FINANCE BILLFirst extract
(Except Clauses 5, 14, 16, 17, 33 and 49)
STANDING COMMITTEE A Thursday 30th January 1975
[Mr. Richard Crawshaw in the Chair]
Transfers and chargeable transfers
Mr. John Pardoe
I beg to move Amendment 465, in page 15, leave out lines 10 to 17 and insert:
“(4) A disposition is not a Transfer of Value unless it is shown that it was intended, and was made in a transaction intended to confer a gratuitous benefit on a person, and it was neither:
(a) made in a transaction at arm's length between persons not connected with each other; nor
(b) such as might be expected to be made in a transaction at arm's length between persons not connected with each other;” .
With this we are to take the following Amendments:
No. 428, in page 15, line 10, leave out “if” and insert “unless” .
No. 429 in page 15, line 11, leave out first “not” .
No. 430 in page 15, line 11, leave out second “not” .
No. 441, in page 15, line 12, leave out from “person” to end of line 17.
No. 603, in page 15, line 12, after “benefit” , insert “in money or money's worth” .
No. 431, in page 15, line 14, leave out from “other” to end of line 17.
No. 604, in page 15, line 14, leave out “not connected with each other” .
I must thank the Committee for awaiting my return. It was clear from the Chief Secretary's mood last night that the only thing that could possibly have persuaded him to allow the Committee to rise when it did was the thought that, if he did not do so, he would miss my moving this amendment. I am therefore grateful to him for timing things so excellently that we start our proceedings with this amendment this afternoon. [column 486]
I warn the Committee and the Chief Secretary that, in keeping with the long-standing tradition that the Liberal Party turns into a pumpkin at midnight, I do not intend to proceed beyond midnight tonight—not even on this amendment.
The amendment is extremely modest and very reasonable and can probably be dealt with very quickly. Indeed, it is so reasonable that I await the Chief Secretary's reasons for refusing it with bated breath.
The real question that I am asking in this amendment is: who has to prove that a transaction is intended to confer a gratuitous benefit on a person? The Bill states on page 15, line 10:
“A disposition is not a transfer of value if it is shown that it was not intended, and was not made in a transaction intended, to confer any gratuitous benefit on any person …”
My amendment states:
“A disposition is not a transfer of value unless it is shown that it was intended … to confer a gratuitous benefit on a person …”
The Bill as drafted refers to the gratuitous benefactor. It is he who, under the terms of the Bill as drafted, would have to show that it was not so intended. Under my amendment it is the Inland Revenue which would have to show that.
It seems to me that we are here at the point where we have to consider whether the long-standing tradition that we are all innocent until proved guilty survives even in matters of taxation. This is the point that I want the Chief Secretary to address himself to in replying. Why is it necessary in this particular case to throw overboard that longstanding tradition, namely, that an individual is innocent until proved guilty, and to place the burden of proof on the individual?
There is no good reason why the burden of proof should not be on the Inland Revenue, as indeed it is in virtually all other tax matters. The Chief Secretary may dissent from that view, but I think I am right in saying that in virtually every other case where one is dealing with the Inland Revenue one puts up that one's expenditure in the course of parliamentary duties is a taxable deduction. It is up to the Inland Revenue to show that it is not. That remains true in virtually every other aspect of tax law.
The second point I should like to put to the Chief Secretary is this. If he [column 487]insists that it must be for the gratuitous benefactor to show that it was not so intended as a gratuitous benefit, how shall that proof be shown? What exactly does one have to produce to show that one did not intend to make a particular gift—either a direct gift or a gift in kind or in various other ways—a gratuitous benefit? Therefore, what will suffice as proof if the Bill stays as it is, and why is it necessary for the Bill to be as it is rather than as suggested in my amendment?
Mr. Graham Page
I support the hon. Member for Cornwall, North (Mr. Pardoe) in this amendment and it will be seen that some of those amendments which we are discussing with his amendments seek to do very much the same thing. The amendments in my name—Nos. 428, 429 and 430—would achieve much the same objective as the hon. Gentleman's Amendment No. 465.
I support everything the hon. Gentleman said about the proof necessary, under the clause as drafted, from the donor. The donor is required to prove a negative here. There is a wonderful double negative in the first two lines of subsection (4):
“A disposition is not a transfer of value if it is shown that it was not intended” ,
and so on. So one starts off with the proposition that any disposition is a transfer for value which is caught for tax under this clause unless the donor proves that it is not such a thing.
First, the donor has to decide what is a disposition. That is not defined in the clause. Then, having decided that this must be a disposition within the meaning of this clause, he is caught for the tax unless he discharges the burden of proof. That is something of an innovation in this type of tax law. Normally one is merely required to make a return of the property, whether it is income or capital gains or whatever, and one is decently believed to be honest. If there is anything doubtful about it, it is for the Inland Revenue to prove that one is telling a pack of lies. To start off by assuming that the citizen is dishonest in making his returns is a gratuitous insult.
By Amendment No. 603 my right hon. Friend and my other colleagues wish to define more clearly the meaning [column 488]of “benefit” . The word “benefit” comes in the third line of subsection (4) of this clause and it is in the phrase:
“to confer any gratuitous benefit on any person” .
A benefit might be a monetary benefit or it might be any sort of benefit. We need some indication in the Bill of what is meant by that word. Therefore, by Amendment No. 603, in order to give elucidation to the provision, we seek to add the words
“in money or money's worth” .
I do not think it is necessary to spend any more time on that. The purpose is obvious, the words are reasonable, and I hope that they will be accepted.
Amendment No. 441 would delete paragraphs (a) and (b) of subsection (4). In trying to understand the purpose of subsection (4) as a whole, I turn to the memorandum given to us by the Treasury, which describes subsection (4) in this way:
“Subsection (4) excludes transfers made on arm's length terms and without donative intention” .
It seems to me that that purpose is well carried out in the first three lines of subsection (4):
“A disposition is not a transfer of value if it is shown that it was not intended, and was not made in a transaction intended, to confer any gratuitous benefit on any person” ,
and that paragraphs (a) and (b) are really superfluous.
Paragraphs (a) and (b) require the donor to prove several other matters before he can escape the tax on a disposition. First, under paragraph (a), he would have to prove that the disposition
“was made in a transaction at arm's length between persons not connected with each other” .
Why is it necessary to require him to prove also that the transaction was at arm's length? Surely the tax falls on the disposition if it is a gratuitous benefit without any other conditions applying.
Secondly, what is meant by the words at the end of paragraph (a):
“not connected with each other” ?
Amendment No. 604 seeks to delete those words. They do not seem to add anything one way or the other to the subsection. I will read the paragraph again:
“that it was made in a transaction at arm's length between persons not connected with each other” .
[column 489]One has a vision of two people at arm's length not connected with each other. This conjures up all sorts of pictures in my mind which have nothing whatever to do with bestowing gratuitous benefits.
Even if the Chief Secretary tells us that that is absolutely necessary, that this is another negative that the donor must prove if he is to escape tax, there is also paragraph (b), which is dealt with in Amendment No. 434. However, as that amendment is not included in this, perhaps I had better leave that and confine myself to paragraph (a).
To some extent I must admit to the Chief Secretary that these are probing amendments. However, I never think that it is worth while putting a probing amendment unless one can suggest a constructive solution. That is what the amendments are intended to do. I believe that Amendment No. 465, in the name of the hon. Member for Cornwall, North, is much more than a probing amendment and deals with something really basic to the clause. The others, however, are constructive suggestions to make the clause perhaps easier to administer. I know that some hold the principle that in Opposition one should never improve a Government Bill but let them stew in their own juice, but on this side of the Committee we are being reasonable, and therefore I am putting forward constructive amendments to try to make this a better clause.
