§ Mr. MacDermot
I beg to move, Amendment No. 37, in page 23, line 39, to leave out "body corporate" and to insert "person".
This Amendment makes a small alteration to the provisions of the long-term tax regarding residence of trustees. It deals with a point which was raised by the hon. Member for Crosby (Mr. Graham Page). Indeed, he has an Amendment down, No. 274, which treats of the same point and which I think will be unnecessary if the House accepts this Amendment.
The general rule is that the residence of trustees is determined in this way, that they are ordinarily resident in the United Kingdom, unless the trust is administered outside the United Kingdom and the trustees, or a majority of them, are non-resident. The proviso to Clause 24(1) provides that a body corporate which is carrying on business which consists of, or includes, the management of trusts, and is acting as trustee of the trusts, in the course of that business shall be treated as not resident if the whole of the settled property consists of or derives from property provided by a person not at the time domiciled, resident or ordinarily resident in the United Kingdom. That is the existing position.
Since the publication of the Bill it has been represented to us, in particular by the Law Society, that the benefit of the proviso to which I have referred ought not to be restricted to corporate bodies which carry on the management of trusts, but ought equally to be available to individuals, for example solicitors, who practise, not as companies, but as individuals or in partnership, and manage trusts in the course of their business. This point appears to us to be a valid one, and is met by substituting the word "person" for the words "body corporate".
§ Mr. Charles Fletcher-Cooke (Darwen)
May I, on behalf of my hon. Friend 1720 the Member for Crosby (Mr. Graham Page) thank the Financial Secretary for this Amendment? It seems extraordinary that there should have been any distinction between a body corporate and an individual person in this connection. One cannot understand how the discrepancy ever crept in. However, now that we have got what we want, it may be ungrateful to say more about that, and I shall therefore restrict myself to thanking the Government for putting the matter right at this late hour.
§ Amendment agreed to.
§ Mr. Peter Walker
I beg to move Amendment No. 229, in page 24, line 15, to leave out:forming part of the settled propertyand to insert:in respect of which the life interest has been determined".If I was on the other side of the House I would describe this as a drafting Amendment, and I would expect the House quickly to accept it. This is an attempt to give a more specific definition to what we consider to be intended by the Bill, and I hope that it will be accepted in that spirit.
§ Mr. MacDermot
I have known Members of the Treasury Bench suggest that matters are drafting matters and get away with it, but I have not previously heard this ploy tried by the Opposition Front Bench.
This is far more than a drafting Amendment. It would make a considerable change, one which at first sight, I readily admit, would appear to have attractions; and I do not mind telling the House that when we were originally considering the scope of the Bill and framing it I raised the question whether it would not be right to deal with the matter in the way suggested by the Amendment. However, I was convinced by the arguments that were advanced that it would not be a useful or practical way of dealing with it, for reasons which I shall try to explain to the House.
The Amendment, in effect, proposes that when a life interest in a trust terminates, the trustees should be chargeable only on that fraction of the property of the trust to which the life tenancy which is terminated relates. We assume that that is the intention. If a life tenant 1721 has a fractional interest in the interest on the property he will normally have an interest in all the assets. It is not clear that the Amendment will make any difference in such a case, but I shall argue to what I assume to be the intention underlying the Amendment, which is that in such a case, in effect, it is only tax on a proportionate fraction that should be payable.
A fractional charge on the assets of a trust may appear reasonable, but it would be extremely difficult to operate, not least for the trustees. It would lead to great complications for everyone concerned. It would not be possible to select certain assets of the trust to the value, for example, of a quarter of the total value if the deceased life tenant had a quarter life interest in the income, and to leave those assets to be disposed of by the trustees. Apart from the fact that the life tenant's interest would normally have been a fractional interest in all the assets, there would be no rational basis for making a selection of the assets in question. If the matter were left to the trustees they would choose all the assets which happened to have shown a loss.
