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
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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