§ The Temporary Chairman
With this it will be convenient to take the following amendments: No. 4, in page 129, line 27, leave out 'child' and insert 'descendant'.
§ No. 6, in page 129, line 36, leave out 'child' and insert `descendant'.
§ No. 5, in page 129, line 36, leave out 'stepchild' and insert 'step-descendant'.
§ No. 10, in page 133, line 10, leave out 'child' and insert "descendant'.
§ No. 11, in page 133, line 11, leave out 'child' and insert 'descendant'.
§ No. 12, in page 133, line 20, leave out 'child' and insert `descendant'.
§ No. 13, in page 133, line 20, leave out 'stepchild' and insert 'step-descendant'.
§ Mr. Beith
The effect of this group of amendments would be to make the settlor potentially liable to tax if any descendant—not just the child—was a beneficiary. There is no obvious reason why the settlors should not be liable to tax on settlements made for the benefit of their grandchildren. The Minister referred to the possibility that a much wider limitation could be placed on overseas trusts affecting other potential beneficiaries. Perhaps he will be able to adduce particular reasons why that should not be so because of the other purpose for which trusts have traditionally been used. I do not see why a trust from which benefits for children are not tax-exempt should provide such an exemption in respect of grandchildren.
§ Mr. Maude
That is the point raised by the hon. Member for Newcastle upon Tyne, East (Mr. Brown). 691 From the temperate way in which the hon. Member for Berwick upon Tweed (Mr. Beith) moved the amendment, I deduce that he accepts that it is no great point of principle. I concede that, if this were the only part of the proposal—if clause 77 stood on its own without the exit charge and without the supplementary charge on settlements that are not caught by these proposals--there would be a case for extending the net a bit wider.
However, one must recognise that settlements are made in non-resident trusts for perfectly legitimate reasons which have nothing to do with tax avoidance. The burden of the amendment is to prevent tax avoidance and to bring transactions within the charge of tax where they should properly be subject to tax. Our judgment was that it was legitimate to restrict the ambit of this charge—the charge to the settler—to settlements of which the beneficiaries were the settlor's immediate family, drawn not all that closely, and extending, of course, to companies that the settlor's immediate family controls and to the immediate family itself.
As the hon. Gentleman knows, that is considerably wider than the corresponding definition for resident trusts, but we believe that it is necessary that it should be wider if an effective charge is to be imposed on those who settle assets abroad from which they or their family can derive benefit. The balance that we have struck is about right. It is a matter not of principle but of judgment as to where one strikes the balance. The gains of non-resident trusts where only grandchildren or remoter issue have an interest will continue to be within the existing provisions, which tax beneficiaries who receive capital payments from the trustees. They will be subject to the supplementary charge which, as I have said, is another important element in the new package and which will apply where appropriate.
In addition, we are strengthening the existing provisions to ensure that capital payments are chargeable when they are received by United Kingdom beneficiaries. We shall keep these measures under review, and we shall not hesitate to take further measures if they are thought appropriate. In the current circumstances, we have struck the correct balance.
§ Mr. Beith
I hope that the Minister will keep the amendments under review because it seems that he has not convinced even himself that the boundary line has been drawn in the right place. Grandchildren are among the most likely beneficiaries of someone who has made a great deal of money in his lifetime and who is looking for tax avoidance routes to keep it within the family and not pay tax in the process. It is a normal transfer from grandparent to grandchild. I shall not press the matter tonight, but I hope the Minister will keep it under review. I beg to ask leave to withdraw the amendment.
§ Amendment, by leave, withdrawn.
§ The Temporary Chairman
With this it will be convenient to take the following amendments: No. 8, in page 132, line 28, leave out '(6)' and insert '(6A)'.
No. 7, in page 133, line 7, at end insert—'(6A) The fifth condition is that a person falling within sub-paragraph (7)(a) or (b) below is a person who will or might benefit from the settlement.'.
§ Mr. Beith
I shall describe the effect of the amendment in detail. Under the Bill as drafted, settlors of pre-Budget 692 settlements are in general caught only if the settlement is subsequently added to, varied or transferred out of the United Kingdom. If the settlors themselves are beneficiaries, there is a strong case for saying that they should be taxed on trusts that already exist in so far as those trusts give rise to income from now on.
The issue was raised as a result of a great deal of publicity given to some large trusts to which the hon. Member for Newcastle upon Tyne, East (Mr. Brown) referred. The public desire to see something done about it, and they will not be satisfied if those large trusts escape the ambit of the clause.