The only practicable course would be to provide that the relevant proportion of all the gains on all the assets should be chargeable. This would be an immensely complicated procedure. It would require, first, that the amount of all the assets should be calculated, as is provided in the Clause at present, and then the relevant portion of those gains would have to be charged on Capital Gains Tax. After that, the notional acquisition cost of all the assets would have to be adjusted to an artificial value which reflected neither their true cost to the trust nor their actual market value when the so-called relevant life interest came to an end. There would be immense complication in the bookkeeping and recording necessary to ensure that the charge was properly and fairly enforced. One has to look to the interests of other beneficiaries under the trust.
We considered this proposal, but came to the conclusion—as much in the interests of the trustees as in the interests of the Inland Revenue—that it would not be advisable. It is for that reason that the course proposed in the Bill has been 1722 chosen. It represents what we believe to be the only possible one to adopt.
§ Mr. Fletcher-Cooke
When I heard the Financial Secretary speak I wondered whether we were really discussing Amendment No. 229, which I imagined to be the one moved by my hon. Friend the Member for Worcester (Mr. Peter Walker). The Financial Secretary pretended that it was in the best interests of the trusts and trustees that this Amendment should be rejected, which is totally contrary to the facts. The facts are that, largely through Estate Duty law, the monstrous principle has crept into taxation law that unless one is careful, every time a life interest passes the whole property is subject to tax—not merely the life interest, or the slice of the assets representing the life interest, but the whole corpus. I have always thought that this was unfair. It may be avoided with great skill in the Estate Duty world, but why we should repeat this principle in respect of capital gains I cannot understand.
The present provision is particularly dangerous It was in respect of this that my hon. Friend the Member for Hendon, North (Sir Ian Orr-Ewing) in Committee pointed out to the Minister without Portfolio that even an advance for the purposes of education, or something of that sort, might be held to form a termination of the life interest in a part of the settled property and thus attract the full Capital Gains Tax on the full corpus of the settlement. This argument was rejected by the Minister without Portfolio, but since then I have been advised that those who are learned in these matters are not totally satisfied with his answer, and that in the normal process of trusts there is a danger that an advance for the purposes of education, or for setting up a beneficiary in his trade or business, will be held to terminate the life interest in a part of the settled property, and that that being so the full amount of Capital Gains Tax will be attracted for the whole capital value of the settlement.
If that happened—and it was held to have happened in one case—in all subsequent cases no one would ever make an advancement for educational purposes, for purposes of setting up in trade or for the normal purposes of advancement. This would inhibit enormously the powers 1723 of trustees and the rightful exercise of those powers, because they would bring down upon their heads and upon the head of the capital of the corpus of the whole settlement this vast tax. I hope that this is wrong, but a great many people think that what I am saying is right. That being so, I hope that we can be reassured that the normal powers of advancement do not constitute, for this purpose, the termination of a life interest in any part of the settled property.
Even if that is right and we can be reassured on this, I must ask the Financial Secretary to think again about whether it is in the best interests of the trustees and of the beneficiaries that, every time a life interest passes, the whole amount of the capital is subject to this tax. Of course it is not in their best interests. This is the way a headmaster treats a pupil when he is about to beat him: he says that it is in the pupil's best interests. Of course, it is in the best interests of every beneficiary that tax should be attracted only to that slice of the corpus which passes on the life interest. It may be, for administrative reasons, that we cannot test it; I do not understand that; but to pretend that it is in the interests of the subject that the whole amount of the capital should, every time the life interest passes, be subject to this is—if I may use an unparliamentary expression—humbug.
§ Mr. MacDermot
If I may have leave to speak again. I am not sure whether the question of the hon. and learned Member for Darwen (Mr. Fletcher-Cooke) is directly relevant, but I would assure him that an advance of the kind he described would not be a determination of an interest so as to be an occasion of charge—
§ Sir Hugh Lucas-Tooth (Hendon, South)
When the hon. Gentleman says "advance", does he mean an advance made under statutory powers or any advance, however made, under the trust? There is a big difference and I think that he is referring only to the first.
