Taylor J:

This is an application for decision by the Court of certain questions arising out of a settlement made in 1893.

The family are Hadramaut Arabs and, of course, Moslems.Their interests are in owning, developing and managing town lands.The settler conveyed property to trustees, on trust to pay the income, derived mainly from rents, to the descendants, in the male line, of himself and his brother for a period approximating to the longest permissible under the rule against perpetuities and then to distribute the corpus among the surviving grandsons of the settlor and his brother.Each left grandsons, some of whom have died and have been succeeded by great-grandsons who now share the income but can never share the corpus.Hence it is of the utmost importance that the trustees should observe, as strictly as practicable, the distinction between income and capital liabilities.

There are now more than fifty beneficiaries, some of whom are infants, but representation orders have been made so that all classes of persons interested under the deed are before the Court.

[His Lordship then dealt with matters which are not relevant to this report and continued:]

The first question is how ought these trustees to deal with the interest payable to the Treasury on estate duty in respect of deaths since 1929.As the question may arise in a variety of circumstances it is desirable to ascertain the underlying principles before examining particular instances.

I think the principles are most easily appreciated by considering a very simple case.Say a man leaves the whole of his property to his wife for life and then to his only son absolutely, that the estate consists of one house valued at $100,000 yielding $5,000 per annum and that the estate duty is $10,000 carrying 5%. On the day following the death the executor has one asset, the house, one liability, $10,000, a future income of $5,000 a year but no cash.

In theory he should forthwith sell the house for $100,000 pay the duty and buy for $90,000 another house, yielding about $4,500 per annum.The widow would then have an income of $4,500 which is the true income of the estate and the son would eventually inherit an asset worth $90,000 which is the true amount of the corpus devised to him.In practice, of course, it would be impossible to buy, immediately a house which fitted the requirements and the costs of the sale and purchase would be a dead loss to the estate as a whole, out of all proportion to the liability of $10,000 which is the sole problem.

If the executor allowed the matter to stand over for a year he would have $5,000 in cash, being accrued income and a liability of $10,500 for duty and interest.If he then paid the Treasury $5,000 on account they would postpone the balance.On this basis he could pay off the duty, with further interest, in about 2'bc years but meanwhile the widow would starve.

The executor might arrange to pay the duty by instalments, spread over 5 or 10 years, which would preserve the house intact, but this is open to three objections.Interest would continue to accrue on the outstanding balance of the duty, so that the total amount paid to the Treasury would be greatly increased.The available balance of income would be insufficient for the widow.The son would eventually receive the whole of the estate, free of duty, instead of the true corpus.In short this scheme would shift the whole burden of estate duty, which is, in the main, a capital liability, from the corpus to the income.

Another way would be to mortgage the house for $10,000 and pay off the Treasury.There might be a small saving if the mortgage interest were less than the estate duty rate but that would be off-set by the costs of the mortgage.Say the mortgage was for $12,000 at 50r $600 per annum.If this were paid from income there would be $4,400 for the widow and when she eventually died the son could sell the house, pay off the mortgage and recover about $88,000 against the $90,000 at which the