· If the person receiving the capital was entitled to the capital, tax would not be chargeable on the amount chosen to be drawn out of the capital. If he is not entitled to the capital, it will be income.
· By a deed of settlement M paid £100k to trustees, to invest and to hold the income on protective trusts for his benefit during his life and, subject to a power to appoint the income to his wife, after his death to hold the trust fund and income for the benefit of his descendants. It was provided that if in any year during M's life the income of fund actually received by the Trustees shall be less than the net amount of £6,500 the Trustees should raise out of the capital and pay to the Settlor for his own benefit the amount of the deficiency. In each of the relevant years, the net income was less than 6,500 and money was raised out of capital and paid to M.
· Held, that M ceased to be entitled to the capital when he executed the deed of settlement so that the payments out of capital were income in the hands of M and were assessable to Income Tax.
· Macnagthen J at first instance (judgment upheld)
· Lord Finlay in Brodie meant exactly what he said, that if the person who was receiving the capital was entitled to the capital, then the tax would not be chargeable on the amount he chose to draw out of his own capital. In this case when Mr Morant executed the deed of settlement he ceased to be entitled to the capital. He received as part of his income under the provisions of the settlement the money the trustees raised out of capital for that purpose.