The Chief Secretary to the Treasury (Mr. Joel Barnett)
May I deal first with the points raised by the hon. Member for Cornwall, North (Mr. Pardoe). I am obliged to him for telling us that he and his fellow Liberals always like to turn into pumpkins at about midnight, or shortly thereafter. The only thing which he did not explain was why he then sought to turn all the rest of us into pumpkins, and, when he failed with the vote, nevertheless decided in true democratic fashion to ignore that vote and go himself. Nevertheless, we are obliged to the hon. Gentleman for his efforts. 4.15 p.m.
The hon. Gentleman said, first, that in taxation generally the taxpayer is innocent until he is proved guilty. He told us that that was the case virtually everywhere in the tax system. I do not know [column 490]where the hon. Gentleman read that, but I regret to tell him that it is not correct. The general rule in income tax matters is that the burden of proof lies on the taxpayer in any disputed matter of fact. Questions of motive and intention are matters of fact of which the taxpayer alone has full knowledge. That applies, for example, when accounts have not been submitted and the inspector of taxes submits an estimated assessment. The burden of proof is then on the taxpayer to show that that estimated assessment is incorrect and that the accounts which he has submitted show the correct figures. Therefore, I hope that the hon. Gentleman will take it from me that what he said is strictly not so, and I shall try to explain why it is not.
I can understand the hon. Gentleman's perfectly reasonable desire to put the onus of proof on the Revenue. In the present case, the capital transfer tax, only the parties to a transfer can, by the very nature of things, be in full possession of all the facts. It would be impossible for an inspector of taxes to be in possession of the facts. No doubt, it is possible to do as is done with income tax matters, where the inspector of taxes raises an assessment and leaves the burden of proof to the taxpayer. That is precisely the situation, so I do not know what the hon. Gentleman is seeking to change. The burden of proof is on the taxpayer.
I see that the hon. Gentleman is looking at me somewhat oddly. Lest he is worried about the position of the taxpayer, let me assure him that the taxpayer is fully protected by this system, because he is protected by the rights of appeal provided by paragraph 7 of Schedule 4, which I am sure the hon. Gentleman will have noticed.
The hon. Gentleman asked me also what the taxpayer would have to prove. The answer is perfectly reasonable. Subsection (4) of Clause 18, to which the amendments relate, limits the wide initial charge provisions of subsection (2) by excluding certain transactions. They are, first, where the transaction was not intended
“to confer any gratuitous benefit on any person”
and second, where it was made, broadly, on arm's length terms. It seems to me quite reasonable for the taxpayer not to [column 491]have to pay capital transfer tax when those tests have been met.
It might be as well if I now came to the variety of amendments which the right hon. Member for Crosby (Mr. Page) has on the Paper.
Mr. Nicholas Ridley
Can the Chief Secretary give us laymen a few examples of what a disposition which is not a transfer of value could be? What has he in mind in this subsection?
I know that the hon. Gentleman is a very patient fellow. I shall deal with that question in replying to the similar points put to me by the right hon. Member for Crosby.
Let me begin by assuring the right hon. Gentleman that no one is assuming that taxpayers are all dishonest. I hope that I have never said any such thing in this Committee. I certainly have no wish to do so.
In coming to the various points raised by the right hon. Gentleman, I hope that he will forgive me if I do not take them in precisely the order in which he put them. May I say that I appreciate the way in which he put them; he told us that they were probing amendments, but, because he always likes to be constructive, he adds construction to the probing amendments.
The effect of Amendment No. 604, in the names of the right hon. Member for Finchley (Mrs. Thatcher) and her hon. Friends, would be to make Clause 18(4)(a) read:
“that it was made in a transaction at arm's length between persons.”
It would destroy the relationship we have now between paragraphs (a) and (b) of the subsection without, I am advised, achieving any particular purpose. There are two reasons for dealing separately with transactions between connected persons and those between unconnected persons.
First, where the persons involved in the transaction are not connected it is reasonable to state the relevant condition in a form which will give the assurance that ordinary business transactions between strangers will not fall foul of the capital transfer tax. I am sure that the right hon. Lady would not wish to do that. The second reason is that transactions between connected persons clearly call for closer scrutiny in order [column 492]to ensure that there is no deliberate disguised benefit. It is perfectly reasonable, if we are to have a capital transfer tax, to ensure that it is not readily avoided.
The effect of the amendment would be to leave connected persons with two possible ways of satisfying the relevant conditions: first, by showing that the transaction was in fact at arm's length, or second, that it was such as might be expected in a transaction at arm's length between unconnected persons. The distinction between these two possibilities is more verbal than real because, where the persons involved are connected, the Revenue would be unlikely to accept that the first alternative was satisfied unless the second also was satisfied. I hope that makes the matter reasonably clear. If it does not I shall be happy to take it further.
Mr. Graham Page
Where do we find any definition of who are connected persons? Is that in the Bill or have we got to guess at it?
I have not started on the right hon. Gentleman.
I thought I was helping the Chief Secretary.
I always appreciate the right hon. Gentleman's help. I turn now to his Amendment No. 441. Subsection (4) of Clause 18 cuts down the wide initial ambition of charge by excluding certain transactions which were, first, not intended to confer gratuitous benefit on any person and, second, broadly, on arm's length terms. The amendment would remove the second leg of the test: for a transfer to be let out, the taxpayer would have to show only that it was not made in a transaction intended to confer a gratuitous benefit.
The right hon. Gentleman is, therefore, seeking to remove one of the tests. He argues that if it can be demonstrated that a transfer was made without intention to confer gratuitous benefit, this should be enough. Why trouble the taxpayer with the further burden of proving arm's length? The answer is that a pure test of intention, though in principle it may appear sufficient, would not on its own be sufficient to protect the revenue. An intention test by itself could let through cases where a gift was effectively made yet the Revenue would have [column 493]considerable difficulty in contesting a claim of no intention to confer a gratuitous benefit.
I submit to the Committee that what we are doing here should have its approval, because we are seeking to restrict the initial charge. We are giving perfectly good reasons which, for most taxpayers, it should not be too difficult to prove, that is, (a) that it was unconnected, and (b), that it was an arm's length transaction. That should not be difficult for any transaction that is not a gratuitous benefit.
I come now to Amendment No. 431. This amendment would exclude from the second leg of the test the criterion that the transfer was such as might be expected to be made in an arm's length transaction between unconnected persons. It mitigates the otherwise stern test that the transfer should have to be strictly a transaction at arm's length between unconnected persons.
When the right hon. Gentleman told me it was a probing amendment, I could then understand why it was put down. But its effect would be contrary to what the right hon. Gentleman has in mind, or what I have in mind. It would leave the taxpayer at a disadvantage because subsection (4)(b) would exclude from the charge to tax certain transactions between connected persons provided that they were such as might be expected to be made at arm's length between unconnected persons. The purpose of this part of the provision is, while letting through genuine transactions between connected persons, to ensure that a charge arises where an asset is transferred to a connected person in circumstances which would not ordinarily be contemplated at arm's length. The sale of part of a controlling holding of shares in a private company just sufficient to deprive the vendor of control at a price not reflecting the loss of control is one of the things I have in mind.
Then I come to Amendment No. 603, one of the right hon. Lady's. They are all taken together. I do not know whether the right hon. Lady prefers me to leave it at this stage.
Mrs. Margaret Thatcher
I do not wish to stop the Joel BarnettChief Secretary, but his briefs do not make the clause live at all. To me what he is saying is [column 494]doubledutch. Later on, we shall give him an example of what we think might be gifts and ask him whether, in his view, they come within the clause. He must know that almost every organisation has been bombarding us with representations as to what this means. When is a gift not a gift? When is it a disposition? The kind of language he is treating us to does not really help.
I am sorry if the right hon. Lady finds it difficult to follow. The fact is that if a gift or transfer is not an arm's length transfer between unconnected persons or, in certain circumstances, between connected persons—I am sorry to speak in this kind of terminology but it is important—there is a distinct possibility that it will be caught under the capital transfer tax.