One must draw a careful line on retrospection. I have argued on many Finance Bills against the use of retrospection to create tax liability where one did not exist at the time. My argument now is not based on the creation of a new tax liability for income derived before the Budget. The purpose of the amendments is to deal with tax liability which will arise from now on, and of course, because of the nature of what we are discussing, they will effectively change the timing of tax payments. There are a number of precedents for going about it in this way, including the Inheritance Act 1974, which meant that discretionary trusts set up before 1974 became liable for subsequent inheritance tax.
One must ask whether people should have a permanent tax holiday merely because they were able to exploit a loophole before it was cleared up. Investors in overseas trusts would have been advised that the loophole was likely to be closed in the future. Those people often received advice from fairly sophisticated tax advisers.
There is a similar element of retrospection in schedule 15, which proposes a charge of 10 per cent. a year on the tax liability of pre-Budget settlements. The Government also accept that it might be a legitimate device to use to ensure that the income from now on of some of the settlements made before the Budget was made liable to tax.
§ Mr. Maude
I am keen to understand what the hon. Gentleman proposes. He talks about income from the trusts, which is a little puzzling. I can see that it would not be retrospection to say that income from a certain date should become liable for tax, and if one announced that from a date that was to be the case that could happen. A capital gain is a different matter. If a capital gain was realised today, for example, there might be a capital gain over a period right back to the rebasing in 1982.
I am not clear whether the hon. Gentleman proposes that the whole of that capital gain, going back beyond Budget day and the announcement of the proposals, should be subject to tax, or whether he proposes that it should be simply the part of the capital gain which has accrued since Budget day. If he proposes the former, that seems clearly——
§ Mr. Maude
Perhaps I may draw to my peroration, Mr. Knox, and finish the point, which was meant to be short, although now I am afraid that I am in danger of having forgotten what it is.
Either the proposal would be retrospective if it were to bring into charge for tax all the capital gain from whenever it began to accrue, or it would simply apply to the part of 693 the capital gain which accrued since Budget day, in which case it would impose an impossible task of valuation of all assets in all non-resident trusts on Budget day.
§ Mr. Beith
I sought to advance the principle—which was rightly picked up by the Minister in his pertinent if lengthy intervention—that we should not give nonresident trusts a permanent tax holiday, but that we should avoid if we can introducing further dangerous precedents of retrospection to add to those in which the Government have engaged in previous Bills and elsewhere in the Bill. The clause about building societies is an example. I am trying to draw a line at the point of the Budget itself, and to move on from there. The Minister has made the perfectly legitimate objection that valuation problems are associated with that, and he may want to deal with that later.
I hope that the Minister will address himself to the central issue, which is that my concern was based on the large sums that have already been put into non-resident trusts. Those trusts will enjoy a permanent tax holiday if the Bill is not amended along the lines that I have proposed. There is a case for an amendment which does not create a retrospective tax liability going back before the Budget but which taxes such trusts in the future, leaving those who would otherwise benefit from them the opportunity of either paying the tax or transferring the assets to some other instrument.
§ Mr. Maude
I will endeavour to keep my speech shorter than my intervention. I appreciate that the point made by the hon. Member for Berwick-upon-Tweed (Mr. Beith) is serious. His concern is that there should not be a permanent tax holiday for existing trusts. I must make two points. First, a non-resident trust already set up under previous arrangements will have to remain untouched—no further beneficiaries added to it and no further funds added to it—for it to remain not subject to the charge introduced by clause 77. If no such changes are made, such trusts do not enjoy a permanent tax holiday if at any time the capital is repatriated to the United Kingdom. At the point at which the capital is delivered to a United Kingdom resident beneficiary, it will be subject not only to ordinary capital gains tax, but to the supplementary charge that we are also introducing which is specifically defined to reflect the lost value to the Exchequer of the deferment of that capital gains tax.
It is not possible to bring existing unchanged non-resident trusts within the new charge on the settlor without either being retrospective by imposing tax on gains that may have begun to accrue some time before Budget day or imposing on the Inland Revenue a gargantuan task of valuation which I am sure that the hon. Member for Berwick-upon-Tweed accepts would be hugely difficult. It would require a valuation on 19 March, or whatever the date of the Budget, of all the assets in all resident trusts so that one knew the base from which the capital gain was being calculated. That is not a terribly practical proposition.
694 8.15 pm
I do not believe that we are perpetuating a tax holiday. At the point when capital is repatriated, the gains will be subject not only to ordinary capital gains tax, but to the supplementary charge which is designed specifically for that purpose.
§ Mr. Beith
I am grateful to the Minister for considering the proposal. I will reflect on his point about valuation. I am touched that the Government are now worried about gargantuan valuation commitments placed on the Inland Revenue, especially when I consider the council tax, which will have precisely that effect. I will reflect on what the Minister has said and see whether either in this context or in the context of the charge at the stage of repatriation to which the Minister referred the point could be pursued later. I beg to ask leave to withdraw the amendment.
