§ (1) If and so long as the terms of any settlement (wherever made) are such that any person has or may have power, whether immediately or in the future, and whether with or without the consent of any person—
- (a) to pay or apply to or for the benefit of the settlor or the wife or husband of the settlor the whole or any part of the income or property which may at any time arise under or be comprised in the settlement; or
- (b) to secure the payment or application to or for the benefit of the settlor or the wife or husband of the settlor of the whole or any part of that income or property;
§ (2) Where the power mentioned in subsection (1) of this section cannot be exercised within six years from the time when any income or class of income first arises under the settlement or from the time when any particular property first becomes comprised in the settlement, then, so long as the power cannot be exercised, that subsection shall not apply to any income arising under the settlement, or as the case may be, any income of that class or income from that property or property representing that property.
§ (3) Where, under the proviso to subsection (2) of section four hundred and five of the Income Tax Act, 1952, the settlor is not deemed to have an interest in any income arising under or property comprised in the settlement, subsection (1) of this section shall not apply to that income or, as the case may be, to income arising from that property.
§ (4) Subject to subsection (5) of this section, the foregoing provisions of this section shall apply for all the purposes of income tax for the year 1958–59 and subsequent years of assessment and also for estimating an individual's total income for the purposes of surtax for the year 1957–58.
§ (5) Where, in the case of any settlement made before the ninth day of July, nineteen hundred and fifty-eight, any income arising 1056 under the settlement would, by virtue of the foregoing provisions of this section, fall to be treated (whether for purposes of surtax or for all the purposes of income tax) as the income of the settlor and not as the income of any other person, but would not fall to be so treated apart from those provisions, it shall not be so treated if—
- (a) no power by reason of which it would fall to be so treated has been exercised after the eighth day of July, nineteen hundred and fifty-eight, or is or can become exercisable after the fifth day of April, nineteen hundred and fifty-nine or such later date as the Commissioners of Inland Revenue may in any particular case allow; and
- (b) neither the settlor nor the wife or husband of the settlor has received or is entitled to any consideration or benefit in connection with the fulfilment of the condition set out in paragraph (a) of this subsection.
§ (6) This section shall be deemed to be included in Chapter III of Part XVIII of the Income Tax Act, 1952, and to precede section four hundred and six thereof and the references in subsection (1) of section four hundred and seven and subsection (2) of section four hundred and eight of that Act to section four hundred and four thereof shall be construed as including references to this section.—[The Solicitor-General.]
§ Brought up, and read the First time.
§ 5.30 p.m.
§ The Solicitor-General
I beg to move, That the Clause be read a Second time.
This new Clause is designed to stop up what we think is a gap which we have not stopped. To let the hon. Member for Gloucester (Mr. Diamond) off making his usual speech on this subject, I will say that this is a case where the Revenue does not know of existing dodging cases, but is trying to get a move ahead—and it seems a wise thing that that should be done.
Section 404 of the Income Tax Act, 1952, when extended by Clause 20 of the Bill, does not cover in this matter of revocable settlements all settlements where a settlor has not effectively alienated his money from himself. Even with the extension provided by Clause 20, the provisions do not catch every case where there is a discretionary power for someone under the settlement to pay or apply the income or property to the benefit of the settlor or his spouse.
Let us suppose a case where a discretion is conferred on someone to pay or apply the settled property in either of 1057 two ways at his discretion, either for the benefit of the settlor or the settlor's spouse, or for the benefit of another beneficiary, where the effective decision as to how the funds are to be applied is taken not when the settlement is made, but only from time to time as the income arises for distribution, when the persons in whom the discretion is vested decide to apply it in that way; that is a case which we have not caught and which ought to be caught, subject to the qualifications in the Clause. It is a case where a settlor has not effectively alienated his income away from himself in advance.
Another example would be a covenant to make annual payments for seven years to a trustee in trust for X, with power for the trustee to make the payments to the wife of the settlor instead. That case would not be caught by existing legislation.
Another example is a settlement on trust to pay the income of the settled funds, at discretion, to any one or more members of a class, including the settlor's wife. That would not be caught by existing legislation, and nor would the settlement in which neither the settlor nor his wife could become beneficially entitled to any part of the settled funds, but where the settled funds could at discretion be applied for his wife's benefit, for example, in reduction of an overdraft.
The Clause is drawn in very wide terms and many of the matters are already covered by existing legislation. We have avoided any overlap, so we hope, by the words which indicate that the Clause is to bite only so far as the matter is not covered apart from the Clause. It will not, in practice, apply to accumulated income, because Section 405 of the Income Tax, in practice, catches all income accumulated by trustees which would otherwise fall within the Clause.
It follows Section 405 of the Act in disregarding the possibility of benefit to the settlor or spouse where that benefit is dependent on the termination of a prior interest by one of the events which are listed in the proviso in Section 405 (2)—things like bankruptcy and other rather sudden and not exactly designed misfortunes in this context. The Clause treats those matters as being excepted from its general provisions. In the circumstances, I need not weary the Committee with 1058 further explanation. Should hon. Members desire it, I am respectfully at their service.
§ Mr. Houghton
We welcome the Chancellor's attempt to close the stable door before the horse has gone. We understood him to be doing that on an earlier Amendment dealing with dividend stripping.