Let us talk in human terms. Some of us have children at university on a university grant. That, some people would say, is wholly inadequate by the time one has been through a means test, but one has to maintain them. Let us take the example of a young person who reaches 21. One uses one's maximum gift to give him money for his 21st birthday for a car. All one's excluded gift has gone and one is then into charge if the next transaction is a gift. Then one realises that he has not enough money to maintain himself. His grant is £400 or £500 a year. We know it costs him £900 a year to stay at university. Therefore, one has to give him a maintenance grant of £400 a year. That is between father and son; it might be mother and daughter, or mother and son. That frequently happens.
Is that maintenance in those circumstances—the Chief Secretary would say between connected persons—a gift? I have many other examples, but this kind of example I understand.
Perhaps the right hon. Lady was not able to follow that example because it raises an issue that will come later in our debates. She instanced a parent seeking to give his or her son a car which, say, meets the £1,000 test and meets the out-of-income test. This is an example to which we shall come later—if hon. Members were to accept all the rest on the nod, I should be happy. [column 495]4.30 p.m.
In defining an arm's length transaction, let us first accept that a father and son would be connected persons.
I am glad the right hon. Lady accepts that. May we secondly accept that the right hon. Lady is talking not about an arm's length transaction, but about a situation that we shall debate later? She is talking about whether a maintenance payment should be treated as a transfer. One would have to consider the total given by the father to the son.
Only if it is. In that case, the Chief Secretary has just said that a maintenance payment is a chargeable gift under subsection (4). If that is so, it is absolutely scandalous.
What the right hon. Lady is saying is correct—but only in this sense—before she looks for applause. It is true that it would be treated as a transfer under the capital transfer tax if the taxpayer in question had given in excess of a capital sum of £1,000, not once but once a year. In that sense she is right: it would be caught. That is the purpose of the capital transfer tax.
If the right hon. Lady says that she does not like that, I can understand it. But that is the way in which the capital transfer tax has been drafted. She may later seek to increase the £1,000 figure, but that would be under a separate provision. I am not seeking to be difficult, but I doubt whether a gift to a son can be said to be an arm's-length transaction.
The right hon. Lady's argument will arise when we discuss the general question of the amount a father or mother should be allowed to give a son or daughter for maintenance costs, in other words, the amount that should not be subject to capital transfer tax.
The issue is much more fundamental than amount; it is whether it is completely exempt. I must confess that I am somewhat surprised that an ordinary maintenance payment to a young person who is working away, perhaps on a wage, but insufficient to keep him or her, at university or not, is the sort of transfer that comes into charge. [column 496]That means that the amount given by a parent to maintain a son or daughter is the kind of payment that comes into charge. Parents might have paid £1,000 to charity, or something like that, or have got rid of their £1,000 exemption elsewhere, but even if they had, if this kind of maintenance payment did not come into charge, it would not matter. What strikes me is that the Government have brought ordinary maintenance payments between parents and children into charge. That is amazing.
With the greatest respect to the right hon. Lady, I understand that she and hon. Members on her side of the Committee live in a different kind of world, but I must tell her that £1,000 of capital per year, plus as much as the parent likes to give out of income to help maintain a son or daughter at university, seems to us a perfectly reasonable figure.
I do not know whether the right hon. Lady is suggesting that we should allow an unlimited figure. If that were done, there would be a massive hole in the legislation. If, on the other hand, she is suggesting that the figure of £1,000 should be larger, I come back to what I said a few moments ago, that that is quite separate from what we are now discussing. But I certainly could not accept any suggestion that we should allow an unlimited figure.
Sir John Hall
I want information on this point, because a similar issue arises over the maintenance of parents. Where a son is called upon to maintain his aged parents, say, in a nursing home, and has to pay for it out of capital—it could be well in excess of £2,000 or even £3,000 a year if he had two parents in a nursing home—is that regarded as chargeable under the provisions of the clause?
The answer is “Yes” , as it stands at the moment. But I was trying to say that the question of the size of the gift, or what the amount should be out of income—I am sorry to have to repeat it—will be debated. It may be that the Committee will decide that the figure should be higher, but we cannot decide that on this amendment. I am sorry if the right hon. Lady does not take the point. Perhaps we can deal with her point more quickly when we reach that part of the Bill.[column 497]
The things that one would regard as transactions within normal families in the helping of parents, maintaining aged invalid parents and so on, are to be subject to the Chief Secretary's capital charge. One could go on a cruise, or spend it on the dogs and not be charged, but if one maintains one's young children when they are starting out in life, or one maintains aged parents, on goes the capital transfer tax.
We are back to the point. Under the Bill as it stands, one may maintain an aged parent or a young daughter if it is within the £1,000 limit and if it is out of income, but that is something quite separate and we are to discuss it later. Nobody could argue—I am sure that the right hon. Lady is not arguing—that under the amendments we are discussing the two people concerned are not connected persons. I am sorry for using the language of the Bill. That is what we are debating. They are connected persons. Nobody can dispute that these are not arm's length transactions. I have to use the language of the Bill, because we are debating it, and I cannot do better than that. We shall debate later the question of how much should be exempt, and I shall be happy to look at it.
Mr. David Howell
We should get on much faster if the Chief Secretary could follow the suggestion of my hon. Friend the Member for Cirencester and Tewkesbury (Mr. Ridley) and, indeed, of my right hon. Friend, and give us some everyday real life examples of what he means. So far, we have elucidated that connected persons means father and son and mother and daughter. Does it mean all relatives? If he could do that, we should understand more of what he is talking about.
I am sure that the hon. Gentleman has read every page of the Bill. I know exactly where it is, and I am sure the hon. Gentleman does and has forgotten. Clause 45(4) on page 33 defines connected persons.
Mr. Nigel Lawson
Is the Chief Secretary saying that the situation referred to by my right hon. Friend the Member for Finchley (Mrs. Thatcher), and the sum of £1,000, shows that we on the Opposition side are living in a world totally different from that of his hon. Friends, as though £1,000 a year is a vast [column 498]sum of money? The sum of £1,000 a year is an allowance of less than £20 a week. If a person gives a few Christmas presents, and birthday presents to his children, all these things have to be totted up so that there is less than £1,000 left. Is he really suggesting that that is such a vast sum? This is not a large allowance to make for the maintenance of children or maintenance of aged parents, as has been pointed out by my right hon. Friend.
Again, will the Chief Secretary give some indication of the test of whether it is out of income. What is the logic behind it? Will the Government treat more generously the person, in this case, with the gift? Is not there anywhere some de minimis rule so that every Christmas and birthday present does not have to be recorded and totted up because at the end of the year the amount might come to over £1,000?
Mr. Joel Barnett
I do not want to trespass on your generosity too much, Mr. Crawshaw, but I know we shall reach the point about the out-of-income test at some time. The hon. Gentleman's patience in these matters is well known and he would not wish me to go so widely out of order to answer his question, but I shall be happy to do so when we come to that part of the Bill.
I hasten to assure the hon. Gentleman that £1,000 of capital plus as much as possible out of income, the definition of which will come later, is a substantial figure for the vast majority of people. I am not saying that there will not be others who want to give more. I am saying that for the vast majority of people it is not an unreasonable amount. Whether it is an amount that the Committee will in due course accept is something which will have to be discussed at a later point. I cannot help the Committee any more on the size because we shall debate it.
I do not want to stop the Chief Secretary, but even when I left the Ministry of Education the annual cost of going to an Oxford or Cambridge college was about £1,100 a year. If the income test was used upon a person and he received only the £50 minimum grant, by virtue of allowing his child to go to an Oxford or Cambridge college, having obtained a place, having failed the income test for grant, he would be actually into charge by allowing him that facility which [column 499]others would have got free, totally at the cost of the State.
The right hon. Lady is right, as the Bill stands. That would be the case if none of the £1,100 could be taken out of income and the £1,100 was out of capital. Then £100 would be caught. I have never sought to deny that. Indeed, I thought I had repeated it frequently and have said that we would come to it when we debate whether it should be more or less and how we define the question of out-of-income. The right hon. Lady is right as the Bill stands, but whether it should be amended will have to wait a while until we reach the appropriate clause. Therefore, I hope that the right hon. Lady will understand that I cannot go further on the amount at this stage.