§ Mr. MacDermot
I was referring to the specific question which I was asked, about the advance for educational purposes.
What we are concerned with in the Amendment is not what constitutes the determination of a life interest, but how the assessment to charge shall be made when that occurs. For the reasons which I have explained, we are satisfied that, in the interests of trustees as well—we have had no representations on this to the contrary—the procedure laid down in the Bill is the only practicable one.
§ Amendment negatived.
§ Mr. MacDermot
I beg to move, Amendment No. 38, in page 24, line 19 at the end to insert:(4A) If, in the case of the death of any individual, no relief is given under subsection (2) of the last foregoing section, or relief which is given in respect of an aggregate sum which is less than the amount available for relief under the said subsection (2),, then that amount or, as the case may be, the difference between that amount and the aggregate sum in respect of which relief is so given shall be available for giving relief under this subsection, and—This Amendment implements an assurance which I gave in Committee when dealing with an Amendment by right hon. and hon. Gentlemen opposite, the effect of which would have been that the unused balance of the £5,000 death exemption should be allowed to be set off against gains accruing to trustees in consequence of that death. I said on that occasion that we should be prepared to allow any unused portion of the £5,000 exemption to spill over to the trust property, and that is what this somewhat lengthy Amendment is designed to do.
and the references in this subsection to the amount available for relief under subsection (2) of the last foregoing section are references to five thousand pounds or as the case may be to that amount as reduced (or extinguished) under section ("transfer of business on retirement") of this Act.
- (a) any gains which accrue to the trustees of a settlement on the disposal of settled property deemed to be effected at the date of the death in accordance with subsection (3) or subsection (4) of this section on the termination of a life interest by the death, or otherwise in consequence of the death, shall be aggregated and only so much of that aggregate as exceeds the amount so available for giving relief under this subsection shall constitute chargeable gains,
- (b) if subsection (5) below has operated to prevent subsection (4) applying on the date of the death paragraph (a) above shall apply to gains accruing on the disposal of the settled property deemed to be effected on the next occasion (if any) when subsection (4) applies,
- (c) in arriving at the aggregate—
and the provisions of this subsection shall not affect the computation of the amount of any allowable loss,
- (i) the respective amounts of the gains shall be computed in accordance with the provisions of this Act (other than this subsection) fixing the amount of chargeable gains, and
- (ii) any allowable loss which accrues on the disposal shall be deducted,
- (d) if this subsection applies in relation to chargeable gains accruing to more than one body of trustees on the same death, the amount available for relief under this subsection shall be apportioned between those bodies of trustees according to the respective values of the settled property which those
1725 trustees are deemed respectively to have disposed of,
§ Mr. Peter Walker
We welcome the new Patronage Secretary, the hon. Member for Cardiff, West (Mr. George Thomas). At any rate, he is occupying the seat usually occupied by the Patronage Secretary. Indeed, we can well understand the appointment of a new Patronage Secretary.
Once again, we welcome this important Amendment. It was a very wrong omission from the original Bill, and we are very pleased at the manner in which the suggestions which we made in Committee have been received by the Financial Secretary. We are grateful to him for proposing the Amendment.
§ Amendment agreed to.
§ The Minister without Portfolio (Sir Eric Fletcher)
I beg to move Amendment No. 39, in page 24, line 23, to leave out "ten" and to insert "fifteen".
§ Sir Eric Fletcher
I think that it would be convenient if we considered together Amendments Nos. 39, 40, 41, 42, 43, 44, 47, 48, 49, 50, 51 and 52.
§ Sir Eric Fletcher
The whole of these Amendments refer to a discussion which 1726 we had in Committee, and they are designed to implement an undertaking which I gave in Committee. The House will recall that Clause 24(4) provides that on the termination of a life interest in possession of all or part of the settled property, all the assets comprised in the settlement are deemed to be disposed of and reacquired by the trustees.
