B. It would not be satisfactory, for example, if the duties 
 respectively payable by A and B were paid out of the settled fund by the trustees, ajid 
 the payment were left to act indiscriminately as a burden upon the interests of both 
 ■'A and B. 
 
 10. The valuation of limited interests and the procedure requisite for the 
 recovery of duty attributable to increases in their value are problems which add 
 very sensibly to the complexity of the duty. It seems worth while, therefore, to 
 enquire at the outset whether means could be devised for avoiding these difficulties 
 as a whole. 
 
 11. This object could indeed be attained at a sacrifice of principle if the con- 
 siderations mentioned in paragraph 9 were overlooked and if, for purposes of the 
 duty, limited interests owned by individuals were not counted as part of their 
 wealth, but, in lieu, settled funds were treated as separate taxable entities, duty 
 being charged upon the trustees in respect of any increase in the value of a settled 
 fund as such. For example (taking again the illustration used in paragraph 9), a 
 settled fund was of the pre-war value of £20,000, and is. now of the value of £30,000. 
 A is the life-tenant of the property, and B is the remainderman. It seems worth 
 while to consider whether — at the expense, no doubt, of creating some anomalies — 
 it would be possible, instead of charging A and B respectively with duty on any 
 increase in the value of their interests, to disregard these interests and, in lieu, to 
 levy a duty at a rate fixed by reference to the circumstances of the settled property, 
 (not of A and B), on the increase of £10,000 in the value of the property itself, 
 recovering the duty from the trustees. 
 
 12. There is perhaps more to be said for such a departure from the general con- 
 ception of the duty (more especially in the light of the obvious simplification which it 
 would secure) than a first consideration would suggest. Limited interests under 
 settlements seem to be differentiated to some extent from other forms of wealth. In 
 origin they partake of the nature either of gifts or of bequests — using those terms in 
 a strictly popular sense — according as they arise under settlements inter vivos or 
 under settlements by will. The interests are not very readily saleable and are not 
 frequently sold. In the eyes of the life-tenant they usually assume the form of a 
 life income; to the remainderman they are in the nature of an expectation. It might 
 not, therefore, necessarily be felt that a distinct treatment of settled property 
 intrinsically represented an altogether indefensible departure from the general 
 scheme of the proposed duty. 
 
 13. In its Revenue aspects also this method of treating settled property would 
 probably be as productive as the method of dealing with the interests separately. 
 It may be conjectured that there is settled realty in this country to the value of about 
 seven hundred million pounds and settled personalty to the value of rather less than 
 one thousand million pounds. As a general rule, the realty will have to some extent 
 increased in value during the war, while the personalty, consisting largely of fixed- 
 interest-bearing securities, will have decreased in value, possibly to a substantial 
 extent. Under the present suggestion, the Exchequer would receive duty upon the 
 
 • Board's memorandum on the pmcticability of imposing a duty on war-time wealth, para. 64. 
 
31 
 
 increase in the value of the settled realty, and the diminution of value of settled 
 property, consisting wholly or mainly of jMirsonalty. would not result in any 
 diminution of the hxchequer receipt.* 
 
 14. But the last-named fact indicates tliat this method of approach would fail 
 to secure a fair incidence of the duty as between different taxpawiH. Many of the 
 individuals who own limited interests in settled personalty which have decreased in 
 value would probably l>e persons who have enjoyed increases in other (non-settled) 
 wealth [jossoHsed hy them, and if they were required to pay tax uixih the whole of 
 the incrwusc in tlicir non-settled wealth without being entitled to set off against that 
 increase the decrcjise in the value of their interest in the settled personalty, a 
 legitimate source of comjjlaint would, as it seems to the Board, be created. 
 
 15. Moreover, it will probably be felt that the duty as a whole should be a 
 graduated duty, the rate having reference both to the increase in an individual's 
 wealth and to his total resources. Such a graduated scale would only be appropriate 
 if the total wealth of each liable individual were taken in review. The practical 
 application of the scale would be deranged if particular parts of the wealth of some 
 individuals were disregarded in the computation of their individual liability. 
 
 16. In these circumstances the Board do not think that the separate taxation 
 of settled property, as such, would be desirable or would be likely to command 
 acceptance. At b<it a method based partly on this principle but obviating its most 
 manifest disadvantages might be devised as a pis oiler if it were decided that the 
 practical difficulties of dealing with the matter on scientific lines are prohibitive. 
 
 IV. — Ascertaining of the capital value of limited interests and adjustmenib 
 
 OF that value necessary for purposes of the DUTY.t 
 
 17. Reverting to the principle of the separate valuation of limited interests in 
 settled property and the charge of duty by reference to net increases in the value of 
 the wealth of individuals inclusive of the value of these interests, two questions 
 present themselves for consideration, viz., (a) tlie methods of valuing the interests and 
 the adjustments of these values which the principles of the duty may entail, and (b) 
 the methods of recovery of the duty attributable to increases in the value of these 
 interests. It is proposed to discuss these questions separately. 
 
 18. The valuation of a limited interest under a settlement involves examination 
 of two matters : — 
 
 (a) the value of the settled property or the income it will produce : 
 
 (b) the extent of the limited share of the particular beneficiary in the property 
 
 or its income.^ 
 
 (a) Ascertainment of the value of settled property or the income thence derived 
 
 19. Owners of limited interests will need to ascertain the value or income of 
 the settled fund. Many such owners (especially remaindermen) when first called 
 upon to make a return for purjwses of the duty may be unaware or not fully aware 
 of the particulars of the settled property and of the income which it produces. 
 
 20. Speaking generally the obligation placed by common law on trustees of 
 settled property (or persons standing in the relation of trustees or having the manage- 
 ment of the property, e.g., the life-tenants of entailed estates) to furnish to the 
 beneficiaries on reauest particulars of the property would be adequate for this 
 purpose : but, in addition, the trustees should be required to furnish the same in- 
 formation to the Board of Inland Revenue in order that the Board may be in a 
 position to check valuations returned by the owners of interests. These returns by 
 trustees (which would be returns of particulars, not valuations) should not in the 
 majority of cases involve material inconvenience or expense. 
 
 • It is not uncommon for realty and personalty to be combined in a single settlement. In sach 
 a case an increase in the value of the realty would tend to be counteracted by a decline in the valae 
 
 of the personalty. 
 
 t This section deals with settlements which were in beini? prior to the appointed prewar date. 
 The question of settlements created at a later date is referred to at the end of this memo., pans. 67 
 and 68 below. 
 
 X Broadly speaking the sum of the values of all the separate interests in a settled fnnd may be 
 taken as equivalent, or nearly equivalent, to the value of the fund asX^^hole. 
 
32 
 
 In this way the owner of an interest would be in a position to gauge the value of 
 the settled property. 
 
 (b) Ascertainment of the extent of the limited interest. 
 
 21. The value of a life interest in settled property of given value is usually 
 measured by reference to the life-tenant's chance of receiving each year's income. 
 This chance is measured by mortality tables and the value is arrived at on a calcula- 
 tion combining .those tables with an interest table. The value thus varies with the 
 expectation or life of the life-tenant or life-tenants. The value of the remainder 
 v^aries inversely in the same way. For example, if the life-tenant is aged 25, his 
 chance of continuing to receive each year's income for the next forty years is very 
 substantial and his interest is at the moment much more valuable than that of the 
 remainderman. If, on the other hand, the life-tenant is very old, his interest is com- 
 paratively small and the interest of the remainderman approaches equivalence to the 
 ownership of the whole settled property. 
 
 22. When such life interests and other interests under settlements are bought 
 and sold upon the market the ordinary market practice is to gauge their value by 
 reference to mortality tables and interest tables, and recognised mortality tables are 
 in use amongst valuers for the purpose. There is not, however, any one set of tables 
 which is exhaustive and is in universal use, and it would be desirable to prescribe in 
 the Act mortality tables to cover the classes of cases which would commonly arise. 
 
 23. There are, however, special classes of cases (dealt with in the immediately 
 succeeding paragraphs), which require further consideration. 
 
 (c) Ascertainment of the value of a limited interest where the life tenant has special 
 'powers or the constitution of the fund is exceptional. 
 
 24. Mortality tables enable an estimate to be made of the life-tenant's chance 
 of receiving each year's income. But in some cases exceptional difficulties occur in 
 estimating what each year's income may be. For instance, if a life-tenant of 
 settled property which includes timber or a mine is not " impeachable for waste," 
 he is entitled to cut down the timber or open and work the mine, and is required to 
 place only one quarter of the proceeds to the capital account of the settlement. In 
 such a case his actual interest in the fund may be far larger than the actuarial 
 computation of it. In the more common case where the tenant for life is " impeach- 
 able for waste," he would be required in like circumstances to carry three-quarters 
 of the proceeds to capital account. In other classes of cases, e.g., Where a settled 
 estate consists of unripe building land or reversionary interests giving but a small 
 present annual return, the reverse condition obtains. In these cases (which would 
 be exceptional) the value of each interest must be deduced from a consideration of 
 the relevant circumstances as a whole. 
 
 {d) Limited interests which may be defeated in certain contingencies. 
 