Mr. Graham Page
May I ask the Chief Secretary this question? Let us suppose I sell a piece of land. This is a disposition. It may well be that there is some dispute over the value of the land and perhaps I have not sold it for its full value. Have I first to submit to the Inland Revenue a valuation of that land in order to get over subsection (2)? To prove that it is a disposition for full value, I suppose one has to produce some evidence to that effect, and then go on to prove that it was not intended to confer a gratuitous benefit. How on earth one proves that I do not know. Does one have to go into the habits of the purchaser? If one happens to have sold him a house next to a convenient pub and he is a heavy drinker, he is getting a greater benefit from taking over that house.
I am exaggerating, of course, but I want to know what is meant by “benefit” if we are not to put the words “money or money's worth” after it. I want to know, not only what is a benefit, but how one is to prove that the purchaser did not get any gratuitous benefit. Then it has to be proved that the transfer was at arm's length, if it is not to be a taxable transfer, and that it is not between connected persons.
On each occasion of a conveyance of land of that sort, does one have to enter in one's returns that the purchaser was not an aunt, uncle, son or whatever it may be in the form of a connected person? Is one going to be asked for an affidavit to the effect that the purchaser is in no way related and that the transaction was at [column 500]arm's length? Subsection (4) puts the burden on the citizen to prove this. It says that he must show it, which I presume does not mean just saying it. Perhaps it will be accepted if the citizen says “The purchaser was not my aunt, uncle or any other relative” . Will that be taken as showing that this is not a taxable transfer?
Why on earth could not the draftsman of this clause say that a taxable transfer is one that is a gift, or a gift is a taxable transfer? It is so simple to put it in the positive instead of in double negatives, and even treble negatives as it is in this clause. It is extremely painful to try to understand this clause. I have turned it round with “unless” , “ifs” , “buts” and all the qualifications and I thought I had it right in the beginning, but the Chief Secretary has assured me now that I have got it all wrong. At least that is what I understand from what he says.
I would have liked to have seen a perfectly simple clause, and if the Chief Secretary would say that he will consult again with the parliamentary draftsmen—I know how eager the parliamentary draftsman is not to make the slightest error, and to that extent is sometimes a little more verbose than we would wish—perhaps the parliamentary draftsman could find a simpler phrase to express what the Chief Secretary wants.
Mr. Joel Barnett
I appreciate that it might be painful to the right hon. Gentleman, and I can assure him that I would very much prefer simpler clauses. One of the problems is—I hate to say this to the right hon. Gentleman—that it might be easier to understand if we waited until we got to the particular point in the later amendments on this clause. The right hon. Gentleman is referring to what might be euphemistically called the “bad bargain” amendment, which we will be coming to shortly, and I see him nodding. In fact, I could put his example the other way round—where there clearly would be a benefit. If the right hon. Gentleman himself transferred a piece of land that he knew to be worth £1 million for £1,000 to a connected person in his family, I would consider that that might conceivably be a gratuitous transfer, although, of course, one would have to look more closely into the circumstances.
The right hon. Gentleman asks whether the taxpayer would have to include it on his tax returns. If the taxpayer is satisfied [column 501]that he has transferred a piece of land perfectly properly at arm's length value, and secured a reasonable price for his land in normal circumstances, and if he knows that there is no question of giving anybody a benefit, he will not include it on his tax return as a capital transfer liable to capital transfer tax. It is perfectly understandable I hope the right hon. Gentleman takes the point.
On the question of the bad bargain, we shall be coming to that matter later in further amendments on the clause. I have no doubt we shall have opportunities to discuss it there.
Mr. Graham Page
Before the right hon. Gentleman sits down, may I put this to him? Under Schedule 4(2) one would need to make returns on every single disposition. That is why I ask whether, on making the return saying “I have sold this piece of land during the year” , the citizen has to add so much proof necessitated by the word “shown” in subsection (4)?
I apologise for missing part of the Chief Secretary's speech, but I would like to ask him a hypothetical question to see how it is, or is not caught, by the subsection.
If one is selling a house in a hurry because the money is needed quickly to pay debts, one virtually takes the first offer that comes along. Subsequently an adjacent similar house is sold for a higher price because its owner has waited for the best offer. Is that a disposal which confers gratuitous benefit? It clearly would have been more advantageous to wait to receive a higher price. In a sense, that person has given a gift to the purchaser of the house. If it so happens that one's aunt bought the house, one presumably has severe tests to pass before one is allowed to get away with that circumstance.
Another example is a topical one—the sale of the British Petroleum holding, which Burmah Oil Company owned, to the Bank of England. Let us suppose that the Burmah Oil Company had been a private individual—which is a circumstance very easy to envisage in these days of Bennery and national enterprise—and that the Government drove a hard bargain and sought a large block of shares at some 20 per cent. below the market value. Presumably the directors of Burmah Oil would have made a gratuitous transfer on its disposal to the Government. I know this does not come [column 502]into it because it is a corporate and not a private matter.
However, if Burmah Oil had been a private company and those shares had been sold cheaply to the Government, as they were to the Bank of England—presumably, Burmah could have obtained more if it had fought and bargained harder, which is a view shared by many of my hon. Friends over that disgraceful transaction—in that case the directors would have been surcharged for capital transfer tax liability on the amount by which they did not realise the full potential of the firm. I am not saying that it is likely that connected persons would be involved in such a transaction, but would such a transaction be caught?
Mr. Joel Barnett
Again, I regret to have to tell the hon. Gentleman—I know he has read the amendments very closely—that we are coming to the matter that we have referred to as a “bad bargain” . Clearly if the transfer is one that is at arms' length it is all right: it will not be caught.
I doubt if the hon. Gentleman's aunt would have any difficulty in this matter, or that he would himself have difficulty if he were transferring his house to his aunt. If he knew his house to be worth £200,000—I am sorry if I have underestimated the price——
It is worth nothing like that.
But if it were to be priced at £200,000 and he transferred it to his aunt for £50,000, I think it would not be unreasonable to say he would be conferring a gratuitous benefit on his aunt. He would be aware of it, so if he then said that he was unaware of it on his tax return, clearly he would be telling an untruth. I am not suggesting for one moment that he himself would do such a thing. I am giving an example.
In general terms, I doubt if there will be the sort of difficulties the hon. Gentleman referred to. We shall be discussing the question whether there was a bad bargain on another amendment, and I hope it will be possible to satisfy hon. Gentlemen on that point.
Mr. John Cope
I do not want to delay the Committee on this matter, but I thought I heard the Chief Secretary say to my hon. Friend the Member for Cirencester and Tewkesbury (Mr. Ridley) that, even if there had been an element of gratuitous [column 503]benefit on the face of it, nevertheless, if it was at arm's length that was all right. I do not read the Bill like that. It says that one has to satisfy both tests. Clause 18(4) says that it:
“was not made in a transaction intended, to confer any gratuitous benefit”
and in addition—
“that it was made in a transaction at arm's length” .
Therefore, even if it is made at arm's length one still has the test of gratuitous benefit, or lack of gratuitous benefit to pass. And that did not seem to me to be what it was saying to my hon. Friend.
With a large number of assets the value is not a defined thing. A house can have a lot of values. For example, whenever a house is auctioned the seller says to his estate agent “I want to sell this house” . They discuss the value and what it will eventually get, and the seller says “I will put a reserve price on it of £10,000” . Meanwhile, the buyers come along and one says “I am prepared to pay £12,000” , and another comes along and says “It is near the golf course. I play golf, so I am prepared to pay £13,000” . The second buyer gets the house, not for £13,000 but for £12,100, because all he needs to do is bid a little more than the first buyer.