In order to prevent the trustees of a settlement from being charged too frequently to Capital Gains Tax on notional disposals in the case of a trust with several life interests simultaneously in possession, subsection (5) provides that the interval between any two charges shall not be less than ten years. If I may give an example, suppose that a trust were set up in year one and a life interest terminated in year three, the trustees would then be charged on the gains accruing on the notional disposal at that time. But if a further life interest fell in between, say, years three and thirteen, the trustees would not be charged until year thirteen, the conception being that there should be no second charge to Capital Gains Tax except after an interval of ten years, but that after ten years they should then be charged whether or not a life interest terminated at that point of time. In order to deal with the case of the discretionary trust where no life interests fall in, subsection (6) provides that such trusts are to be charged every ten years.
In Committee, these proposals were criticised on the ground that the ten-year interval was too short. Amendments were put down by the Opposition suggesting that the period of ten years should be extended. Some hon. Members suggested twenty-one years and others suggested twenty-five years. At that stage I gave an assurance that if the Amendments were withdrawn the Government would put down a series of Amendments to extend the period of ten years to fifteen years. The Opposition Amendments were not, in fact, withdrawn. Nevertheless, the Government wish to implement the undertaking which I gave, and the whole of these series of Amendments gives effect to that undertaking.
§ 10.0 p.m.
§ Mr. Fletcher-Cooke
The whole concept of notional disposal is, as the 1727 Minister without Portfolio knows, repulsive to my hon. Friends and I, and it does not make it any better that the notional disposal takes place at 15-year intervals instead of at 10-year intervals. The notional disposal concept is, of course, another aspect of how this tax is turned from a Capital Gains Tax into a capital levy or wealth tax.
It is as though when one is dealing with Income Tax one says that someone who is not working as hard as he might shall be taxed on the sort of income that he could earn if only he exerted himself. It is the same principle, translated into the Capital Gains Tax. It is saying, "These trustees are not turning over their investments as fast as we want them to so that the Treasury can have its cut and, therefore, we will tax them as if they were". It is, to our way of thinking, totally foreign to the concept of a real, genuine, sincere and honest Capital Gains Tax.
If the theory behind the Capital Gains Tax is, as I believe it to be, that those who depend entirely on earned income do not like to see people enjoying capital gains, if one is to have parity of reasoning and parity of burden then, as I said when I first spoke on this subject, the Treasury should tax the wage earner as if he had earned the full wage of which he was capable, whether or not he had earned it.
Why trustees and settlements should be singled out for the notional disposal treatment I do not know. It may be that a great many of them do not turn over their investments as quickly as the Treasury would like, but they are in a fork here. If they turn them over too quickly they get subjected to the short-term Capital Gains Tax at a very high rate. If they do not turn them over fast enough, along comes the Treasury and says, "We will tax you as if you had".
It is difficult to know at what speed the prudent, reasonable or governmentally approved of trustee should turn over or switch his investments. It is a monstrous thing to tax people for a capital gain which they have never made simply because the Treasury wants the money. I do not believe that the interval of another five years—and I am talking 1728 here of trusts without a life interest; there are not only discretionary trusts—makes any difference. We know that the Treasury does not like discretionary trusts and I have some sympathy with that view. As I say, there are many trusts without life interests. There are trusts for persons with a disability, persons of unsound mind and so on. There may be no life interest whatever. I do not understand why these trusts should be singled out for this revival of the law of mortmaine, as I mentioned in Committee.
Companies are entitled to sit on their investments for many years without turning them over. If companies and corporations are not subjected to this 15 or 10 year assessment of what they would have made if they had turned over or switched their investments why should settlements be so singled out?