 25. There are cases also where life tenancies (and other vested interests) may 
 be defeated in certain contingencies. For example, a widow may be a life-tenant 
 for the duration of her life or pending re-marriage. The possibility of an interest 
 being defeated no doubt detracts from the capital value of the interest, but seldom 
 to an extent which can be satisfactorily estimated. In connection with a duty on 
 capital this question might prove embarrassing, but in connection with a duty on 
 increases of capital only, the possibility of an interest being defeated can be dis- 
 regarded with but small effect upon the incidence of the duty. It is suggested that 
 these contingencies should be disregarded, save in cases where the event has 
 happened before the passing of the Act or before some other prescribed date. 
 Where the contingency has thus occurred, the term of the life-tenant's interest, 
 which was previously uncertain, can be treated as a term certain in the light of the 
 actual event. 
 
 In a limited number of cases the disregarding of a contingency which has not 
 occurred' at the date of valuation but which occurs afterwards might produce hard- 
 ship against which a safeguard would be necessary. A safeguard is suggested in 
 paragraph 58 below. 
 
(«) Contingent intere»t$. 
 
 26. A further question for ounsideration is that of contingent interests. Many 
 of these interests are such that it is almost impossible to place a value'upon them 
 and still more diflicuit to trace any increase or decrease in that value between the 
 pre-war date and the post-war date. 
 
 27. For example, an indivdual may be entitlerl to the remainder to a settled 
 estate in the event of mn\Q other pers^m dying childless. Or again, the remainder 
 to settled personalty may vest in such one of the children of A as B may hereaft4!r 
 appoint. 
 
 2H. Speaking t^enerally, any attenjpt to deal fM-ientifically with the value of 
 contingent interest.- of individuals in cases of this kind would break down, ami 
 specialmeans of defiling with these cases are necessary. This matter is dealt with 
 in paragraph 61 below. . 
 
 (/) Market value of interests dependent upon life. 
 
 29. It has been assumed in the foregoing paragraphs that the valuation of 
 limited interests in settled property will be directed to the ascertainment of their 
 market value at the apj)ointed pre-war and post war dates, and it has been indicated 
 above that this value is normally ascertained with the aiii of mortality tables which 
 estimate average expectation of life. 
 
 Over any large number of cases the avenige results given bv accurate tables are 
 correct. But in any individual case a value so arrived at will not usually accord 
 with the facts as subsequently revealed, as the life by reference t« which the calcu- 
 lation is made will not usually fail at precisely the date which mortality tables 
 presume. Often, of course, the discrepancy will be very large. 
 
 30. Tlie question arises whether valuations made by reference to mortality 
 tables ought to be revised and the whole calculation recast after the death of the 
 individual by reference to whose life the calculation proceeded, where the death 
 takes place at a date other than the " expected " date. 
 
 31. If this procedure were adopted there could be no finality in the proposed 
 duty. Assessments made at the present time, both upon life tenants and u|x>n 
 remaindermen, might require adjustment by way either of increase or of decrease 
 at any moment in, say, the next seventy or eighty years. 
 
 32. In their memorandum on the practicability of imposing a duty on war- 
 time wealth (paragraph 69) the Board suggested that the duty must be based on a 
 comparison of pre-war and post-war market values, and they consider that .if the 
 duty is to be workable, this principle must apply in all cases, i.e., in cases of pro- 
 perty (including limited interests) which are subject to fluctuation of value or 
 sudden change of value from time to time, no less than of property the value of 
 which is ordinarily more stable. 
 
 33. The adoption of this principle may give rise to the possibility of hard- 
 ship in one class of case^ viz., the case where a life tenant, having been charged 
 to duty upon an increase of wealth estimated upon the assumption that he will live 
 for a certain time, dies at a date much anterior to the assumed date. Safeguards 
 against this hardship would be requisite, and possible measures are suggested in 
 paragraph 57 below. 
 
 {g) Waxing and waning of limited interests owing to the passage of time. 
 
 34. It may be well to recall that life interests and remainders automatically 
 wax and wane owing to the passage of time. 
 
 35. In the normal case as a life-tenant grows older and his interest draws 
 nearer to extinction its value decreases and the value of the interest of the remainder- 
 man increases by a corresjwnding amount. 
 
34 
 
 36. The following example relating to settled property of the value of £30,000 
 and producing income at 5 per cent, will illustrate the point : — 
 
 A is the life-tenant aged at the pre-war date 70, and at the post-war date 75. 
 The value of the settled fund remains constant. 
 
 The pre-war value of A's interest on the Carlisle mortality tables was £9,450 
 and the pre-war value of B's interest was £20,550 
 
 £30,000* 
 
 The post-war value of A's interest (on the same tables) is £7,500 
 
 and the post-war value of B's interest is £22,500 
 
 £30,000* 
 
 37. In the above example the value of the life tenancy has decreased in a period 
 of five years (i.e., the period which, it may be anticipated, will separate the two 
 valuations for the purposes of the suggested duty) by £1,950, and the value of the 
 remainder has increased by the same amount. This increase and decrease is due 
 solely to the effluxion of time. 
 
 38. The view might be taken that any decrease in the value of a life interest 
 or any increase in the value of a remainder due merely to effluxion of time should be 
 eliminated in calculating the increase in an individual's wealth. 
 
 39. But on examination this view hardly seems tenable. While its adoption 
 would benefit remaindermen by eliminating from the scope of the duty any increase 
 in their wealth due to the growth in the extent of their interest it would vrork with 
 the opposite effect in its application to life-tenants. For example, it may be found 
 that the value of a particular life tenancy at the post-war date (compared with it^ 
 value at the pre-war date) shows neither increase nor decrease ; on further investiga- 
 tion it may transpire that this result accrues because an actual increase in the income 
 from the settled property precisely counterbalances the effect of the decrease in the 
 extent of the life interest due to the increased age of the life-tenant. The life- 
 tenant, the market value of whose interest has remained constant, would feel a sense 
 of grievance if an adjustment of that value were made for the purposes of the duty, 
 rendering him liable to pay duty on account of the increase in the income of the 
 settled property without giving him credit for the diminution, owing to the passage 
 of time, of his interest therein. 
 
 40. Moreover, the waxing and waning of interests in property by passage of 
 time is by no means peculiar to the limited interests now under consideration. Such 
 limited interests as purchased annuities, leaseholds (whether for lives or years), or 
 shares in businesses (e.g., gold mines), the assets of which are wasting assets, 
 decrease with the passage of time, and such interests as reversions to leases at a 
 ground rent, life insurance policies, funds accumulating at compound interest, or 
 funds invested in undertakings which are not immediately productive, increase in 
 value in the same way. It would, of course, be unthinkable that an attempt should 
 be made so to adjust valuations for purposes of the duty as to correct every natural 
 growth or decline in the value of capital in all the various cases just mentioned. 
 
 41. In all the circumstances, therefore, the Board take the view that it would be 
 undesirable to eliminate from, the purview of the duty alterations of the value of 
 limited interests caused by the passage of time. 
 
 (h) Interest enlarged by death, &c., since the standard date. 
 
 42. Cases will frequently arise in which in the interval between the pre-war 
 date and the post-war date a limited interest has been enlarged by the dropping out 
 of a precedent life. For example, A was at the pre-war date remainderman to 
 an estate of which the life-tenant was aged 20. A's interest at that time, being 
 deferred for the equivalent of some forty years, would, when valued by reference 
 
 • In this illustration, for the sake of simplicity, the fact that settled property producing the same 
 income before and after the war would ordinarily have fallen in value owing to the general increase 
 in the rate of interest has been ignored. Though this fact would, if taken into account, complicate 
 the calculations, it does not invalidate the general principle underlying them. 
 
to mortality tables, be extremely small. If before the appointed post-war date the 
 life-tenant has died prematurely, A'» interest will have been enlarged into full 
 ownership. 
 
 43. In these cases the elements which go to make up the increase in the value of 
 the estate of the remainderman at the appointed post-war date (as compared with ite 
 j)re-war value aHcertained on mortality tables) may be regarded as three in 
 number : — 
 
 (a) any increase in the value of the settled estate (of which the remainder- 
 man has become full owner) between the appointed pre-war and post- 
 war dates; 
 
 (6) the unexpected enlargement of the renminderraan's interest due to the 
 premature death of the life-tenant; 
 
 (c) the natural increase in the size of the remainderman's interest (due to 
 passage of time) as between the appointed pre-war date and the date 
 
 of the life-tenant's death. 
 
 44. Of these elements of increase it is suggested that the second should be 
 treated as otitside the scope of the duty. The advantage gained by the remainder- 
 man by the death of the life-tenant seems to be strictly analogous to that gaine<l by 
 any heir who inherits during the war property which has not increased in value since 
 the appointed pre-war day. 
 
 45. The other elements in the increased value of the remainderman's interest 
 (viz., the increased value of the settled property which he now towns, and the natural 
 increase in tiie extent of his interest as between the pre-war date and the date of 
 the death of the life-tenant) seem to fall properly within the scope of the duty. 
 
 46. If this view is adopted effect could be given to it with sufficient practical 
 approximation by providing that, in ascertaining the pre-war value or limited 
 interests in cases in which an individual, by reference to whose expectation of life 
 the valuation would be made, has died between the two appointed dates, the pre-war 
 valuation should be based on the actual term of life of the deceased individual, and 
 not upon average length of life. 
 
 (i) Conclusions. 
 