Therefore, what is the value of the house? In a sense, by paying £12,100 the buyer is getting £900 worth of gratuitous benefit, because he is prepared to pay £13,000. In one sense, therefore, that is the value. In another sense, however, it is the other way around. He is paying more than the seller asked on the basis of his advice, and this is where the test of gratuitous benefit is extremely difficult and complex. It is a provision which has to be passed by all transactions whether or not they are at arm's length.
May I probe a little further. I should like to know more about something which puzzles me. If the Chief Secretary has already explained it, I hope he will not mind explaining it again for my benefit. It concerns the second criterion that has to be satisfied. Subsection (4)(b) says:
“that it was such as might be expected to be made in a transaction at arm's length between persons not connected with each other” .
“that it was such as might be expected to be made”
[column 504]mean? Is this intended to bring in the possibility of an arm's length transaction between connected persons? It would seem to be perfectly reasonable that this should be treated equally with arm's length transactions between unconnected persons. If that is the case, surely paragraph (a) should say, “that it was made in a transaction at arm's length” and not contain the words
“persons not connected with each other” .
Surely, if a transaction is at arm's length that is good enough, and it does not matter if the persons are connected. Indeed, it seems to be an absurdity. If it is the distinction between arm's length transactions between persons who are connected and persons who are not connected, one would have to go a boringly long way round and say that if A and B are connected, A transfers it on an arm's length basis to C who is not connected, and in turn C will transfer it—again on a genuine arm's length basis—to B. Therefore, a deal takes place on an arm's length basis all the way along, but, of course, there is no direct transfer between the connected persons.
If the transactions are at arm's length, I cannot see why it matters if they are connected. Therefore, I should like some clarification on paragraph (b).
I turn now to the point raised by my right hon. Friend the Member for Finchley (Mrs. Thatcher) about helping one's child to pay his way through university, as many parent quite reasonably want to do. I hope this does not make them candidates for extinction in the Socialist Utopia. Many firms say to their employees “We will pay for you to go to university if, when you are qualified, you come back into the firm” . Supposing a father says to his son, “I will pay for you to go through university if you come into the family business afterwards” . That would seem to be a genuine arm's length type of transaction. Many large companies such as ICI adopt this practice.
Can the Chief Secretary assure us that the small family business will not be treated less favourably than ICI, Shell or Unilever in situations of this kind?
Mr. Joel Barnett
May I first say to the hon. Member for Gloucestershire, South (Mr. Cope) that if I unintentionally misled him into thinking I was not dealing with both tests it was because, when I answered the hon. Member for [column 505]Cirencester and Tewkesbury (Mr. Ridley), I was dealing with just one of the tests. I was dealing with the test as to whether he intended to confer a benefit. The other test was perfectly clear; they were connected persons. The question whether he intended to confer a benefit would be known between him and his aunt.
That is why it is necessary to put the onus on the taxpayer, which brings me back to the original point we started on an hour ago with the hon. Member for Cornwall, North (Mr. Pardoe). An inspector could not possibly know whether there was an intention on the part of the taxpayer to confer a gratuitous benefit. I thought it had been made crystal clear, from our discussion during the last hour, that an inspector of taxes would never know whether a gratuitous benefit was intended. I hope that that deals with the point made by the hon. Member for Gloucestershire, South. If not, no doubt he will tell me.
The hon. Member for Blaby (Mr. Lawson) raised a point on subsection (4)(b):
“as might be expected to be made in a transaction at arm's length” .
He could envisage a situation where the arm's length test might not be needed.
Let me give as an example a situation where a man had 51 per cent. of the shares of a private company, which was a controlling interest. He transferred 2 per cent. of the shares. That 2 per cent. might have a modest value—a minority interest. If that was transferred to a connected person, the 51 per cent. would remain in the family and it is important to know that particular aspect of the transfer. Am I carrying the hon. Gentleman with me?
Mr. Norman Lamont
If the person with the 51 per cent. holding had no intention of passing control to his cousin but sold the shares to a cousin as an arm's length transaction at the market price, is not the effect of the Bill that he would have this intention attributed to him?
Not necessarily. If it is an arm's length transaction at the market value it would not be caught under this provision. That is perfectly reasonable. But the hon. Gentleman shows how impossible it is to put this in simple terms. It is a complex area and if we did what [column 506]the right hon. Member for Crosby (Mr. Page) suggested in the amendments we could leave large loopholes, making it possible to transfer for the benefit of others who would not otherwise be able to do so without being liable to capital transfer tax. That is why such clauses have to be less simple than hon. Gentleman would like.
Finally, let me come to the point repeated by the hon. Member for Blaby about paying for a student through university. We shall come later to the question of the allowable amount not liable for capital transfer tax. Usually, before a taxpayer has to pay the whole of the grant he has to have a reasonable income, not enormous.
About £5,000 gross.
About £5,000 gross. It is just possible that out of that there might also be something spare out of income. But we will come to that later.
Whether it would be a gratuitous transfer would depend entirely upon what figure we eventually decide to have in the Bill for the limit of the £1,000 capital. That is crucial to whether it would be a gratuitous transfer in the case of a student. It would be impossible to discuss that without knowing what the figure will be. At the moment we can discuss it only in the context of £1,000. I cannot go further than that, as I cannot discuss that clause.
I was not asking the Chief Secretary to discuss that. I know we will come to it eventually, but he has not taken my point. When he says it is an arm's length transaction and that it is all right, does he include arm's length transactions between connected persons? He has not answered that question.
I answered it about 45 minutes ago. There are two tests, the hon. Member for Gloucestershire, South (Mr. Cope) mentioned. Subsection (4) is the provision which cuts down the wide initial ambit of charge by excluding transactions which were not intended to confer gratuitous benefit on any person and were broadly on arm's length terms. The word “broadly” would, I think, deal with the point made by the hon. Member for Gloucestershire, South. If it was an arm's length transaction the house could have been sold at a slightly higher [column 507]figure in certain circumstances, but it was, nevertheless, an arm's length transaction in broad terms.
The test, therefore, is a composite one, to be considered against the facts. This is why it has to be for the taxpayer to say whether, in his view, it was his intention to confer benefit, as nobody else could know.
I take entirely the point about the first test. It is the second test on which I am trying to get the Chief Secretary to be more precise. I know that he keeps reading from the Bill, but this is not clear enough. I take it that he is now saying that if it has passed the first test—that there was no intention to confer gratuitous benefit and that there was no gratuitous benefit that is fine. In the second test, it is an arm's length transaction, but one between connected persons. If it is not, that is all right. The fact that it has been between connected persons does not exclude it from the arm's length provision.
In a sense, therefore, A could say that he was making a transaction at arm's length between persons whether or not connected with each other. If it is so that the second case is met, and if it is an arm's length transaction even though between connected persons, with the type of case we have discussed, of paying to go through university, we do not have to worry about the £1,000 test, the incomes test or such things, as it could perfectly well be an arm's length type of payment. Many companies pay for young men to go through university on a perfect arm's length basis. The private business man with a family business might do exactly the same.
I must disagree with the hon. Gentleman. The comparison that he has put to the Committee of a company that seeks to pay for a student to go through university is quite different from the position of a parent giving a certain amount of money to help his student son or daughter go through university—paying the grant, in place of the grant, or whatever. That is a totally different thing. In most cases the parent is helping the young person to survive at university, to pay the expenses and the little bit extra. That is quite separate from what a company does. The relationship between a company and the man or woman it is [column 508]seeking to put through university is not the same as that between a parent and a son or daughter.
Let me proceed to the other points. The presumption about most transactions in the everyday world must be a matter for judgment in each case. There is no other way of seeing it, but there will be instances where it might transpire that one of the parties may appear to have made a bad bargain of the kind referred to by the hon. Member for Gloucestershire, South (Mr. Cope), because he sold a house at a figure lower than that at which it might otherwise have been sold.
In that case it will be excluded from the charge by the wording of subsection (4), because the facts will demonstrate that there was no intent to confer gratuitous benefit and, in the second test, that the transaction was at arm's length.
