Clause 38.—(Estate Duty: Interests Limited To Cease On Death.)
The Solicitor-General (Sir Dingle Foot)
I beg to move Amendment No. 316, in page 43, line 19, at the end to insert:
(2A) If immediately before the death of the deceased a number of persons were, as beneficiaries under a discretionary trust, together entitled to an interest in the property limited to cease on the death and the deceased was then one of those persons, or at some earlier time had been a beneficiary under that discretionary trust, then, in determining the questions in subsection (1) above as regards that interest, any other interest in the property which, whether as arising from the same trusts or otherwise, belongs to those who immediately before the death were the beneficiaries under the discretionary trust shall be treated as being held by persons other than those beneficiaries, and other than the deceased.
I propose, with your permission, Sir Eric, and that of the Committee, to take with this Amendment, Amendment No. 317, as they go together.
I can propose this Amendment in a few words, but to make it in some degree more comprehensible may I refer to the reasons for the Clause to which it is an Amendment. This Clause was foreshadowed by the Chancellor in his Budget statement. He then made it clear that it was proposed to close a gap in the law of Estate Duty which had been revealed by the House of Lords' decision in the case of Ralli Brothers v. Commissioners of Inland Revenue. I do not think that the Chancellor's announcement or this Clause has come as a surprise to anyone familiar with Revenue legislation.
The House of Lords decision, which reversed the decision of the Court of Appeal in the previous October, was delivered on 15th December last. I will say a word about its effect?
Under Section 1 of the 1894 Act—the Act where Estate Duty began—a duty is imposed on all property, real or personal, settled or not settled, which passes on the death of any person. Under Section 2(1)(b), the property which passes includes property.
“In which the deceased or any other person had an interest arising on the death of the [column 760]deceased, to the extent to which the benefit accrues or arises by the cesser of such interest” .
Where property is settled on a tenant for life, Estate Duty becomes payable when the tenant dies because the property then passes to the reversioner. In the Ralli case, the reversioner assigned the income of the reversionary capital to the life tenant until a fixed date to be expected after her death, that is, some years ahead. In fact, she was certain to have died before that date was reached. Following her death, therefore, some years before the date fixed, the income continued to be paid to her estate.
The House of Lords held, in effect, that the interest did not cease on her death and that the beneficial ownership of the settled fund remained the same. In other words, the property had not changed hands and there was no liability to Estate Duty.
As the Committee will appreciate, this opens up an enormous prospect of tax avoidance, and it is for that reason that this Clause has been included in the Bill. As drafted, subsection (2) deals with ordinary trusts, but by the Amendment it is proposed to make the same provision for discretionary trusts. The Committee will note that a discretionary trust is defined in the new subsection (5) proposed in Amendment No. 320 as including a trust
“under which the disposition of any of the trust income is at the discretion of the trustees or of any other person” .
In order to avoid transgressing the rule against perpetuities, there has to be some provision in a discretionary trust for the ending of the trust. There is nothing at present in the law to prevent the employment of what I call the Ralli device, which I have described and which was held to be lawful by the House of Lords, in a discretionary trust: that is to say, the settlement may be expressed to continue until the last beneficiary dies or until a much later date. It is necessary, therefore, here to deal with [column 761]the discretional trust in the same way as the ordinary trust, and these Amendments are proposed for that purpose.
Mrs. Margaret Thatcher (Finchley)
Sir Dingle FootThe Solicitor-General has given us a detailed account of what is known as the grafting operation, and I understand that the purpose of this set of Amendments is to cure the law as it was shown to be in In re Holmden's Settlement Trusts, the judgment in which was published in The Times on 13th May last, against which the Clause as originally drafted would not have been sufficient to strike.
In view of the debate on the last occasion, I ask the Solicitor-General whether he is quite certain that the Amendment which he proposes strikes at that mischief and goes no wider. Having examined it reasonably carefully, I think that the words
“or at some earlier time”
take it very much wider than the Holmden case. I should be grateful if the hon. and learned Gentleman would look at that point, because there is no time limit at all. The expression “or at some earlier time” could cover a very long time ago.
Will the Solicitor-General give his considered opinion on Report if I put down an Amendment to delete those words? I recognise that it would be asking a lot to expect an expression of opinion now, but I am concerned that we should not unwittingly enact a provision which went much wider than the case at which it was intended to strike.
I should be very glad to give the hon. Lady my considered opinion on Report, but I think that I can probably set her mind at rest here and now as regards the words,
“or at some earlier time had been a beneficiary under that discretionary trust …” .
There may be a number of beneficiaries under a discretionary trust.
Supposing we take the case of an old lady, let us say, who is one of the beneficiaries under the trust, and it may be that obviously she has not long to live. She can give up her interest under the trust and the result would be that the payment of Estate Duty would be avoided. It is to meet that kind of situation that these words are included. [column 762]That is the purpose, but I will, of course, look at it again as the hon. Lady asked and, if she wishes, give her further information on Report stage.
The words to which I referred go much wider even than that explanation. The words are “at some earlier time.” The old lady could have been a member of the trust from the time she was born, and if she ceases to be a member of the trust at 21 she would still have been a member at some earlier time, even if she did not die until she was 80. What the right hon. and learned Gentleman said encourages me in the view I expressed, and I would ask him to reconsider the point.
Amendment agreed to.