 47. The foregoing paragraphs deal with the ascertainment of the capital value 
 (pre-war and post-war) of limited interests under settlements and of adjustments 
 of those values necessary for the purposes of the suggested duty. It will probably 
 be conceded that, except in. the case of contingent interests for which a special pro- 
 cedure has to be found (see paragraph 61 below), the ascertainment of the capital 
 value and the increase or decrease therein is practicable. 
 
 48. The questions involved, however, will be of a character unfamiliar to many 
 taxpayers and it will no doubt be felt that in the period in which returns are being 
 called for and rendered, the resources of the Board ought to be freely extended to 
 taxpayers to give them all possible assistance and advice in the rendering of returns. 
 In some cases no doubt they will elect to seek professional assistance. 
 
 49. It will be observed that once the value of settled proi^erty is ascertained, 
 the remaining problem is mainly that of apportioning that value between the 
 different limited interests.* The assessing organisation will need to take account 
 of the fact that normally the sum of the values of the separate interests should equal 
 the value of the whole, and, as far as necessary, to deal concurrently with the cases 
 of the owners of different interests in a single fund. These owners would need also 
 (as a safeguard) the right of representation on an appeal by any one of them as 
 regards the value of his interest. 
 
 50. Seeing that the owners of limited interests are very often members of a 
 single family this fact causes somewhat less difficulty than would at first sight 
 appear. It is, however, a factor which makes for delay in the final settlement of 
 assessments. 
 
 • In practice the value of the different interests is deduced from a consideratiou of the net 
 annual income, but the" underlying principles which are followed are the same. 
 
36 
 V. Rkcovery of duty attributable to increase in the value of limited 
 
 INTERESTS. 
 
 51. At this point it may be well to repeat that settled funds consist chiefly of 
 landed estates which may be expected to have to some extent increased in value, and 
 of stocks and shares which in many cases will have substantially declined in value, 
 and further that life-tenancies wane while remainders wax with the passage of time. 
 
 52. The first of these facts suggests that the aggregate amount of duty to be 
 collected on account of increases in the value of interests in settled property is 
 unlikely to be large : the second suggests that a considerable proportion of the duty 
 collectible will be collectible from remaindermen. 
 
 53. The duty will be payable in eath case by the individual on whom it is 
 charged and must be paid by him out of his own resources. It should not in the 
 normal case be paid out of the settled funds; those funds do not belong to the person 
 charged, although he has an interest in them. 
 
 54. There are however certain contingencies which have to be provided for; in 
 this connection the life-tenancy, the vested remainder and the contingent remainder 
 need separate consideration. 
 
 55. Life-tenancies. — It may happen that the life-tenant has no wealth (or little 
 wealth) other than his life-tenancy (which represents only a life income). In tliat 
 event he would probably be unable to pay the duty, if it is substantial in amount, 
 otherwise than by instalments. 
 
 56. Further, as has been mentioned above {see paragraph 33), the charge of duty 
 upon a life-tenant by reference to the increase in the market value (ascertained upon 
 mortality tables) of his life interest may in some cases give rise to a hardship calling 
 for remedy. The increase of capital value shown by the comparison of two values of 
 a life interest based upon the assumption of a normal length of life may greatly 
 exceed the increase which will actually be enjoyed if the owner dies within a short 
 time after the valuation is made. Thus, in the absence of safeguards, life-tenants who 
 hereafter die prematurely might have previously been called upon to pay a sum of 
 duty even exceeding the capital increase which tney have enjoyed. 
 
 57. To remove the danger of hardship the Board suggest the following course : 
 Life-tenants should be entitled as of right to pay duty attributable to increase 
 
 of value of their interest by instalments extending over ten years or their expectation 
 of life based on a prescribed mortality table (whichever is the shorter). 
 
 If the life-tenant dies before all the instalments are due, the undue instalments 
 should be remitted. The life-tenant should further be entitled to give notice to the 
 trustees of the settlement that, in the event of his death before all the instalments 
 are due and in the event of the duty payable by him up to the date of death in respect 
 of the increase in the value of his life interest exceeding the sum which would have 
 been payable in respect of such increase on a valuation based on the actual term of 
 his life, the excess will be claimed by his estate out of the settled funds. This excess 
 would then in effect fall on the next life-tenant (if any) and the ultimate reversioner, 
 neither of whom would have cause of complaint as he has ex hypotkesi come into his 
 estate at an earlier date than he had reason to expect. 
 
 58. A precisely similar hardship might arise in cases in which a contingency 
 capable of defeating a life interest has been disregarded in the valuation of the 
 interest and subsequently materialises (see paragraph 25 above). The same pro- 
 cedure in regard to the remission of duty, &c., is suggested as applicable also to this 
 class of case. 
 
 59. Vested Remainders. — The remainderman liable to pay duty in respect of 
 the increased value of his remainder may possess no property (other than his 
 remainder) out of which to make the payment. In such circumstances it would seem 
 proper to give him tlie right to call upon the trustees to advance him the necessary 
 sum to make the payment. The advance of tliis sum (whether obtained by realisa- 
 tion of part of the settled funds or by borrowing) would reduce the incx)me of the 
 life-tenant (unless such a sale or mortgage were strictly limited to the reversioner's 
 interest, which would not always be practicable), and the trustees should therefore 
 be empowered either to buy the life-tenant an annuity sufficient to kee]) up the capital 
 value of his interest or to transfer to him [)art of the remainderman's interest with 
 
87 
 
 th« same object by allocating for hi« abBohit<» use an appropriate part of the settled 
 funds. 
 
 60. This solution presupposes that the reinaindertnan would ifot be in a 
 position to jwy interest on the advance. If he is in a position to do so the necessity 
 for this adjustment does not arise. 
 
 61. Contingent Remainders. — It haa been mentioned above (paragraphs 26-28). 
 that it is not piactiaiblu to deal with these rcimiiiiderH im oart of the pni|>erty of an 
 individual. Fho following poHKiblc (xMirse suggests itself : — 
 
 To value the parti(;ular interests which an* Hubject to the oontingeocjr aa 
 one entity and to calculate tlie duty as il the interests were the sf>le property 
 of an individual poH8e«He<l of no other estate, but granting aoroe uniform 
 exempt margin instead of the si)ecial allowanoes and relief^ which may be 
 provided for individuals; to reouire the trustees tf) f)ay the duty out oi the 
 settled fund and to safeguard tne position of the life-tenant (by buying him 
 an annuity or otherwise) in the same niann^'r as has been suggested, for 
 the case when trustees advance duty to a remainderman in respect of duty 
 on a vested remainder. 
 
 62. In order to make payments or advances in the manner suggested trustees 
 would need statutory powers to realise or transfer settled assets or to borrow. 
 They would also need power to charge against the estate any expenses necessarily 
 incurred in the discharge of any statutory functions imposed upon them in 
 connection with the duty. 
 
 63. The forms which limited interests assume are so varied and often so com- 
 plicated that exceptional cases must necessarily arise in which the question of the 
 proper arrangements inside the trust resulting from these provisions will be the 
 subject of doubt or dispute. To meet this point it might be well to appoint a 
 tribunal for the purpose of hearing such cases and making orders upon them at the 
 request of the parties without the expense and formality of recourse to the Courts 
 in each case. A right of appeal to the Courts from the decision of such a tribunal 
 would, of course, be appropriate. 
 
 VI. Lesser Points calling for Special Consideration. 
 
 (a) Resettlements. 
 
 64. It is not uncommon for a remainderman to settle his remainder. Thus. 
 one limited interest may become wrapped up in several more. Theoretically, the 
 difficulty of valuing a limited interest is increased when the corpus of the ifund 
 itself includes such an interest. In practice, for purposes of the duty now under 
 consideration, the matter is not of great importance. Probably it is only in a 
 minority of cases that an increase or decrease in the value of an interest in an interest 
 is sufficiently great to be accurately gauged. 
 
 65. It would merely mean that the original settlement and the subsidiary 
 settlement would have to be considered together and the interests ascertained in 
 accordance with their joint operation. The practical effect would De to take the 
 original remainder out of the category of a vested remainder and put it into a new 
 cjitegory detennined by the terms of the second settlement. 
 
 (b) Entailed Estates. 
 
 66. An entailed estate where there is a life-tenant would need to be treated 
 on the same principles as other settled property, and similar methods would have to 
 be adopted in cases of estates that are the subject of inalienable Crown entails or 
 that are inalienably entailed by Act of Parliament. Other entailed estates give 
 rise to no special difficulty. 
 
 It would be necessary to enact that (except in the case of inalienable entails) a 
 tenant in tail in [X)ssession or in remainder subject to a preceding life estate should 
 for the purpose of the duty be regarded as a tenant in fee simple in possession or in 
 remainder according to the circumstances. 
 
 (c) Annuities, jointures, &c., under wills. 
 
 67. These annuities. &c., would require to be valued by reference to the pre- 
 scribed mortality tables {see paragraph 22). Interests of this kind would not in 
 
38 
 
 ordinary circumstances show an increase of value and they are unlikely to create 
 difficulty. 
 
 {d) Residuary estates. 
 
 68. Some persons called upon for returns will no doubt be entitled to residuary , 
 estates under wills, and the valuation of such estates may present difficulty. For 
 example, in cases in which a deceased person has bequeathed his estate to his 
 trustees on trust to pay certain annuities and to pay the residue to a residuary 
 legatee, the legatee must be able to obtain from the trustees particulars of the con- 
 stitution and income of the fund. This power he already possesses under common 
 law but similar particulars would need also to be furnished by the trustees to the 
 Board of Inland Revenue on request. 
 