It appears that the hon. Gentleman is still puzzled and I am sorry about that. If I am wrong and that is not what happens under the subsection, I shall be happy to look at it, but I am advised that that is the way the subsection would be interpreted. I hope that that will be to the satisfaction of the hon. Gentleman, because it entirely meets his point.
I think it meets my point, but when the Chief Secretary reviews this as he has kindly said he will, I should have thought it sufficient to rely, in the case of unconnected persons, on the test that the transaction is at arm's length. A house at auction is a clear example of a transaction being at arm's length. It would be unlike the Revenue to try to pursue a gratuitous benefit in respect of a house at auction.
Nevertheless, it seems that by having the gratuitous benefit test as well as the arm's length test, even with unconnected persons, this effect may follow. A man may have a house near a golf course. The house itself may have the values to one person of just being a house and garden but to another person it will have the additional, gratuitous benefit of being near the golf course. That is not an example which I expect the Inland Revenue to pursue, but there might be others which it might be tempted to pursue as long as there are these two tests to fulfil.
Mr. Joel Barnett
The hon. Gentleman is right. It would not be pursued. For one thing, the taxpayer would know that he has not conveyed any gratuitous transfer and that it is an arm's length transaction.[column 509]
Arm's length is not sufficient.
The two tests would be met under subsection (4), as I have explained. If they are not met, that is not our intention. But it is our intention to meet them and, as we see it, it is met under the wording of the subsection. If it is not, I shall make sure that it is.
Mr. Norman Lamont
I am sorry to pursue this point, but does gratuitous benefit include a retaining control of a company within a family? As I understand it, if part of a controlling interest is given away, one is assessed in respect of that slice of the equity to more than if it were sold to another person. Therefore, if someone sold to a close relative and were given the market price, would there be an assessment on top of that? Is that the position?
The hon. Gentleman, most unusually for him, could not have been listening, because I dealt precisely with that point. If a man has 51 per cent. of the shares in a close company and he sells 2 per cent. to his son, that is a totally different matter because the 51 per cent. control remains in the family.
Let us return to the hon. Member for Cornwall, North (Mr. Pardoe). I hope that he will agree, following all the ramifications of the discussions we have had over the last hour-and-a-quarter, that it would be—to put it mildly—somewhat difficult for the Inland Revenue to prove whether there had been a transfer, from the many examples given. It is also a fact that there is nothing new here in the tax law. I therefore hope that the hon. Gentleman will feel able to withdraw his amendment.
It is clear from the way the debate has gone this afternoon that we are on the battlefield on which the greatest number of court actions will take place over the years about this capital transfer tax. With all the willingness that he has shown to answer the questions put to him, the Chief Secretary has not shed any light on a host of legal problems that will crop up.
I accept what the right hon. Member for Crosby (Mr. Page) said about finding the whole clause extremely difficult to understand. When I first tried to understand it and could not do so I turned to the Inland Revenue's original Press notice, thinking that the Press office must have put it in [column 510]simplified form. That notice said:
“Broadly speaking, the tax will apply to any lifetime transfer in which there is an element of gift;” ——
that was not too difficult, but it went on—
“or, to put it another way, it will not apply to a transfer if it was made without donative intent and at arm's length” .
It was at that point that I realised that putting the burden of proof on the individual was utterly wrong, because, if the Chief Secretary is right in saying that all our deliberations this afternoon must lead us to conclude that the Inland Revenue cannot prove any of these things, it equally must lead us to conclude that individuals are not going to be able to prove these things.
The right hon. Gentleman may be right in saying that I was wrong in the generality of my assertion that in tax matters, as in other legal matters, the burden of proof is on the accuser and not on the individual. That may well be true. Nevertheless, a charge has crept in regarding the incidentals of tax matters. But it ought not to do so when we are concerned with a general imposition of this kind and when, as we have seen from our deliberations this afternoon, it will be virtually impossible for the individual to prove anything at all.
If I make a gift, I have to prove a variety of things to avoid the tax. First, as the right hon. Member for Crosby has pointed out, I have to prove a negative, and it is notoriously difficult in law, as in life, to prove a negative.
Secondly, I have to prove an intention. Heaven help me! How do I prove an intention in this kind of area?
Thirdly, I have to prove that it was at arm's length. That is a legal term, and obviously the courts are fairly well able to deal with decisions of that kind, but I am bound to say that individuals, who will have to work this clause to their own satisfaction, are not all that well-equipped to do so.
Even worse than that, not only do I have to prove that it was at arm's length, but according to subsection (4)(b):
“that it was such as might be expected to be made in a transaction at arm's length” .
That is even more complicated than paragraph (a). Lastly, I have to prove that there was no element of gift.
The right hon. Lady the Member for Finchley (Mrs. Thatcher) has put a series [column 511]of examples to the Chief Secretary and he has not really answered them. I am sure that, as the hon. Lady said, she has a whole host of other examples, and there are one or two examples that I would mention because they demonstrate the appalling difficulties that will face any individual.
I suppose that, because there is a general obligation on a parent to maintain children under the age of 18, if I pay for the cost of my children's education—and I know that that is a hideous crime to some hon. Gentlemen, although quite a lot of hon. Members on the Government side pay for their children's education, so let us have no humbug about that; they may be ashamed of it, but it is true—does that obligation go to the extent of maintaining them in private education? How much of the cost of that private education is my obligation and how much of it is not? I am assuming that it is coming out of capital, so the Chief Secretary must not come back at me and say that I am paying it out of income.
Secondly, what about games between parents and children? Let us suppose that A plays a round of golf with his son every weekend for a £50 stake. During a year he wins 10 times and his son, being the better golfer, wins 40 times. Over the year the son wins £1,500. Did I intend to lose those games to my son? Is it or is it not a chargeable gift? If it can be argued that I am the better golfer and, therefore, the fact that I am a better golfer but lost means that I intended to lose——
Mr. John Tomlinson
Would not the hon. Gentleman agree that playing golf 40 times a year would suggest that he probably was not devoting enough time to reading the Finance Bill?
I have to tell the hon. Gentleman that since my National Service days I have not swung a golf club at all. Golf is the prerogative of the Labour Party, as a Hampstead golf club knows only too well.
I come now to a more complicated instance. My hon. Friend the Member for Isle of Ely (Mr. Freud) is a director of the Playboy Club. Let us suppose that I go to the Playboy Club—I hope nobody will raise the question, because I have never been inside it—and lose money hand over fist to my son, or to any other relative. If the wheel is fixed, I suppose that there is a [column 512]clear intention to lose, but if the wheel is not fixed, there is not a clear intention to lose. What is the Chief Secretary's answer to that?
Let us suppose I take on a bet with somebody who is a relative, a bet that obviously cannot come right, not an open bet, but a bet, for instance, that the Prime Minister will honour a certain promise in the manifesto. We all know exactly what the outcome of that will be. So I can confidently expect to lose money to my son on that sort of bet. Is that intended? Is that a chargeable gift or is it not?
I hope that the Chief Secretary recognises that the complexities of proof that have arisen in the course of our debate this afternoon show the necessity not, as he thinks, for the individual to prove his case, but for the Inland Revenue to prove its. Therefore, the argument must come down in favour of the amendment, which has been supported by the Opposition.
The Chief Secretary must recognise—and I hope his right hon. Friend the Chancellor will recognise—that the complications we are debating today arise almost entirely out of the decision to make this a donor tax. If it was a donee tax, there would be no difficulty about it. If I receive a gift, it is either part of my income, in which case I am subject to income tax, or it is a gift, in which case I am subject to capital transfer tax, or accessions tax, as I would have it. It is easier to prove that I have received a gift——
Could the hon. Gentleman help me? I know of his great knowledge of the donee base tax. Would the four examples be liable to tax under a donee based tax?
The first of the four examples I have given concerns paying for education. It is easy to see whether that is a gift. In an accessions tax there might be a specific provision to exempt education. Here there is not, so we do not know. That is why I have moved the amendment, because there is a whole host of things that I do not know. What about the golf example, too?
