§ 'In paragraph 17(1)(a) of Schedule 5 to the Finance Act 1975 (Settled Property Trusts for Benefit of Employees, &c.) after the words "carrying on" there shall be inserted the words "or formerly carrying on".'—[Mr. David Hunt.]
§ Brought up, and read the First time.
§ Mr. David Hunt (Wirral)
I beg to move, That the clause be read a Second time.
This is very much a tidying-up clause. Capital transfer tax exemption does not cover a situation that I should like to describe.
When trusts for the benefit of employees were brought within the tax, there was very little discussion of the matter when the relevant new clauses were moved by the Government in Committee, and as there was a guillotine on Report 958 there was no discussion of the matter at that stage.
Since that time a loophole has appeared. It would be closed by this clause without giving an opportunity for the avoidance of tax liability. If the proprietor of a family firm that has existed for a number of years retires, he may wish to set up a trust fund for retainers and employees who have been with him for, say, 50 years. However, if the firm is taken over in these days of takeovers and mergers, it is not possible for exemption to be claimed. If, for instance, it is taken over by GEC, such an old family firm is no longer able to ensure that such employees receive the benefits intended. The clause would allow such employees to benefit even though the identity of the family firm was lost in the larger identity of the major company taking it over.
When such a proprietor makes his will is not relevant. What matters, obviously, is the situation of the firm at the time of his death, and it is at that time that the decision whether to give capital transfer tax exemption is made. If the firm is taken over between the making of the will and the death of the proprietor, the exemption is lost.
This circumstance has arisen in a specific case which has come to my attention where someone wanted to set up a small family trust for his former employees. His firm had become merged in another partnership of professional people. He was told by the Inland Revenue that it would not be possible for him to claim this exemption. Therefore, there is a very real problem here which is not met within the terms of the present legislation.
It is surely reasonable that if a person wishes to reward or give benefit to former employees of a firm of which he was the proprietor, or with which he had close contact, he should be allowed to do so without diluting all the limited capital he might have to benefit a much larger firm that has taken over his original undertaking.
Take my original example of GEC. If between the date of making a will and the date of his death a person's company was taken over by GEC, the only way in which the testator's wishes could be put into effect would be by having his trust applied for the benefit of all the 959 GEC employees. His company might have employed only 20 people, but under the terms of the law the trust would have to be spread among the thousands of GEC employees.
This is a very important point. It probably affects only a small number of cases. A solution to the problem is certainly to be found in the wording of the clause, which would be of great benefit to the existing legislation.
§ Mr. Denzil Davies
The hon. Member for Wirral (Mr. Hunt) has raised an important and difficult point. He has written to me about the specific case that he mentioned. The difficulty arises when one firm takes over another and the firm that was taken over becomes merged into the larger entity. The exemption afforded through the capital transfer exemption trust is lost since the trust is not to benefit all the employees of the larger entity.
The hon. Gentleman said that his clause was merely a tidying-up clause to solve this problem. But we are afraid that it could lead to manipulated situations in which it would be possible for a small group to get the capital transfer trust benefit by using the explanation in the clause.
We recognise that there is a problem here and we shall look at it to see whether it is possible to draft something to meet the limited point that the hon. Gentleman has in mind without opening loopholes for avoidance. I hope that the hon. Gentleman will be satisfied with that for the time being. I cannot make any commitment because at the moment I cannot see how the matter will be dealt with, but we shall look at it.
§ Mr. David Howell
I support my hon. Friend the Member for Wirral (Mr. Hunt) and I wish the Minister of State well in his endeavours to find a way through this matter. There were those of us who argued when the capital transfer tax legislation went through that it was a pity that the provision insisted upon application to all employees. We argued—in a sense it was a different argument from the one we are now pursuing—that there would be a great opportunity for the development of employee stock trusts of various kinds if the limitation could be less stringent and if the trust could apply to only a few employees.
960 I did not foresee then that it would arise in the context in which one firm is merged into a larger firm so that the employees of the firm that is taken over are no longer, by definition, all the employees. That creates this new problem which my hon. Friend the Member for Wirral referred to with lucidity and precision. I think that my hon. Friend has put forward a fair point. I hope that the Minister, without having to go back on the position taken up by the Government—I personally think too narrowly on the overall issue of capital transfer tax application to employee trusts—will now be able to find a way through.
It is a situation that may come up again. It must surely stand in the way of our aims and wishes. The Conservative Opposition are very much in favour of seeing a wider ownership among employees of the wealth of firms and the wealth of the country. Labour Members, at any rate, believe in employee trusts where all the shares are transferred to all the employees.
One way or another, I hope that enough common ground can be found to inspire the Minister to find his way through.
§ ion and clause, by leave, withdrawn.