 {e) Discretionary Trusts. 
 
 69. There are cases in which funds are held by trustees on trust to apply 
 the income in certain ways or to accumulate it at their discretion; in some instances 
 they have a discretion also as to the ultimate destination of the capital. For 
 example, trustees may hold an estate on trust to apply the income, so far as 
 necessary, to the maintenance and education of an orphan and to accumulate the 
 balance, and on the orphan attaining the age of 25 to give the capital to him or 
 to other persons as the trustees may think fit. It would seem that cases of this 
 kind should be dealt with in the same manner as contingent interests : See paragraph 
 61 above. 
 
 (/) Settlements inter vivos made since the appointed pre-war date. 
 
 70. Settlements inter vivos (e.g., marriage settlements) are in the nature of 
 gifts and such settlements made since the appointed pre-war date would need to 
 be dealt with in the same manner as gifts made in the same period.* 
 
 (g) Settlements under wills of persons who have died since the appointed pre-war 
 
 date. 
 
 71. The treatment of these settlements would follow the lines which may 
 be laid down for dealing with inheritances acquired since the pre-war date.f 
 
 Conclusion. 
 
 72. The Board would add one further observation. It is no doubt the case 
 that owners of limited interests of the kind dealt with in this memorandum will 
 find the legislation complicated and the treatment of their interests difficult to 
 deal with. Criticism is often heard of the complexity of tax legislation. That 
 complexity, it is suggested, is due far less to over-elaboration of the general con- 
 ceptions underlying the taxes of this country, than to the effort to fit conceptions, 
 simple in themselves, to the complex conditions of modern social organisation. 
 Owing to the forms which in a modern society capital assumes, and to the problems 
 which the valuation of capital presents, this difficulty (which is felt in varying 
 degrees in regard to all taxes) probably reaches its height in the case of a non- 
 recurring tax charged at a high rate by reference to capital valuations. 
 
 * See Board's memorandum on the practicability of imposing a duty on war-time wealth 
 paras. 58-61. 
 
 t See Board's memorandum on the treatment for the purposes of the duty, of property which 
 has devolved on death since the pre-war date. • 
 
an 
 
 APPENDIX. 
 
 ILLUSTRATIONS OF SETTLEMENTS OF PROPERTY. 
 
 No attempt ii mado in thew examplM (o preMrre the 
 aoouraoy of the totjiiiical lomi pbrueology of a Mttfe- 
 ment, nor to rotuiii tlio vorDpletcneM of the oonreyancing 
 form whom the omimion in immaterial ; — e.g., in the 
 " itrict " nettiemcnt no refpird ii |iaicl to the proviiiion " on 
 ■uch truita aa X and Y hIibII jointly hy dee<l a|>[K>int and 
 iubject thereto," which, although imiK>rtant in other 
 connection*, ia not for thi* puqxMie of moment. 
 
 l.—Fwamplt of Rimfi* Trail Legacy lellletl hy a Will. 
 
 J. Smith died in Fuhruary, 1905, leaving estate worth 
 £12,0(K). By his will ho directed liiM trunteea to pay the 
 income of the capital to hin wife Eli/.al>eth Kmith for life 
 subject to a condition that the income Hhould bo reduced 
 to one-half on re-marriage. He directed that after the 
 death of the wife the capital Rhould be divided equallv 
 among bia three children Jamca Smith, William Smith 
 and Ada Jobnaon. Elizabeth Smith i« ittill living and haa 
 not remarried. 
 
 The trasteea were empowered to lend to each of the 
 children a sum not exceeding a half of the share ulti- 
 mately falling to each for bis or her advancement in life. 
 Under this power £1,000 hoc l)«en advanced to James 
 Smith and £600 to each of the other two children. The 
 total advances, viz., £2,000, with £10,000 now invested in 
 5 per cent. War Loan Stock, make up the full value of the 
 testator's estate, viz., £12,000. The children will have to 
 account for the sums advanced to them when the final 
 distribution is effected on the death of their mother. 
 
 2. — Example of Simple Tnut created by a Marriage 
 Settlement. 
 
 The Settlement in this case was made in 1900 on the 
 occasion of the marriage of Alfred Brown and Louisa 
 Jones. 
 
 The funds were settled by Alfred. Brown and consisted 
 of :— 
 
 £5,000 3J per cent. India Stock. 
 £2,000 4 per cent. Debenture Stock, L. & N.W. Ely. 
 £47 cash. 
 
 Under the Settlement it was provided that the income 
 should be payable to Alfred Brown himself for 
 life and after his death to his wife for life. 
 
 On the death of the survivor the capital is divisible 
 among the children of the marriage in such shares as the 
 mother and father shall together in a joint deed direct, 
 or failing a joint direction by deed in such shares as the 
 survivor shall, by deed or will, appoint. 
 
 In the event of a failure to appoint specific shares to 
 the children either by will or deM, the capital is to go 
 equally to the children of the marriage who being sons 
 attain 21 or being daughters attain 21 or marry. 
 
 In the event of there being no children of the marriage 
 or no children attaining 21, the funds revert to the Settlor 
 and will follow either the general directions of his will or 
 will pass to his next of kin. 
 
 The trustees are given the usual powers to advance 
 sums necessary to set up the children in life and in 
 accordance with the usual custom any sums advanced 
 have to be accounted for when the final distribution is 
 made. 
 
 At present the state of the facts is as follows : — 
 
 Husband and wife are alive ; there are three children 
 of the marriage, Lawrence Brown aged 17, Kathleen 
 Mary Brown aged 15, and Mabel Frances Brown aged 10. 
 No appointment of shares has so far been made and there 
 have been no advances to the children. 
 
 The husband is in possession of a life interest ; his 
 wife is entitled to a life interest if she survives him ; and 
 the shares of the children are at present unascertained. 
 
 While it is certain that the property must ultimately 
 go to such of the children as attain 21 a* a date the 
 power of the father and mother to appoint the extent of 
 the share leaves the quantum of tne interest of any 
 
 p«rticular child indeterminate. Then to Um fartker 
 poeaibilitv that the father and mother ■*/ lesfv tlM 
 power of appointment unexercised, ia whieh tarn Um 
 e«t«te ia divwible erjually among tboee ebildfeo wbo 
 attain 21. As the three children at priaaat are all oader 
 21 the interest of any individual n ece—iriJy *rfm^ Bpoo 
 his or her attaining that avv. 
 
 X— Examine of a SrltUmeiU by WUl of Ou R4»idmatf 
 Eilatf of the Testator. 
 
 In this case the teatAtor, Hugh Moody, died in 1910 
 and his residuary estate is now reprMented by 
 
 (a) Sums of £2(),(X», £10,000, and £10,000 on 
 mortgage, £30,000 Bank Stock, and £7,300 
 Conaolik 
 
 This may be increaaed by 
 (&) £10,000 if a certain Mary Jonea ibonld die 
 withont tearing a child. The £10,000 in 
 <|oeation waa beaueathed to Mary Jonea for 
 life, and on her death the capital wu to go 
 equally to her children snrriTing her, bat, la 
 the erent of no children aorviTing her, tiie 
 amount waa to revert to the teatator** 
 reaidnary eatate. She ia at preaent a spinater, 
 aged 30. 
 
 The funds in question are settled by the teatator's will 
 
 ontruit 
 
 for the testator'a daughter, Lncy Roberta, for life, 
 and on her death 
 
 a» to one-third to her son, Richard Roberta, abao 
 lutely and a* to the remaining tico-third* on tnut 
 to pay the income equally to the three danghtara of 
 Lncy Roberts, viz. : — 
 
 Ethel Barker, Frances Roberts, and 
 Belinda Roberts for their respective livea, 
 and on the death of each such daughter one-third of 
 the said two-thirds is to go equally to the children of 
 such daughter so dying who survive her and attain 
 21 (or being daughters, marry.) 
 
 Failing either of these events the share of snch 
 daughter dying without children is to be held equally on 
 the same trusts aa the shares of the other daugbtera, Le. 
 it increases their shares. 
 
 And failing all the preceding trusts the two-third share 
 is to go to the son, Richard Roberts, absolutely. 
 The slate of the facts is as follows : — 
 Ethel Barker is married and has one child, Lncy 
 Barker, aged 10. 
 
 The other daughters are spinsters, and are aged 27 and 
 and 23 respectively. 
 
 The son, Richard Roberts, has mortgaged his intereat 
 under the will for £5,000 and interest at 5 per oentb by 
 Deed executed in 1912. 
 
 So far as Lucy Roberta ia oonoemed 
 
 (a) she is actually in poaseaaion of a life intenat in 
 
 £77,300 ; and 
 (6) she has a further poi<ability of an intereat in 
 £10,000. Thia powibility however draewk 
 on future events, via. : whether Mary Jooaa 
 marriea and has issne surviving her. 
 
 The interest of the son, Richard Roberts, ia absolute, 
 so far as one-third of the £77,300 ia cMioeRied. The 
 same element of uncertainty noted abore entera into hia 
 interest in the £10,000. He has alao a chance of aocoeed- 
 ing to the remaining two-thirds of the £77,300 ahonld 
 the trusts of (he shares of all his sisters tail by thor 
 dying withont issne. 
 