This Clause seems to stop up a few gaps. I do not recognise the definition of "gentle racket" which my hon. Friend the Member for Gloucester (Mr. Diamond) used, but it is clear that in this complicated subject of settlements there are many variations and provisions which make it extremely difficult for the Income Tax Act to catch every one of them. They are a form of tax avoidance in many cases and we certainly welcome this Clause, which is a kind of continuation of the previous one.
We are still without explanation of why the two new Clauses have appeared on the Notice Paper at this late stage in the consideration of the Bill. We would have welcomed them earlier. It adds to our anxiety about the effectiveness of checks on tax avoidance and it gives the feeling that this is a sporadic exercise. It is almost a hit and miss effort, according to whether there is a Finance Bill in the second half of the year, or whether the Committee stage of a Finance Bill lasts long enough for the Chancellor to be advised of additional provisions which should be included in the Bill. It always makes those of us on these benches who are interested in these matters consider whether stopping up gaps as we go along is the most satisfactory way of doing it.
§ The Solicitor-General
I thank the hon. Member for welcoming the Clause and I use the opportunity to repair an omission. I should have said that since there is once more a discretion in the Commissioners to extend the time, parallel with the case of the Amendment to Clause 20, my observations in that context as to the view the Commissioners would take about their duty equally apply in this instance.
§ Mr. Mitchison
I want only to ask one question. I always feel about this settlement difficulty that the case for which there is not sufficient provision is that where the trustee of one settlement is the settlor of another settlement, and where there is an arrangement between two or 1059 more people, formally or informally, by which they each purport to confer an unlimited discretion on the other, on a perfectly good understanding that each will do the right thing, as they would regard it, or the wrong thing as the Revenue would regard it, by the other.
I wonder whether that kind of case is sufficiently met and whether, now that the Chancellor is taking the course of providing against rackets before they occur, he will see whether he cannot find a racket of that sort lurking about somewhere and take steps to deal with it in this or some future Finance Bill.
§ Mr. Mulley
If I may now ask the learned Solicitor-General to reply to the point which I endeavoured to make on an earlier Amendment, I think it would be quite in order, because the form of this new Clause follows exactly the form of Clause 20.
It seems to me that provision is made, rightly or wrongly, for those people who have, probably deliberately, used this means of tax avoidance to put matters right within the period prescribed by the Clause. On the other hand, it seems to me that the people who, innocently, have included the words "spouse or wife" or something of that kind, can be denied the possibility of putting it right, because, as I understand it, trustees have no power to change the terms of the trust deed.
It could happen, as I tried to put it earlier, where, simply to widen the objects of the trust deed, someone could provide for a nephew's children to be included in the discretionary class and also provide for the spouse of the nephew, as well as his own children. It is conceivable, though probably extremely unlikely, that the settlor could marry the ex-wife of his nephew, and, in such a contingency, if the Revenue took the extremely rigid view, they could automatically, under this new Clause, as they would under Clause 20, hold that it would not preclude possible benefit in future to the settlor or a possible wife of the settlor.
If they took an extremely academic view, and there is reason to suppose that they may well do so, I submit, without going into the merits of the possibilities for exemption, that innocent parties may not be able to escape from this net, which has, quite rightly and properly, been laid 1060 by the Revenue, whereas those who went in for the idea of tax avoidance will be able to get out.
The spouse or settlor will be able to disclaim a hypothetical or possible future object of such a discretionary trust, and the disclaimer comes about at the moment when, possibly, they are not even in existence. I should like to ask the Solicitor-General if he could, without straining his conscience about being out of order, answer the point which I endeavoured to make.
§ The Solicitor-General
It would not be my conscience, Sir Gordon, but, with great respect, yours that would be strained. Subject to the limits of tolerance which you permit me, I will try to deal with the point which the hon. Gentleman has put to me, and I am sure he will be good enough to indicate if I have not got it right.
I imagine that he is conceiving the case where, innocently, the settlement has been made in such terms that there is a power of determination in the settlement, and a possibility that the exercise of that power would benefit the unascertained future wife of the settlor, and, therefore, the settlement is caught. The problem which the hon. Member puts to me is whether that power can be purged from the settlement so that the settlement can endure and be cured for the purpose of this Clause.
Let us suppose that the Variation of Trusts Bill—I am not certain what stage it has reached now, but it is about to become law—actually becomes law. The court, if applied to, will be able to consent to a variation of the settlement getting rid of the offending power, because it could, on behalf of an unascertained wife, consent to that variation under the Bill. That is why we believe that this let-out operates even in the case which the hon. Member has been putting to me. I greatly fear that all this is out of order, but I hope that it is a satisfactory answer to the point which the hon. Member put to me.
§ Mr. Mulley
I am much obliged to the learned Solicitor-General, but the Government are legislating in the Finance Bill and seem to be assuming that the position will be made just as between taxpayers by private Members' legislation which is still not law. The Government should 1061 have tackled the subject in a more comprehensive way. This is merely another illustration of the rather slipshod way in which the Government have dealt with their legislation.
§ 5.45 p.m.
§ The Solicitor-General
It would be a miserable precedent if we were to try to amend the law on trusts in the Finance Bill.
§ Mr. Mitchison
Another example of the slipshod methods of the Government is provided by the fact that the learned Solicitor-General did not answer the point I made.
§ Question put and agreed to.
§ Clause read a Second time, and added to the Bill.
§ Bill reported, with Amendments; as amended (in Committee and on re-committal), considered.