Again, in the accessions tax there has to be a specific definition of whether one has received a gift or not. But it is a great deal easier to prove whether a person has received a gift than to prove an intention to give one. That is the point. However, we are not now debating the accessions [column 513]tax, although I should be happy to do so at any time.
The simple point I am making is this. The Chancellor of the Exchequer told us that his reason for conversion from a donee tax to a donor tax was administrative complication. I am saying that this kind of tax raises enormous and hideous legal complications of its own which are in no way compensated by the small administrative conveniences. I therefore hope that the right hon. Gentleman, if he is not prepared to accept the amendment now, will reconsider the matter and come forward with some further provision on Report.
Mr. Joel Barnett
The hon. Gentleman has made the best case against the amendment that has been made so far, since four o'clock this afternoon. He has explained in clear terms how difficult it would be for an inspector of taxes to know whether there was an intention to convey a gratuitous benefit. If a man lost £1,500 to his son in a golf match, regularly every week, 50 times a year or whatever, he would know only too well whether that was a gratuitous benefit. But the Inland Revenue would not know. It would be up to him to say, because he is the only person who would know. The same applies in each of the examples he gave. Indeed, he made the point for me when he said that in his donee-based tax, which I do not necessarily rule out, there must be a definition.
We are talking here about a definition. Even with a donee-based tax, only the transferor and the transferee can judge—or certainly they would be the best able to judge—whether there was an intention to confer a gratuitous benefit. The hon. Gentleman is a reasonable man sometimes. I hope, therefore, that he will recognise that he has made a powerful case against his amendment.
Let us consider again the fourth example, a bet with a relative, in which a lot of money is lost, on say, how many seats the Liberal Party would lose at the next General Election—a fairly easy bet, in fact. It would be possible for the transferor to know whether in so doing he was giving a gratuitous benefit and trying to avoid the capital transfer tax.
The hon. Gentleman has given four examples. I assure him that without the clause there would be many who would be able to find much more elaborate ways of avoiding the capital transfer tax. The hon. [column 514]Gentleman was hardly trying when he came up with four. The right hon. Lady, who has greater knowledge of these matters, would no doubt be able to come up with a lot more. There are many ways in which avoidance would be possible but for the clause. That is why it is there—to stop avoidance, some of the forms of which the hon. Gentleman has given.
The right hon. Gentleman has got the argument entirely upside down. One has to be certain about this beforehand. It is not a question that can be settled after the event, as he seems to think. If a person gets it wrong, if by some mischance he gives something that he never intended as a gift, and the Inland Revenue says “Prove that you did not intend it to be” , and he cannot do so—in a host of the illustrations he cannot prove it—he will be subject to a whacking tax perhaps some considerable time after the event when his financial circumstances may be very different. Therefore, he has to know in advance. Because of the area of uncertainty in this whole section of the tax, I claim that it is up to the Inland Revenue and not up to the individual.
I am not competing with the right hon. Lady the Member for Finchley (Mrs. Thatcher) in putting forward examples of the hideousness of this tax. We could go on for a long time swapping examples, no doubt. It is not difficult to think them up, and one does not have to have a great deal of working knowledge of the tax system to do so.
I give the right hon. Gentleman the gifts definition in the donee tax, which is very simple. It is a gift when, if it was not, it would otherwise be chargeable to income tax. That is a very simple definition, if the right hon. Gentleman would like to think about it.
The Chief Secretary got the bet entirely wrong. It is almost impossible for anyone, psychological expert or the right hon. Gentleman, to estimate how many seats the Liberal Party will lose or gain at the next election because it has absolutely no relation in equity to the number of votes we shall win.
Mr. Graham Page
I think that I have reduced one and a half hour's talking into 57 words. I believe that I can express what the Chief Secretary has been trying [column 515]to tell the Committee all this time. Here it is: When I transfer an asset no capital transfer tax is payable if I can show that I did not intend to confer a gratuitous benefit on anyone, and if I can show that it was in a transaction which is of such a kind that it might be expected to be at arm's length between unconnected persons.
I put that on the record, believing that it is exactly what this clause requires. My objection is on two points. I said, “if I can show” . I want to know how I have to prove this, particularly as I have to prove abstract matters of intention. Second, what is a benefit? This is where I think we need the words in one of our amendments.
I hope that I have put it clearly and that the Chief Secretary will think about it again.
Mr. Norman Lamont
This question of the price or value of blocks of shares transferred between people, particularly between people within a family, is fraught with difficulty. What sort of valuation can one place on them? The Chief Secretary seems to assume that there is always a difference between the market price of shares and the market price of 51 per cent. but that will not in every case be so. The premium on the market price that will be paid for control will vary enormously from situation to situation, and in some situations there will be no premium. People will just not wish to have control of a company. There will be many companies people do not want to get involved with. They may wish to run away from the problems, and the market value may well be the actual realistic value for transferring the shares, either between managers or between members of the family.
The second problem is whether one always will be able to distinguish where a business has been family-controlled whether, the sale of shares is an arm's length transaction. Let us take a common situation—a second-generation family business. By second generation I do not mean that it is intended to be passed on to the second generation of the family; it is simply that a new generation of management is coming into the company. There may be no intention that the control of the business should be retained within one family. In this common situation, the original founder of the business has asked in a lot of younger [column 516]managers but he also has one son there as an executive.
The founder of the business, owning 100 per cent. of the equity, then decides that he will give the executives in his company, including his son, a chance to have a stake in the business and he sells blocks of shares to seven managers. One of those seven is his son. Although this is done only to put his son on the same basis with the six other managers, and although he is diluting his ownership of the company, nevertheless, mathematically, the fact of giving it to his son will mean that the Revenue could take the view that family control was not being lessened.
It seems to me that the business question of transferring or selling shares at the market price will be very difficult to disentangle.
I come back to the aspect in which I am interested, transactions in ordinary family life between parents and children or an invalid relative for the ordinary duties and expenditures—to use a neutral word—that take place within a family. This point has been put to the Revenue in a memorandum sent in by all the chartered accountants, submitted to the Chairman of the Board of Inland Revenue on behalf of the Councils of the constituent members of the Consultative Committee of Accountancy Bodies. Under Clause 18, they have asked:
“We ask for confirmation that expenditure on education and training including the incidental costs of maintenance, incurred by a parent on behalf of his child, is not a transfer of value. As is well known, it is often impossible for taxpayers to pay such costs out of income so as to bring them within the exemption conferred by Schedule 6 paragraph 4” .
The Joel BarnettChief Secretary has not answered that point at all. It has been put to the Inland Revenue. The accountants think that expenditure on education, training and maintenance is not a transaction which confers a gratuitous benefit in those circumstances. When I refer to subsection (4), I do not see that it is out of charge completely. The accountants do not know. I do not know. What does the Chief Secretary intend?—never mind what the clause says.
The question is again taken up—I am sure the Inland Revenue will have seen it—in an article in the British Tax Review for this quarter, written by Professor Wheatcroft, a former taxing master in [column 517]courts. He says, on page 6:
“One problem area is how far expenditure by A which benefits B is to be treated as a gift. If A asks his grown up children and young grandchildren to stay on holiday with him and pays their bill has he made a gift to them?” .
Professor Wheatcroft continues:
“Presumably the payment of education, clothing and maintenance for one's own children under 18 is not a gift as there is an obligation to maintain them” .
But how does the position change at 18, particularly with regard to a person in the sixth form? Is it on the 18th birthday? I see nothing in the Bill about this. I see nothing about an obligation to maintain.
The third case that has come in is that of a mentally retarded or handicapped child who becomes a young person, and the parents regularly pay out of capital to a home to maintain the child. Is that a transaction intended to confer a gratuitous benefit on the child, or is it an arm's length transaction between the parent who pays that sum and the home which provides the maintenance? I do not know. Some legal and accountancy advisers do not know. The Chief Secretary has not said what he intends or given us the benefit of what he thinks this clause means.