 The interests of the daughters consist in their expecta- 
 tion of each receiving a two-ninth share of the inconw on 
 £77,300 on the death of their mother, and of a poaaibia 
 two-ninth share in the income of £10.000 prerionsly 
 referred to. If any of the daughters liaTing mar rie d 
 dies before her mother, her share will be divided equally 
 
40 
 
 among her children. If there are no children her share 
 will go to increase her sister's shares. In the event of 
 all three daughters predeceasing their mother without 
 children, the brother, Richard Roberts, will succeed 
 absolutely to the whole of the capital. 
 
 The daughter of Ethel Barker, viz., Lucy Barker, will, 
 if she attains 21, succeed to a 2/9th share of the capital, 
 [f her two aunts die without issue she may succeed to the 
 whole 2/3rds. On the other hand, her interest is subject 
 to reduction as soon as other children are horn. 
 
 4. — Example of a Settlement on Marriage of the Wife's 
 Expectant Interests under various Titles. 
 
 In this case the Marriage Settlement was executed in 
 18R7 on the marriage of Lewis Strange and Agnes Rees 
 (afterwards Agnes Strange). 
 
 The Settlement contained the following subject matters 
 repi'e8enting,'^in the main, future interests of the wife 
 Agnes Strange : — 
 
 ((f) one-fourth share of the residuary estate of her 
 grandfather John Rees, to which she was 
 entitled under his will on the death of the 
 survivor of her father Owen Rees (who is 
 still living) and her mother Margaret Rees 
 (who died in 1900) : 
 (/)) one-half of a trust legacy of £.5,000 to which 
 she was entitled to succeed upon the death of 
 her mother (w)io died in 1900) under the will 
 of an uncle : 
 (c) one -fourth share of funds held under the 
 Marriage Settlement of her parents dated 
 1859. Agnes Strange succeeds to these funds ' 
 on the death of the survivor of her parents 
 (her father is still alive) under the direction 
 contained in a Deed Poll of Appointment 
 made in 1887 : 
 ((/) other and after acquired property to which she 
 shall become entitled during the marriage if" 
 of a value exceeding £200. 
 
 Under this sweeping clause {d) the following property 
 has been brought in : — 
 
 (1) £2,500 legacy by will of David Strange (who 
 
 died in 1895) : 
 
 (2) one-half of £3,000 to which Agnes Strange will 
 
 succeed under the same will on the death of 
 Muriel Strange (still living) : 
 
 (3) one-third of £10,000 under the will of 
 
 Jacob Clarke (died 1896). This interest 
 will materialise, however, only if Mrs. Strange 
 survives the widow of Jacob Clarke. 
 
 The trusts upon which the funds are held are as 
 
 follows : — 
 
 ( 1 ) for the wife herself for life and after her death 
 to her husband for life (he is now dead) and 
 on the death of the survivor the capital to the 
 children of the marriage in accordance with 
 the directions given either by husband and 
 wife jointly in a deed or by the survivor in a 
 deed or will and failing appointment in this 
 manner equally to the children who being 
 sons attain 21 and daughters attain 21 or 
 marry. There is also provision, in the event 
 of all the trusts failing, for the funds to go to 
 the next of kin of Mrs. Strange the settlor ; 
 that is to say, in the event of all the trusts 
 failing the funds will devolve as if Mrs. 
 Strange had died intestate. 
 
 The present state of the facts is as follows : — 
 
 There are two children of the marriage who have both 
 attained 21, John Strange (son) and Violet Strange 
 (daughter). 
 
 The mother has exercised the power which she pos- 
 sesses under the Marriage Settlement to appoint one-half 
 of the funds to hnr son on her decease. He has sold his 
 interest under this appointment to a company dealing in 
 reversionary interests. The company accordingly stands 
 in his place. 
 
 It will be observed that of the' subject matters com- 
 prised in the Marriage Settlement only (6) and part of 
 the funds caught under the sweeping clause (rf) are 
 actually in possession of the life tenant. The interest of 
 Agnes Strange in the other funds is more or less remote. 
 
 As already noted the son has dropped out and the 
 company which bought his interest stands in his stead. 
 
 The extent of the interest of the daughter is unknown, 
 as the mother has not yet appointed to her any share of 
 the Marriage Settlement property. Her share, however, 
 cannot exceed one-half of the funds, as one-half has 
 already been appointed to her brother and disposed of 
 by him 
 
 5. — Example of Voluntary Settlement of Real Estate and 
 Leas'holds. 
 Voluntary Settletnenl dated 25th .fanuary, 1896, made 
 by Sir Arthur Jam^s. 
 
 The subject matter of the Settlement is as followB : — 
 (a) Twelve freehold houses subject to a mortgage of 
 
 £1,.500 at 4 f)er cent, interest : 
 (A) Twenty leasehold houses held for the residue of 
 a term of 99 years commencing from 1885, at 
 a ground rent of £4 per house. 
 Under the Settlement these properties were conveyed 
 to trustees on trust to sell, and the proceeds were !<ettled 
 as follow* : — 
 
 (1) The income to be paid to the settlor himself for 
 
 life, and 
 
 (2) after bis death to his nephew Hubert James for 
 
 life or until he becomes bankrupt or parts with 
 his life interest : 
 
 (3) in the case of bankruptcy of the nephew or 
 
 attempt on his part to sell his interest, the 
 trust funds are to be held by the trustees in 
 their absolute discretion to apply the whole or 
 any part of the income for the benefit of the 
 nephew Hubert James, his wife and children ; 
 and any surplus income is to be held for the 
 children of the nephew Hubert James : 
 
 (4) the children of Hubert James or such of them as 
 
 attain 21 are to succeed co the corpus of the 
 estate on their father's death. The share of 
 each son is to be double that of each daughter : 
 
 (5) if all the children die under 21, the funds are to 
 
 devolve to the persons who would be the next 
 of kin of Hubert James. 
 
 The state of the facts at present is as follows : — 
 
 The settlor is still alive and he has borrowed £2,000 
 from an Insurance Company and mortgaged hi.s life interest 
 for this amount to the insurance company and further 
 has agreed to charge the premiumb of the life insurance 
 policy, which he has taken out for £2,000, on his life 
 interest if they should fall in arrear. 
 
 The nephew has married and has one child, a son 
 aged 2. He is not bankrupt and has not parted with his 
 interest. 
 
 The interests of the parties in this case are com- 
 paratively simple. 
 
 The iettlor is in possession of a life interest. The 
 interest of the nephew is a possibility of succeeding to a 
 life interest in the funds if he survives the settlor, with 
 the further qualification that he may lose his interest if 
 he becomes bankrupt or attempts to dispose of it. 
 
 The interest of the nephew's wife is the possibility of 
 benefiting under the discretionary trust imposed on the 
 trustees in the event of the nephew becoming bankrupt. 
 The son aged 2 may possibly succeed to the whole of the 
 trust funds on the death of his parents if he attains 21. 
 At present his interest extends to the whole of the trust 
 funds but on the birth of other children his share will be 
 reduced proportionately. 
 
 The persons who would succeed to the property on the 
 failure of all the previous trusts and on the death of the 
 settlor are a brother of Hubert James with several 
 nephews and nieces. 
 
 6. — Strict Settlement of Real Properly. 
 
 The principle on which the strict settlement of real 
 property is drawn is comparatively simple. 
 
 The law does not permit property to be tied up for an 
 indefinite succession of generations but a settlement may 
 be drawn which will give : — 
 
 (a) an estate for life to A and after his decease 
 
 (6) to his son B as tenant for life and after bit 
 
 decease 
 (c) to B.'s son C as tenant in tail. 
 The word " tenant " is here used simply in the tense of 
 the person who " holds " some " fee " or interest in land, 
 and "estate" is the amount of the interest which is held. 
 A " fee simple " it the fullest and freest " estate " which 
 it is possible in this country to hold and it is practically 
 coincident with absolute ownership. A " tenant in tail 
 holds a "fee tail" which is a restricted form of "foe 
 simple." The nature of the restriction lies in the fact 
 that in the absence of any steps on the part of a tenant to 
 destroy the entail the tenant (i.e. the holder of this estate) 
 is restricted in his p iwer of disposition on death, as the 
 estate must devolve to bis own lineal descendants. Where 
 the estate is in " tail male " the property passes only to 
 male descendants. (Alternative lines of descent are 
 generally provided by giving si :!ce88ive fees tail to 
 younger members of the family in case elder members of 
 the family die without issue.) 
 
41 
 
 Thin rsMiriction nwjr however etwily b« ramoTed Mad 
 the "e«Ut«" turned into a fee aiinute by tb« pro emm 
 known an " ImrrinK the entail." To t«r the entail 
 it i* only noceanary to enrol in tbo C^uurt the dc«<J 
 containing the diamitailing declaration and if the twiant 
 in tail i» in poMeanion of (be eatate be mav dr> tbia alone. 
 If be ia not in poaaeMiion but baa a right to auooeed aa 
 " tenant in tail " on the expiration of an exiatiny life 
 intert<at he muHt, in order to create a fall fee aimple, 
 obtain the conattnt of the party who would lie entitled, or 
 who repreaenta the peraon who would Iw ontitlo<l, to ttie 
 reveraion to the property if the tenant in tail die<} 
 witboat iaaue. Tnia peraon, who ia a xtatutory (lenion, 
 known aa the Protector of the Settlement i« uKually the 
 peraon in poa ae aa i on of the flrat lifi< tntereat. Without 
 nia oonaent the tMant in tail nut in iKMaeaaion can only 
 free the eatate to a liraited extent. He can onl^ bar the 
 entail *o far aa bin own iaaue are concerned and if be doea 
 ao be orjatea a reatricted and inconvenient form of title 
 called a " baae fee." 
 