This seems a most monstrous imposition and the Government have as yet said nothing to persuade me that this is anything but the thin end of a very dangerous wedge indeed. I wrote about this in the columns of The Times at the time of the Budget Statement. The mere fact of extending this Domesday Book from 10 to 15 years leaves my withers quite unwrung.
§ Mr. Scott-Hopkins
I completely support the remarks of my hon. and learned Friend the Member for Darwen (Mr. Fletcher-Cooke) and I hope that the Minister will particularly consider the case of an estate which has been left in trust to a minor, someone aged one or two. It would appear from the 15-year provision that when the minor becomes of age the estate, perhaps a farm, will be valued and the Capital Gains Tax will be paid on the value. This could lead to great hardship, even to the breaking up of the estate, which would be a very bad thing, particulary if it were a farm.
Under the present Administration, with increasing inflation, the 15-year provision may cause great hardship. I urge the Minister without Portfolio to again consider the time factor and realise that the difficulties which may be caused resulted in my hon. Friends suggesting the period of 21 years in Committee. It is an important issue, and I hope the Minister without Portfolio will think about it. 1729 because hardship will be incurred by imposing a 15-year period.
We heard during the Report stage that a decision had been deferred in respect of widows and so on. Where a minor is concerned, I think it is quite inequitable that an estate should be valued for the purposes of Capital Gains Tax, and it could well lead to the disposal of part of the estate to pay the tax. It is quite unfair, and I hope the Minister without Portfolio will think again and change the period of time he is now trying to write into the Bill.
§ Mr. Peter Walker
While supporting the cogent arguments of my hon. and learned Friend the Member for Darwen (Mr. Fletcher-Cooke) and my hon. Friend the Member for Cornwall, North (Mr. Scott-Hopkins), the only way I can summarise the Amendments is by the reference I made to them in Committee, when I said:One realises therefore, that this is a thoroughly bad Clause, and the Amendments in the names of my hon. and right hon. Friends of the Liberal Party all express these very real problems. None of these have been answered and the concession offered by the Minister was an insult after the debate. It has been obvious throughout the debate that the Government are unwilling to listen to realistic arguments and that it is a waste of time for us to argue against them."—[OFFICIAL REPORT, 26th May, 1965; Vol. 713, c 704.]Now that they have had a longer time to consider those arguments, they have shown once again that they are unwilling to listen to logical reasoning. This is a mean, unimportant concession, in the sense that it is a concession. We will have to support it and let it go through, but I regret that the Government have not given more consideration to the very cogent arguments in that debate.
§ Sir Eric Fletcher
The issue is whether the period should be 10 or 15 years, and I understand from what the hon. Member for Cornwall, North (Mr. Scott-Hopkins) says that he is in favour of such an extension. However, I think the hon. Member has misunderstood the effect of the Clause. There is no automatic charge to Capital Gains Tax every 15 years, except in the case of a discretionary trust.
§ Sir Eric Fletcher
In the case of a discretionary trust the situation would arise in which, unless there was some such provision, such a trust would escape liability to Capital Gains Tax altogether. That would open the door to very considerable evasion, and I do not think that any hon. Member opposite is proposing that in the case of a discretionary trust this Clause should be a complete escape from liability.
In the case which the hon. Member supposed of a trust for an infant, there is no charge to tax when the child becomes 15 or 16 years of age. In a case of that kind, the charge only arises when the life interest passes.
§ Amendment agreed to.
§ Further Amendments made: In page 24, line 25, leave out "ten" and insert "fifteen".
§ In line 28, leave out "ten" and insert "fifteen".
§ In line 30, leave out "ten" and insert "fifteen".
§ In line 32, leave out first "ten" and insert "fifteen".
§ In line 32, leave out second "ten" and insert "fifteen".
§ In page 26, line 2, after "(4)", insert "(4A)".
§ In line 6, leave out "1955"and insert "1950".
§ In line 10, leave out "1955"and insert "1950".
§ In line 11, leave out "tenth" and insert "fifteenth".