§ Amendment, by leave, withdrawn.
§ Question proposed, That this schedule be the Fourteenth schedule to the Bill.
§ Mr. Arbuthnot
The Country Landowners Association, whose taxation sub-committee I have the pleasure to serve, has raised some points with my right hon. Friend the Chancellor. I hesitate to raise them in detail at this stage, but I would like to run quickly through them in the hope that my hon. Friend the Minister will write to me about them afterwards. I do not ask my hon. Friend for a detailed reply at this stage.
The points raised by the Country Landowners Association mainly concern the question of what happens to a settlement that was made before 19 March 1991 which becomes subject to the regime set out in clause 77. The conditions on which a pre-19 March settlement becomes a qualifying settlement are quite complicated. They are set out in paragraph 11.
The first condition in paragraph 11(3) is:on or after 19th March 1991 property … is provided directly or indirectly for the purposes of the settlement—Certain minor activities could make the entire settlement a qualifying settlement. In certain circumstances, if one simply added a first-class postage stamp to the settlement, one could make the entire settlement a qualifying one. There is an argument to suggest that only the new property which is added to a settlement after 19 March should be treated as a qualifying settlement rather than property that existed in the settlement beforehand.
- (a) otherwise than by way of a bargain made at arm's length".
The second condition that would mean that a pre-19 March 1991 settlement became a qualifying settlement is that the trustees of the settlement become non-resident after 19 March 1991. That could cause some difficulties unless the settlor himself has power to appoint or to reappoint the trustees. If he has no such power and if he has no say over who the trustees are, yet nevertheless becomes liable for capital gains tax on the settlement, that could cause some unfairness in some cases. I hope that my hon. Friend will look at that point and will come back to me on it.
The third condition is that a pre-19 March 1991 settlement can become a qualified settlement if there is a variation of the settlement after 19 March 1991. There are circumstances in which settlements might be varied—for example, a foreign court might vary a settlement. Those are circumstances over which the settlor would have no control and which could result in unfairness.
695 I ask my hon. Friend the Minister to write at some stage about these matters. I did not give him any warning that I would raise them this evening.
The idea is that a settlor should pay the capital gains tax in a qualifying settlement subject to his right to reimbursement from the trust. If a pre-19 March 1991 settlement becomes a qualifying settlement and therefore gives rise to a liability, would it be possible to have a revaluation of the assets at market value at the time when the settlement enters the regime of schedule 14? That would relieve the settlor of any gains or losses on any non-qualifying period.
I apologise for boring the Committee with these detailed and technical matters. I ask my hon. Friend the Minister to write at some stage, and hope that he will do so in the not-too-distant future.
§ Mr. Maude
The Committee will be disappointed that my hon. Friend the Member for Wanstead and Woodford (Mr. Arbuthnot) has given me a let-out by inviting me to write to him rather than entertain the Committee by responding to the important matters that he has brought to our attention which I shall consider carefully.
We have carefully framed the proposals by which the new charge will apply to existing trusts in particular circumstances to avoid any element of retrospection. If I am right, it is broadly the possible, potential retrospection, if such a concept exists, which is troubling my hon. Friend. That is that an element of retrospection could be triggered other than by the deliberate and conscious act of the settlor or the trustees.
§ Mr. Arbuthnot
It is partly that and partly that some settlors will have been locked into certain arrangements from which they are unable to withdraw. It is because they are locked into certain arrangements that they find themselves liable to an entirely unexpected tax liability.
§ Mr. Maude
I understand what my hon. Friend says. Broadly, the settlor should, I would guess, always have the power not to add funds to the trust and hence not to trigger the pre-existing trust into becoming a qualifying one. If there are circumstances that could trigger the pre-existing trust other than that, we shall need to examine them carefully.
My hon. Friend said that there could be circumstances in which the settlor might have no power over the appointment of trustees, where a non-resident trustee might be appointed and thus trigger the settlement into becoming qualifying. It would be an odd appointment. It would be an odd decision for whoever had the power to make the appointment to act in that way in the knowledge that it would bring such a trust within the new regime, if it were possible in the circumstances that my hon. Friend outlined to avoid making such an appointment.
My hon. Friend talked of the power of a foreign court to amend the terms of a trust. I cannot comment on that now. It is a matter to which I shall give careful attention.
My note of my hon. Friend's following point came to an end after I had written "valuation". I cannot remember in more detail what it was, but I shall be glad to deal with it when I have had the benefit of refreshing my memory by reading Hansard.
§ Question put and agreed to.
§ Schedule 14 agreed to.