 The control exerciaod by the Protector of the Hettleroent 
 ia alight but it providex the baaiii for the bargain of 
 father with aon (a« explained in the following paragrapha) 
 embodie<l in the uKual form of family aettlement, althougn 
 probably the aauction of cuatom ia more effective than 
 the Hiignt control over the entail. 
 
 At some point of time in the biatory of a family 
 property the poHition will bo aa followa : — 
 
 A. if* tenant for life under nn onrlier aettlement ; bianon 
 B. ban juHt attained 21 and in tenant in tail in suoceaaion 
 to hia father. The aon having arrived at hi* majority 
 can proceed to " bar the entail,'' but to do it completely 
 be muat have bia fatber'HconMnt. Acnordingly the father 
 and (ton agree to bar the entail (technically known aa 
 " enter into a disentailing amnrance ") and to resettle the 
 property. In tbia reaottlemeiit 
 
 (a) the life estate which the father had under the 
 
 previoua settlement is restored to him : 
 (I)) an estate for life commencing from the death of 
 
 the father is given to tho Bon : and 
 (c) the tenancy in toil is carried one step further to 
 
 the son's issue (which may l>e and probably is 
 
 at the moment non-existent). 
 
 The aon ia usually given an immediate annual allowance 
 in the settlement. 
 
 In accordance with t)ie usual custom provision has to Ix* 
 made for 
 
 (a) the widow of the father (i.r. the first life 
 
 tenant) : and 
 (/)) the younger memliers of the family. 
 
 The provision for the widow is effected by giving the 
 first tenant for life {if., the father) power to create a 
 charge for the benefit of the widow during her life, usually 
 described as her " jointure." 
 
 Provision is made for the younger sons or daughters by 
 giving power to the father (first tenant for life) by deed 
 or by will to charge the estates for the benefit of his 
 younger children up to a certain limit varying with the 
 number of the children. 
 
 When the grandson comes of age the same process will 
 be gone through again and the estates will again be 
 resettled and the tenancy in tail carried one generation 
 further on. 
 
 At any point in the history of an estate there may be 
 mortgages for general purposes such as improvements ; 
 there may also be more than one jointure afoot ; there 
 may be charges securing portions for younger children ; 
 and if the estate is in the bands of an old family the 
 settling and resettling process may have been many times 
 repeated and the details may be contained in more than 
 
 But while the aubieet nutter flwjr ba 
 ptieaM the principle ia aimple. fban am on* or 
 life tenant! with • WHMindT to a tMuuit in toil 
 
 impoaed on tba aataU ineooM an tlia varioaa ehama 
 naoaaaary to prorida for tba paopb wbo omj daim to M 
 maintained out of Uw aatata. 
 
 Kmrn/Je of a Hirirt BtUUmMt <^ Rml EltaU. 
 
 In tbia eaaa a raaattJament waa affeetad ia 1906. Tba 
 aubjeet mattar of tba aettloment ia a fraahuM aalata o£ 
 2(),(XM) aeraa aabjaet to mortaaM for £17,000 
 subject alao to tbe " jointnra" of tba widow of a i 
 tenant for life, emtM] nndar a daad axaeotad in 1857. 
 
 The Mrttlora in tbia caaa are Edmood Wbita wbo ia 
 t«nant for life under a reaettlentrat effected in I8&4, aod 
 Evarard bia son who ia tenant in tail under the aao* 
 daad and who, on coming of aga baa, wiib bia fatliar'a 
 oonaent, barred tbe entail (that ia, eseciitad a diaentaUtaf 
 aaauranoe). 
 
 Tbe eatete ia aettled in tbe dead of 1906, in aoeordanea 
 with tbe naual cuatom, on Edmond White tbe father for 
 life (be died in 1913), 
 
 and after bia death to bia aon Bverard for life, and 
 thereafter to bia sons auooeaairely in tail male with 
 various other alternative remainders in tail in tbe 
 event of tbe first remainder to tba aona of Evanud 
 failing. 
 
 Power ia also given to Evcrard to charge tbe eatate 
 with a jointure of £1,0IXJ |<er annum to bia widow for life 
 to oommenoe on bis death, but tba eatataa are not to ba 
 charged with more than ill, .000 a year for jointure at any 
 one time (that ia to aay, if there are two widows entitled 
 to jointure at any one time tbe fimt will get £1,000 and 
 the second i.WO only). 
 
 Power is also given to charge tbe eatatea with liability 
 for capital sum* for younger children wbo attain 21 or 
 being daughters marry, viz., £.0,000 if one cbildi, £8.000 
 if two and £10,000 if three or more. 
 
 Under these powers Evcranl, who on tbe death of bia 
 father in 191.') succeeded to tbe eatate aa tenant for life, 
 baa by a deed in favour of bis wife (wbo is still living) 
 charged the eatatea to tbe full extent of £1,000 par 
 annum and baa alao by a deed exerciaed bia power to 
 charge the eatate for tbe full.capital sum of £10,000 in 
 favour of his three younger children in tbe proportiona 
 he shall appoint. 
 
 Edmond White having died aince tbe reaatttaoMat, 
 Everard Whit« is in posseasion for life. 
 
 Tbe widow of YAraonA White enjoya a jointure of 
 £1,000 per annum, and the wife of Everard would, if bar 
 buslmnd predeceased his mother, be entitled to a jointoia 
 of £.'>00 while her mother in-law ia alive and tbereaftar 
 during her life to £1,000 per annum. 
 The four children of Everard are : — 
 
 Alfred White bom 1890 
 
 Stewart White „ 1892 
 
 Malcolm White „ 1895 
 
 Eleanor White „ 1897 
 
 Alfred White is tenant in tail in suoceaaion to hm 
 father's life interest. 
 
 The remaining children have an interest in the capital 
 of £10,000 referred to above ; at preaent this interest ia 
 one-third share, but may be altered by tbe birth of 
 further children or the exercise of Everard White's 
 power of appointment over the shares of the £10,000. 
 
 Other members of the family not in this line will 
 succeed if the remainder in tail to Alfred White, or such 
 other of his brothers as stands in his place, should foil. 
 
42 
 V 
 
 BoAUD OF Inland Kevenuk, 
 
 Somerset House, 
 
 January, 1920. 
 
 Memorandum by the Board of Inland Revenue on the Place of Public 
 Companies in a Duty on War-time Wealth. 
 
 1. It was mentioned in the Board's memorandum on the practicability of imposing 
 a duty on war-time wealth (paragraph 79), that no difficulty would ordinarily be 
 experienced in arriving at the market value of shares in public companies owned by 
 individuals either at the pre-war or at the post-war date. The Slock Exchange 
 quotations on the two appointed days would govern the question. It is only in 
 exceptional cases — those of public companies for the shares of which no effective market 
 exists or the Stock Exchange quotation is artificial — that a special proceduie would be 
 requisite for arriving at the actual value of the shares. 
 
 2. It was further pointed out, however, in that memorandum (paragraphs 100 etseq.) 
 that the aggregate market value of the shares in a public company may not always 
 correspond to the real value of the business carried on by the company as a going 
 concern, and that, if the matter is not pursued further, some danger of leakage of duty 
 might exist. If the full value of accumulations of war-time profits in the reserves of 
 pubhc companies is not reflected in the market value of the companies' shares, this war- 
 time increase Avould not be revealed, or fully revealed, in the returns made by the 
 individual shareholders. 
 
 3. The following example will illustrate the manner in which the market 
 capitalisation of a company's assets, as evidenced by share values, may be found to fall 
 below the actual value of the company's business as a going concern. 
 
 The shares and debenture stock of a company and their respective market values as 
 quoted on the Stock Exchange, at the post-war date, are as follows : — 
 
 100,000 £l ordinary shares, quoted at 1|- ... ... ... 150,000 
 
 100,000 £1 preference shares, quoted at 16a-. ... ... 80,000 
 
 40,000 £100 debentures, quoted at 75 30,000 
 
 £260,000 
 
 The sum of £260,000 thus represents the market capitalisation of the assets of the 
 company, as evidenced by the Stock Exchange quotations. If all shareholders and 
 debenture-holdei's make returns for purposes of a War Levy, and include therein the 
 market value of their shares and debentures, the aggregate amount which they will 
 return in respect of their holdings in this company at the post-war date should amount 
 to £260,000. 
 
 It may, however, be the fact that the actual market value of the company's business 
 as a going concern is not £260,000 but £300,000, arrived at as follows : — 
 
 £ 
 
 Market value of the Company's buildings, plant and stock... 200,000 
 
 Market value of Company's investments ... ... ... 30,000 
 
 Value of debts due to the Company... ... ... ... 20,000 
 
 Value of Company's goodwill ... ... ... ... 80,000 
 
 330,000 
 Zess debts due by the Company ... ... ... ... 30,000 
 
 300,000 
 
 If this be the case, the value of the Company's business as a going concern 
 (£300,000) would exceed the market capitalisation of its assets (£260,000) by £40,000, 
 and no portion of this excess of £40,000 Avill appear in any of the returns made by the 
 individual shareholders and .debenture-holders. 
 