§ In line 13, leave out "tenth" and insert "fifteenth".
§ In line 14, leave out "ten" and insert "fifteen".
§ In line 15, leave out "1955"and insert "1950".—[Mr. MacDermot.]
§ Mr. MacDermot
I beg to move, Amendment No. 53, in page 26, line 15, at the end, to insert:but subsection (4) of this section shall not be applied by virtue of this subsection (taken together with subsection (6)) on a date falling before 7th April, 1967".After my earlier hesitation, Mr. Deputy-Speaker, I am now glad to say that I can give a very full explanation of the Amendment if any 1731 hon. Members wish me to do so, but perhaps it is sufficient to say that it introduces a two-year moratorium on the operation of the charge to tax of discretionary trusts under subsection (6).
This Amendment results from an argument which impressed me in Committee. It was then pointed out that if the provision calling for the automatic levy of charge every 15 years on discretionary trusts had to begin to operate immediately as from Budget day, it would mean, owing to the spread provision introduced to see that these charges are spread over the whole of the 15-year period and do not all get bunched up at one moment, that the charges in the first year or two would involve a great deal of labour and result in very little revenue. It seems more satisfactory to have the moratorium for the first two years, which means that not until two years after the tax comes into force will we begin to operate the provision. The work would then produce some useful result. Meanwhile, the tax for those two years will be deferred until after 15 years have elapsed.
§ 10.15 p.m.
§ Mr. Peter Walker
May I congratulate the Financial Secretary on his recovery and the tremendous zest and enthusiasm which he put into the brief he had just seen for the first time? In fairness to him I should withdraw that statement, because he remembered the debate we had on this question. In fact, however, he remembered it only for the purpose of what he expressed as part of the debate. The point he made was that there would be administrative inconvenience in starting on the valuations within a few months of the Bill coming into operation and also inconvenience for the taxpayer.
The point we made when discussing this in Committee was a suggestion that the first valuation should not take place, when it was to be 10 years, until 1975 and, now that it is to be 15 years, not until 1980, and thereafter on the appropriate anniversaries of the appropriate trusts. Otherwise we should get a situation in which someone whose trust anniversary happened to have fallen in 1967 would have to start revaluing assets of the trust and paying Capital Gains Tax rather earlier than in a trust formed after 1965. This Amendment, however, deals with 1732 part of our complaint and will ease the administrative problems not only of the taxpayer but also, we believe, of the Revenue. For that reason we find the Amendment acceptable.
§ Mr. R. J. Maxwell-Hyslop (Tiverton)
I wish to ask a question of the Financial Secretary. If no provision is made in the trust deed—which presumably there would not be—as to the cost of these periodic valuations, is there anything to enable trust deeds to pay the cost of the valuation out of the trust funds rather than making the beneficiary pay?
This is attributable to a number of different Clauses but it arises here when we are fixing the date at which a trust is to be valued. It is matter of concern that, notwithstanding what is written into the trust deed, the cost of the valuation if any could be met out of the trust rather than out of the residual benefits to the beneficiary of the trust.
§ Mr. MacDermot
By leave of the House I speak again, but I am not sure that the question arises on the Amendment although it arose in one of our earlier discussions when, I think, the hon. Member for Tiverton (Mr. Maxwell-Hyslop) was not with us. I referred then to a provision in the Schedule which deals with the question of the expenses which can be allowed when calculating tax. I am afraid I cannot answer specifically without notice the question about the position between the trustees and the beneficiaries, but I imagine that there is a general provision entitling trustees to incur proper expenses in the administration of the trust and in the Schedule one would find that would be covered. If the hon. Member has anything further specific to ask about this when he has had an opportunity of looking at the effect of the Amendment, I will write to him.
§ Mr. Deputy-Speaker (Dr. Horace King)
This is a little wide of the Amendment, but having allowed the question, I thought I must allow the answer.
§ Amendment agreed to.