Stedeford (H M Inspector of Taxes) v Beloe [1932] AC 388

The retired headmaster of Bradfield College received a £500 annual pension granted at the discretion of the Warden and Council under college statutes. The House of Lords held that this purely voluntary payment, which could be rescinded at any time, was not assessable to Income Tax.

Facts

The Respondent, the Rev. R. D. Beloe, was appointed headmaster of Bradfield College in December 1914. Owing to ill-health, he tendered his resignation in February 1928, which was accepted with regret by the Warden and Council. At a subsequent meeting on 21 March 1928, the Warden and Council unanimously resolved to grant him an immediate payment of £1,000 and an annual pension of £500 commencing 2 April 1928, payable out of the residue of income as defined in Statute No. 25 of the college’s Royal Charter.

Statute No. 25 empowered the Warden and Council to apply residual income to such purposes as in their absolute discretion they deemed for the benefit of the college, including the payment of pensions or retiring allowances to former headmasters. There was no scheme under which the Respondent could have qualified for a pension, no negotiations took place before the payment was made, and the Warden and Council retained the right at any time to rescind the resolution and cease payment. The £500 was assessed to Income Tax under Schedule E for the year ending 5 April 1929.

Issues

The central issue was whether the £500 annual payment was chargeable to Income Tax, either:

• as a profit accruing in respect of an office or employment under Schedule E; or
• as an annuity or other annual profit or gain originally chargeable under Schedule D and made chargeable under Schedule E by virtue of section 18 of the Finance Act 1922.

Arguments

For the Crown

The Crown contended that the £500 was chargeable as a pension within Schedule E, or alternatively as an annuity or annual profit. Reliance was placed on Duncan’s Executors v Farmer (5 T.C. 417) as authority that such a payment was taxable as an annuity, and on Drummond v Collins (6 T.C. 525) and the Tollemache case (11 T.C. 277) to argue that the Respondent received the payment as a beneficiary under the trust created by Statute No. 25. It was further suggested that, since the funds in the Warden and Council’s hands enjoyed charitable immunity from tax, the payment ought to bear tax in the Respondent’s hands.

For the Respondent

The Respondent argued that the payment was a purely voluntary gift, that there was no consideration for it, and that he had no right of action to enforce payment. Reliance was placed on Beynon v Thorpe (14 T.C. 1).

Judgment

King’s Bench Division (Rowlatt J)

Rowlatt J held that the case was governed by the principle in Beynon v Thorpe. He considered that the fact that the trustees acted under the authority of a deed did not give the recipient any further right. There was no office or employment held by the Respondent, only the receipt of an annual sum which could be discontinued. The charitable status of the source of the funds was irrelevant to whether the receipt constituted income in the Respondent’s hands.

Court of Appeal

Lord Hanworth MR held that the substance of the matter, not the label of “pension”, was decisive. The Respondent held no office at the time of payment, had no right to receive any sum, and the Council could rescind payment at any time. Applying the principle stated in Herbert v McQuade (4 T.C. 489), the test was whether, from the standpoint of the recipient, the payment accrued to him by virtue of his office; here it did not. The cases of Drummond v Collins and Tollemache were distinguishable, as the Respondent was not a cestui que trust enjoying the money as of right.

Lawrence LJ agreed, distinguishing Duncan’s Executors v Farmer on the basis that there the pension had been granted for good consideration (complete resignation of the parish) and was enforceable, whereas here the allowance was purely voluntary and could be stopped at any moment. He held that the sole cestui que trust under Statute No. 25 was the college itself; recipients of pensions or mortgagees did not become beneficiaries.

Romer LJ agreed, observing that it was difficult to see how the payment could be said to be made in respect of the Respondent’s office when the whole reason for the allowance was that he no longer held it. The funds were held on trust for the benefit of the college; the Respondent was not a cestui que trust and had no right to receive the sums.

House of Lords

Viscount Dunedin held that the payment was not chargeable under Schedule E because it was not given in respect of the office of headmaster, since the Respondent no longer held that office. Nor was it chargeable under Schedule D (and so, by section 18 of the Finance Act 1922, under Schedule E), because a mere voluntary gift is not a real profit or income; it is merely a casual payment dependent on another’s goodwill. He distinguished Duncan’s Executors v Farmer, where the annuity had been granted for consideration (complete resignation of the parish) and was enforceable.

Lord Warrington of Clyffe agreed, emphasising that each payment was wholly voluntary and need not necessarily be continued. Lord Thankerton concurred, adopting the contrast drawn in Duncan v Farmer between a regularly constituted annuity for consideration and a mere donation given each year with no certioration that it would be repeated. Lord Macmillan also concurred.

Implications

The decision confirms that a purely voluntary payment, made at the discretion of trustees or a governing body and revocable at will, is not chargeable to Income Tax under Schedule E as a pension in respect of a former office, nor under Schedule D as an annuity or annual profit. The critical features are the absence of consideration, the absence of any enforceable right in the recipient, and the fact that each payment is, in substance, a fresh gift.

The case clarifies the boundary between taxable annuities or pensions (which involve a legally enforceable right, typically supported by consideration, as in Duncan’s Executors v Farmer) and non-taxable voluntary allowances. The fact that payments are made regularly, automatically credited, and have continued for some years does not convert them into taxable income where the payer retains an unfettered discretion to discontinue them.

The decision is significant for retired employees, officeholders, and recipients of ex gratia allowances from charitable or corporate bodies, and for those advising on the tax treatment of discretionary payments. It also confirms that the charitable status of the source of funds does not, of itself, render an otherwise non-taxable receipt taxable in the recipient’s hands. The decision does not address situations where a contract of service contemplates post-retirement payments, or where a scheme creates an enforceable right to a pension; in such cases, the analysis may differ.

Verdict: The Crown’s appeal was dismissed with costs. The House of Lords unanimously affirmed the decisions below, holding that the £500 annual payment to the Respondent was a purely voluntary allowance and not assessable to Income Tax under either Schedule E or Schedule D.

Source: Stedeford (H M Inspector of Taxes) v Beloe [1932] UKHL TC_16_505