 4. It is a matter of some difficulty to find any short descriptive term which accurately 
 defines this excess (which forms the subject matter of the present memorandum), and in 
 the following paragraphs it is proposed (for purposes of brevity) to describe it by the 
 term " unrevealed value." 
 
48 
 
 .5. Thitt thiis '' uurevealerl value " exitita in a number of inHtancM m beyond queftion. 
 F(»r cxHinjjIe, inforiritttion from time to time comen U> the knowledge of the Board of 
 Iiilutid lievciiue >i\iowiu^ thut (e.</., ujion an ainulgumation) buHinexttcs have dtan^fci 
 ImiidM at a price clearly and markedly in exceitM of the market Ciii>italiwition of their aMtet« 
 iiH evidenced by the ({iiotatioiiH of their Khitrun and deVjeotures. CuMOit of atiuUgammtion 
 cannot, however, Im: regarded n» repreHcnbitive of companieii in general, inaMmucn as con- 
 cerns of which the market capitaliwition h low sku c<impared with tlieir projier value way 
 be more likely tluin otherH to be 8electe<l for j>urchaMe, 
 
 C). The exiHtcnce of this " unrevealed value " may, at first sight, cause surprise. 
 Stock brokerH and stock jobbers make it part of their businew to study the refKirts, 
 uccountH and balance sheets of public ajmpanies for the purpose of arriving at a true 
 cstimutc of tlie value of the shares, and it might be anticipate*! thut the umrket 
 uipitiiliKHtion w(jul<l at any time bear a fairly close relation to the true value uf the 
 buKiiiesH as a going concern. There are, however, certain causes at work which tend to 
 create disparities. 
 
 7. These causes are of different kinds. In the first place, the market value of sbaiea 
 is from time to time affected by special influences which have no immediate a*nncction 
 with the prosperity of the business. For example, sudden liquidation of large holdings 
 (<'.(/., realisations by executors of large holdings acquired by a deceased person) will 
 depress share values, while steady buying on the part of persons who desire to obtain a 
 controlling interest in a company will cause share values to rise. In the second place, the 
 market is notoriously sensitive to the passing mood of investors. Speculative b«x>ms and 
 slumps may proceed u]>on considerations in which the intrinsic value of a company's 
 business plays a comparatively suiuU jjart. 
 
 8. These questions by themselves might not prove to be of any great importance. 
 They tend sometimes unduly to depress, at other times unduly to inflate, the market 
 capitalisiition as compared with the intrinsic value of the assets of the business, and on 
 balance they might have little influence upon the aggregate figures shewn by returns of 
 individuals for purposes of a War Levy. There are, however, further considerations 
 which probably tend, on the whole, to depress the market capitalisation and thus to 
 create an " unrevealed value." 
 
 9. In the first place, it could not be expected that the stock and share market would 
 always possess full knowledge of the resources and potentialities of a business ; it is a 
 common practice in industry (from motives of prudence) to create reserves which are not 
 disclosed in published balance sheets, and for this reason market estimates of the value of 
 shares may be expected to be upon the whole conservative. It is ptjssible no doubt that, 
 if a market estimate is very conservative, persons with inside knowledge may come into 
 the market as buyers, but any counteracting influence on the value of the shares which 
 they might exercise would be limited in extent. 
 
 On the other hand, there are no doubt cases in which optimistic balance sheets have 
 tended to keep share prices above the true value. 
 
 10. A further consideration lies in the inability of an individual shareholder to 
 influence the disposal of the assets, or even of the profits, of the business in which he 
 invests. Although a business may be making very large [jrofits, it may be the policy of 
 the directors (from motives of prudence) to increase the resources of the business by 
 placing profits to reserve rather than distributing them. Although the profits so placed 
 to reserve give additional security and prospects of additional future yield to the investors 
 in its shares, these advantages may be less attractive to the investors than the actual 
 receipt year by ye^ir of a large dividend. It would no doubt be agreed that if there are 
 two businesses each making (say) 20 j>er cent, profit, and each identical in all particulars 
 with the other, except that one distributes 5 per cent, profit and csirriea 15 jx;r cent, 
 profit to reserve, while the other distributes 10 \)er cent, profit and airries 10 per cent, 
 profit to reserve, the market value of the shares of the second company (which distributes 
 10 per cent.) will be substantially higher than the market value of the shares of the other 
 (which distributes only 5 per cent), notwithstanding that the intrinsic value of the a&sets 
 of each business may be identical. 
 
 11. There is a further circumstance which, at the present juncture, is probjibly 
 operating to create an " unrevealed value " in the assets of public compmies. Many 
 companies have preference shares and debentures which were issued at a fixed rate of 
 interest (<".(/., o per cent.) in pre-war times and, owing to the rise in the general rate of 
 interest which has taken place during the war, the market value of these shares and 
 debentures has fallen by more than 20 per cent. In effect what has occurred is this : 
 the effective proprietors of the business (i.e., the ordinary shareholders) are in the 
 fortunate position of being able to anticipate a higher range of profits in the future (owing 
 
44 
 
 to the anticipated increase in the earning power of capital) without having to provide for 
 any higher rate of interest on the preference capital or the borrowed money which helps 
 to earn the prolits of the business. In broad terms it may be said that a certain transfer 
 of wealth has taken place from the preference shareholder and the debenture-holder 
 to the ordinary shareholder. This process, however, has been a gradual one and one that 
 has been in progress since the outbreak of war, and while the decline in the value of 
 preference and debenture securities can be easily measured and has now made itself fully 
 effective, the corresponding addition to the value of the ordinary shareholder's rights, 
 being more problematical and less easily measured, has probably not yet made itself fully 
 felt in the market valuation of ordinary shares. 
 
 12. The preceding paragraphs have been addressed to the question how the 
 " unrevealed value " in the assets of public companies comes to exist. The question also 
 arises in what way, if at all, this " unrevealed value " ought to be brought within the 
 scope of a duty on war-time wealth. The suggestion might be made that the " unrevealed 
 value" at the post-war date ought to be ascertained and subjected to a tax, but 
 upon examination this suggestion would appear untenable. The tax, if imposed, would 
 (it may be assumed) be a tax on companies, ancillary to the main War Levy and designed 
 to prevent a leiikage in that duty. If, however, the " unrevealed value " at the post-war 
 date is po greater than the " unrevealed value " at the pre-war date, it will be seen that 
 its existence will not affect the amount of increase of capital revealed in returns made by 
 individuals for purposes of the Levy. All that will happen in such a case will, broadly 
 speaking, be that, when the individual shareholders in the particular company make their 
 returns for purposes of the Levy, they will return the value of their shares in the 
 company both at the pre-war date and at the post-war date at a figure slightly less than 
 the true value, but less by the same amount at each date. The amount of increase in 
 their capital will therefore be unaffected. 
 
 13. The case in which leakage might arise is the case in which the "unrevealed 
 value" at the post-war date is greater that the " unrevealed value " at the pre-war date. 
 For example : — 
 
 At the pre-war date the market capitalisation of a Company's ^ 
 
 shnres was ... ... ... 250,000 
 
 and the value of the Company's business as a going concern was ... 250,000 
 There was therefore no "unrevealed value" at that date. 
 
 But at the post-war date, while the market capitalisation was ... 350,000 
 
 the value of the Company's business as a going concern was ... 375,000 
 
 and there was therefore an "unrevealed value" of ... 25,000 
 
 This post-war " unrevealed value " of £25,000 (which had no counterpart at the pre-war 
 date) is in effect a war-time inci*ease which is not reflected in share values and of which 
 no part will be included for purposes of the Levy in the returns of any individuals. 
 
 14. This illustration will indicate that, if the duty be imposed, it should be 
 imposed only on the excess of the post-war " unrevealed value " over the pre-war 
 " unrevealed value." It would seem right also to bear in mind that many shares 
 in public companies are held by individuals who would not be liable to the War Levy, 
 by reason either of their not having enjoyed an increase of capital during the war or of . 
 their wealth being below the limit fixed for exemption from the duty. This would 
 suggest that if a duty were imposed (upon the excess of the post-war " unrevealed value " 
 over the pre-war " unrevealed value ") it would be adequate to impose it at a low flat 
 rate. 
 
 15. The character of the problem having been indicated, it remains to consider 
 whether it would be practicable to evaluate the "unrevealed value" in the assets of a 
 company so as to. impose in respect thereof any duty which might be considered 
 appropriate. 
 
