§ '(1) Where a company issues any share capital to which section 33 of this Act applies in respect of shares in the company held by a person as trustee, and another person is at the time of the issue absolutely entitled thereto as against the trustee or would be so entitled but for being an infant or other person under disability (or two or more other persons are or would be jointly so entitled thereto), then—
- (a) notwithstanding sub-paragraph (1)(a)(i) of paragraph 4 of Schedule 7 to the Finance
1557 Act 1965 (reorganisation of share capital etc.), the case shall not constitute a reorganisation of the company's share capital for the purposes of that paragraph; and
- (b) notwithstanding section 22(4)(a) of that Act, the person who is or would be so entitled to the share capital (or each of the persons who are or would be jointly so entitled thereto) shall be treated for the purposes of paragraph 4(1)(a) of Schedule 6 to the Finance Act 1965 (expenditure allowable in the computation of gains under that Schedule) as having acquired that share capital, or his interest in it, for a consideration equal to the appropriate amount in cash within the meaning of paragraph 1 of Schedule S to this Act.
§ (2) This section shall be deemed to have come into force on 6th April 1975.'.—[Mr. Joel Barnett.]
§ Brought up, and read the First time.
§ Mr. Joel Barnett
I beg to move, That the clause be read a Second time.
This new clause deals with the difficulty arising where stock dividends are allotted to trustees in a case where a beneficiary is absolutely entitled to them. The clause provides, firstly, that the new shares shall not form part of the trustees' holding and, secondly, that the cost to the beneficiary of the new shares shall be the amount provided in paragraph 1 of Schedule 8 to the Bill, which determines the amount to be assessed to income tax, under Clause 33 of the Bill, on the recipient of the new shares.
We have received representations—this aspect was discussed in Committee—suggesting that in a case in which a beneficiary was absolutely entitled to the income of a trust, Clause 31 as it then was, now Clause 33, could impose a form of double taxation where stock dividends were allotted to the trustees.
This, it was thought, could arise in the following way. The Revenue took the view that stock dividends allotted to trustees became settled property of the trust. A charge to capital gains tax therefore arose on the trustees under Section 25(3) of the Finance Act 1965, which provides that there is a deemed disposal by trustees where a beneficiary becomes absolutely entitled to income as against trustees, on the allotment of the stock dividends. Clause 33 of the Bill contains provisions for charging stock dividends, measured in a certain way, to income tax. This charge will fall on the beneficiary where he is absolutely entitled to the stock dividends.
1558 As has been indicated to us, the stock dividends are then being charged to tax twice, firstly to capital gains tax in the hands of the trustee, and secondly to income tax in the hands of the beneficiary. We are now advised that where the beneficiary is absolutely entitled to the income of a trust he is also absolutely entitled, ab initio, to stock dividends issued in lieu of cash dividends. The stock dividends do not, therefore, become settled property, and no charge to capital gains tax on the trustees therefore arises, as Section 22(5) of the Finance Act 1965 applies.
It being accepted that there is a division of ownership as between the shares held in trust and the new shares allotted in respect of them, the existing capital gains tax rules do not provide a satisfactory measure of cost for the old and the new shares respectively.
I hope that is reasonably clear to the House. I see the right hon. Member for Crosby (Mr. Page) following my remarks avidly.
§ Mr. Graham Page
I want to intervene at this point only to say that I congratulate the Chief Secretary on being so modest and using Latin to hide the normal legal definition of these people as bare trustees.
§ Mr. John Nott (St. Ives)
Will the Chief Secretary remind the House of what Section 22 of the 1965 Act says? I did not quite catch what he said.
§ Mr. Barnett
Section 22(5) of the Finance Act 1965 provides that, where assets are held by a person as trustee for another person absolutely entitled as against the trustee, the acts of the trustee shall be treated as if they were the acts of the beneficiary.
I know that it is absolutely clear to the right hon. Member for Crosby, because he is an expert on bare trustees and not-so-bare trustees. I hope that that explains the matter to the hon. Member for St. Ives (Mr. Nott).
§ Mr. Barnett
Good. I should be happy to explain any further parts of the new clause which are not clear to hon. Members, but I am sure that they will recognise the need for the clause.
§ 5.45 p.m.
§ Mr. David Howell
I am glad to hear that this matter is very clear to my hon. Friend the Member for St. Ives (Mr. Nott), and indeed, no doubt to everyone in the House this afternoon. Perhaps I may have one shot at stating what, as I understand it, in slightly less technical language, the clause does. Then, if the Chief Secretary nods, I shall be happy and I shall be able to join my hon. Friend in having it absolutely clear.
Am I right in assuming that where trustees are acting for a child or a minor, or whoever it is, as beneficiary, all that the clause does is to relieve them for capital gains purposes from the capital gains tax to which they might be liable in addition to the income tax to which they will be liable under Clause 33, as approved in Committee? Is that the purpose of it? Is it that kind of minor relief under a general provision about which we were not very happy? Have I got that right, and is the Chief Secretary nodding?
§ Question put and agreed to.
§ Clause read a Second time, and added to the Bill.