 16. It is, of course, easy to arrive at the market capitalisation of the assets of a 
 company as evidenced by the quoted values of shares and debentures ; that is a mere 
 question of arithmetic. On the other hand, it will be appreciated that it is a matter of 
 grave practical difficulty to arrive precisely at the value of a business of a company as a 
 going concern and to demonstrate how far that value diverges from the market capitalisa- 
 tion of its assets. Although the balance-sheet of a public company made up at any date 
 gives a general conspectus of the position of the company at that date, it does not purport 
 to represent the value of the business as a going concern. Assets of a business are often 
 entered in a balance sheet at cost price, less allowances for wear and tear, &c., (a figure 
 which may correspond, but does not necessarily correspond, fairly closely with their 
 market value at the time), but on the other hand it is not an uncommon practice in the 
 
45 
 
 Ciiwj of prudently iiiuiiagrMi buMirieH»e» t<* write Home of the a«i«.'tM <i<,wii to a low, aod 
 HuiiK^tiiiios even u nominal figure, far lea* than the price which cuuld 1^ oUitined for 
 tb<;in ufxtn u MuIe. In addition, a targe {lart of the ca[>ititi value of a proxperou^ bosineM 
 may lie in what in tcriue<l it« giKKlwiII ; in other wordn, in itH exjK;ctatioh (owing, e.g.t 
 to th(! HiAti and character of \tn clientele, the excellence of it>« products or itM general 
 reputation) of continuing to earn in the future a rate of profit greater tlmn die normal 
 iMiMiiiiiiiii return (iiK)n capital which invcHtorH would require ua an incentive to inveiit 
 their money in the buHincHH. NumlN:rH of public com{ianie» include in. their baUnoe 
 HheetB no entry for gcKidwill, even though the goo<lwill may actually 1* of high value. 
 
 The following would Im: a Himple illuMtration of the |K)int. A ouHineMM with itHgood* 
 will haH been purchahcd and the l)ulancc nheet of the purchaMing c<jm[jany may thereupon 
 Htand aH follows : — 
 
 £ 
 
 Sharoh 100,000 
 
 £100,000 
 
 £ 
 
 Gwidwill ... 20,000 
 
 Build ingH, &c. ... 80,000 
 
 £100,000 
 
 ProfitM to the amount of £20,000 are then made and applied to writing off the 
 
 goixiwill, and the balance sheet then becomes 
 
 £ 
 
 Shares 100,000 
 
 £ 
 
 HuildingH, &c. ... 80,000 
 Investments ... 20,000 
 
 £100,000 £100,000 
 
 'file value of the iitssuts appears to be £100,000 but their real value, if the busineM 
 is still sound, is £120,000, for the book entry which eliminates the goodwill does not 
 alter its intrinsic value. 
 
 17. In these circunistjinces any attempt to arrive precisely at the " unrcvealed value" 
 of a company's assets from a study of the oalance sheet is in most cases foredoome<l to 
 failure ; an actual valuation must be made to ascertain the value of the business as a 
 going concern. 
 
 18. In the case of such undertakings as railways, docks, lighting and power 
 companies, mines, tramways, omnibuses, or waterworks companies, the ascertainment of 
 this value even in a single case would involve an expert valuation which could only be 
 made alter ascertainment of all the material facts and a prolonged study of the 
 potentialities of the business. Where the undertaking is carried on abroad — e.g., a 
 company working a foreign railway, or a cable company — the difficulty of valuation is 
 iuoreased. Again, the ascertainment of the value as a going concern of a large modem 
 bank oi* of an insurance company is a matter presenting serious practical problems. 
 Although the difficulties would be less in the case of general commercial businesses 
 carried on in this country (which constitute the main body of public companies), many 
 of these undertakings are exceedingly large and complex organisations, and any attempt 
 to establish the value of any one of them as a going concern as compared witli the market 
 capitalisation is exceedingly difficult. 
 
 19. The Board have examined balance sheets and other information which they 
 possess in regard to a considerable number of public companies, and while they find 
 considerable evidence of the existence of an " unrevealed value " in many companies and 
 of a very substantial one in some, they find it impossible to evaluate this value exactly in 
 individual cases without much more information than they require or receive in connection 
 with ordinary taxing operations and without an exhaustive expert examination in each 
 case. Their conclusion is that any attempt to reach this " unrevealed value " by way of 
 taxation would be a task too difficult to be successfully accomplished. 
 
 20. In the Annex to this Memomndum there are included one or two examples 
 which are given as illustrations of the results which enquiry on this point might be 
 expected to yield. Under the general rule of confidentiality of information furnished for 
 Income Tax purjwses the figures are disguised to conceal the identity of the examples 
 selected but relatively the figures represent the actual results obtained. 
 
 21. It may be suggested that there is some inconsistency between this conclusion 
 and the suggestion which the Board made in paragraphs 76-8 of their Memorandum on 
 the practicability of imposing a duty on war-time wealth, to the effect that the wealth 
 represented by private businesses and private limited companies should be arrived at by 
 ascertaining their value as a going concern. But upon examination this apparent incon- 
 sistency disappears. The problem in connection with private firms and private companies 
 
46 
 
 is merely to ascertain (as nearly as circumstances permit) the value as a going concern. 
 The problem in ascertaining the " unrevealed value " in a public company would be a 
 different one, viz., to evaluate precisely the value as a going concern and establish the 
 margin of excess of that value over the market capitalisation. The problem is tliat of 
 evaluating a margin and often a very narrow margin, and inasmuch as all valuations are 
 in the nature of things subject to the possibility of a certain measure of error, the margin 
 to be evaluated is as a general rule too fine to admit of accurate measurement. 
 
 22. The question will occur whether the impracticability of reaching any increase 
 in the " unrevealed value " of public companies detracts to a serious extent from the 
 completeness and consistency of the suggested War Levy. Probably it would not be 
 considered that this is the case. 
 
 23. It has been indicated that the question whether there is at a particular time an 
 " unrevealed value " in a company may often be a matter of accident. For instance, such 
 a value may arise through a temporary depression of the market value of shares owing to 
 the liquidation of a large holding acquired by a person now deceased. In view of cases 
 such as these there seems much to be said for the view that companies should not be 
 called upon to pay duty (out of their own resources) upon any increase of " unrevealed 
 value" which may result from temporary and fortuitous causes. It is indeed conceivable 
 that a i)ayment of duty imposed 'upon a company in such circumstances might tend 
 further to depreciate the value of the company's shares. This would be an anomalous 
 result seeing that the initial cause of the imposition of the duty would lie in the fact that 
 the company's shares already stood too low in the market. 
 
 24. It will be recalled also that a duty of this kind would fall upon the general 
 resources of a company and indirectly affect all its shareholders, including those not 
 personally liable to War Levy and including residents abroad. As regards the last named 
 point, there are large numbers of companies which are registered and controlled in this 
 country, but which are engaged in the management of assets situated abroad and have 
 large bodies of non-resident shareholders {e.g.^ British companies registered in this country 
 managing tramways, gas undertakings and the like abroad). The imposition of a tax of 
 the character now under consideration upon companies of this class, even had it been 
 practicable, might be held to be an undesirable extension of the principle of the proposed 
 War Levy. 
 
 ANNEX. 
 
 Examples of " unrevealed value." 
 
 " A." 
 In 1918. ' & 
 
 Net valuation of assets (including goodwill) ... ... ... ... 850,000 
 
 Debentures at ... Gl^^ 
 
 Preference shares at . . . | > Total market capi^-alisation 
 
 Ordinary shares at ... 2 j 
 
 Excess of assets over market capitalisation 
 
 In 191.S. 
 
 Net valuation of assets (including goodwill) 
 Debentures at ...100.| 1 
 
 Preference shares at ... l| >- Total market capitalisation 
 Ordinary shares at ... 2{^q j 
 
 750,000 
 
 100,000 
 
 775,000 
 975,000 
 
 Deficiency in valuation of assets as compared with market 
 
 capitalisation ... ... ... ... ... ... 200,000 
 
 Net assets increased by .. . ... ..'. ... ... £75,000 
 
 Market capitalisation decreased by ... ... ... £225,000 
 
47 
 
 " B." • 
 In 1918. 
 
 Net valuation of aMwtH (including gcxxivrill) 
 
 Debentures at t.. ... 75^^ 
 
 Preference Rharet at ... l^g > Total market capitaliiiation 
 
 Ordinary Hhares at ... l|J 
 
 Excess of assets over market capitalisation 
 
 In 1913. 
 
 Net valuation of assets (including goodwill) 
 Debentures 1 
 
 IVeference Hliares at ... l/o }■ Total market capitalisation 
 Ordinary s 
 
 ) at ^^^^i) 
 
 Hliares at ... l/o >'\ 
 hares at ... ^H ) 
 
 Deficiency in valuation of assets as comparer! with market 
 
 capitalisation 
 
 Increase in assets 
 Decrease in capitalisation 
 
 1,000,000 
 800,000 
 100,000 
 
 980,0(K) 
 1,000,000 
 
 20,000 
 
 £20,000 
 £200,000 
 
 (I Q " 
 
 In 1918. 
 
 Net valuation of assets (including goodwill) 
 
 Debentures at 62 J ~| 
 
 Preference shares at ... ,^ !] > Total market capitalisation 
 Ordinary shares at ... l|j 
 
 Excess of assets over market capitali?ation 
 
 In 1913. 
 
 Net valuation of assets (including goodwill) 
 Debentures at ... 771 
 
 Preference shares at -nr r Total market capitalisation 
 Ordinary shares at ^^ J 
 
 Excess of assets over market capitalisation 
 
 330,000 
 
 250,000 
 
 80,000 
 
 300,000 
 160,000 
 140,000 
 
 Increase in assets 
 Increase in capitalisation 
 
 £30,000 
 £90,000 
 
/' ■ 
 
VH niC99