The fourth case I have is a particularly piquant one which came in only this morning. An estate was severely in deficit to the Inland Revenue. The widow was left with nothing, but the tradition of the family was that they never got into debt. The grandmother, to retain the tradition of the family to have no debts, literally paid over the amount of the debt to the Inland Revenue. They now think that she is actually going to be charged as a gift to the widow on the amount which she need not have paid, but did pay, to cover the debt that would otherwise have been due to the Inland Revenue.
What I am concerned about is that the ordinary expenditures within a family should not be made an extra charge to a capital tax, because I do not think that that was ever the intention of those who originally thought that they would be in favour of a gift tax. It goes straight to the heart of what is, and what is not, a chargeable transfer.
Mr. Joel Barnett
I shall first deal with the points made by the hon. Member for Kingston-upon-Thames (Mr. Lamont). [column 518]He said that there could be circumstances when transferring 2 per cent. out of 51 per cent. need not necessarily be a gratuitous transfer, even if it were transferred for a price which was the equivalent of a minority value. That is quite right. The hon. Gentleman gave his own example. If I may quote him, he said that there was no intention to retain control, and he transferred seven blocks to managers, one of whom was a son.
I said a considerable time ago that it will depend upon the circumstances in each case. If the prices received for the transfers of those shares meet the tests, which we have discussed at some length, they will not be caught. It is as simple as that. But, if they do not meet those tests, they will be caught.
However, I hasten to assure the hon. Gentleman that it must be a matter that is decided in each case, because there will certainly be occasions when there will be no need for a premium when a man transfers a number of shares so ending his control. It may be a perfectly genuine transaction, but it will depend upon the circumstances in each case.
I turn now to the observations by the right hon. Lady the Member for Finchley (Mrs. Thatcher). I am sorry to say that I must deal with these comments on these series of amendments on the general point, because the detailed issues of which the right hon. Lady spoke come up later when I shall be happy to deal with them. She spoke about ordinary transactions between the family, the maintenance of a son or daughter at school or university, whether there was an obligation to maintain. All these questions come up under later amendments.
It is a complex area not directly relevant to these amendments. I hope that the right hon. Lady will take it from me that I am not in any way seeking to avoid the questions. I shall be happy to come to them when we reach the relevant stage. I assure her that I shall deal with them properly, adequately and directly when we get to them.
Question put, That the amendment be made:—
The Committee divided: Ayes 16, Noes 17. [column 519]
Division No. 11.]
Cope , Mr. John
Fairgrieve , Mr. Russell
Hall , Sir John
Howell , Mr. David
Lamont , Mr. Norman
Lawson , Mr. Nigel
MacGregor , Mr. John
Newton , Mr. Tony
Page , Mr. R. Graham
Pardoe , Mr. John
Parkinson , Mr. Cecll
Rees , Mr. Peter
Ross , Mr. Wm.
Ridley , Mr. Nicholas
Thatcher, Mrs. Margaret
Wiggin , Mr. Jerry
Barnett , Mr. Joel
Bates , Mr. Alf
Boothroyd , Miss Betty
Callaghan , Mr. Jim
Davies , Mr. Denzil
Dunnett , Mr. Jack
Gilbert , Dr. John
Graham , Mr. Ted
Hamling , Mr. William
Harper , Mr. Joseph
Hayman , Mrs. Helene
Hoyle , Mr. Douglas
Hughes , Mr. Mark
Sedgemore , Mr. Brian
Tomlinson , Mr. John
Ward, Mr. Michael
White, Mr. Frank R.
Question accordingly negatived.
Mr. Wm. Ross
I beg to move Amendment No. 45, in page 15, line 17, at end insert:
“or (c) that it was made by way of settlement of a legal claim, with or without admission of liability” .
I do not think that this amendment is anywhere near as controversial as the last, and no doubt we shall be able to pass away from it quickly when the Chief Secretary accepts it.
We are seeking to clear up what we consider to be a defect. For instance, if someone's wife when visiting a next-door neighbour slips on the floor, breaks her leg and claims, if the householder in whose dwelling the leg was broken was insured, well and good; however, if not, the injured person may have a legal claim against him. In these circumstances, it would appear that as the Bill is drawn a sum paid with or, more likely, without acknowledgement of liability, as an ex gratia payment to such a person could be held as intending to transfer a gratuitous benefit.
I should like to assure Labour Members that we do not wish to create a loophole by way of bogus ex gratia payments. But surely it is not intended to catch transfers in conditions such as payments made in lieu of damages awarded by a court.
The amendment may not be the right way to achieve the object, but if there is no way of meeting the point elsewhere, surely the Government will make an amendment to meet it here.
Mr. Joel Barnett
I am pleased to be able to tell the hon. Gentleman that there is no question of seeking to catch the type of case to which he refers where there is no collusive intent, in other words, where the two people are not colluding in order to [column 520]make a transfer. What he seeks to provide is already in the Bill.
Money paid in bona fide settlements of a legal claim is already excluded by the subsection as it stands. I assure the hon. Gentleman that that is the way it is and, as it meets the intention of his amendment, I hope that he will feel able to withdraw it.
Mr. Graham Page
May we have this a little more clearly from the Chief Secretary? Let us suppose, for example, that there was an oral agreement to create a settlement—it does not need any formal document to create a trust or a settlement—and the beneficiary under it took action to enforce that oral arrangement or informal arrangement. This would come within the terms of the amendment. It would be made by way of settlement of a legal claim with or without admission of liability.
If the Chief Secretary says that this sort of situation is already covered, how wide does that cover go? It looks as though we are creating a loophole, but the Chief Secretary shakes his head when I say that. Perhaps he could develop this case a little further and tell why it is not becoming a loophole.
The reason is that if the legal claim is a clear sham between the two parties in order to ensure that a gift is transferred, it would be caught, because it would not meet the two tests.
Mr. Graham Page
In the example that I gave it might not be a sham at all. It might be a legal action where there was some doubt as to whether an informal trust had been created. If a legal claim is made, it may be that it will escape the tax.
As long as there was not collusive intent to make a transfer to avoid the tax. If there were such a sham collusive [column 521]intent, it would be caught. It would not meet the two tests that we have been debating at some length. The hon. Member for Londonderry (Mr. Ross) instanced where there was no such sham, where there was a perfectly legitimate arrangement about the legal claim. That would not be caught, I am assured, under the subsection.
Is the Chief Secretary specifically referring to this subsection? Is he not resting his argument on any of the schedules?
May I ask what is the procedure? One would expect this not to be collusive but straightforward, so presumably the subject would not return it in his schedule. Would the procedure be that the inspector raised an assessment on it and then it was up to the person to prove that it was genuine?
Yes, but I cannot see the sort of circumstances of the kind where there was a perfectly legal claim, no sham of any kind, and the Inspector would seek to raise an assessment. As the right hon. Lady knows, there are many situations for income tax purposes where a taxpayer, for example, does not submit a return. He is liable under Schedule D and does not submit accounts, and the inspector of taxes raises an estimated assessment. It is up to the taxpayer to prove that that estimated assessment is wrong by submitting the necessary information.
But in the sort of circumstances that the hon. Member for Londonderry is putting to the Committee I cannot imagine that the inspector of taxes would seek to raise a claim, and there would be no reason why the taxpayer should put it on his tax return. There would be no liability to capital transfer tax.
If it is a legal claim, and the sum is made in settlement of a legal claim, it is often far better to make it out of court than to go to court. I do not understand what the Chief Secretary means when he says, “if it was a sham or with collusive intent” . If it was a legal claim, and in settlement of a legal claim, the other things would be very difficult to prove or disprove.
One can imagine all kinds of situations where there is a claim. As the [column 522]right hon. Lady said, the best advice usually is to settle it out of court. But it certainly would not be a sham or collusive claim and, therefore, it would not be liable to the tax. I hope that I have made that clear.
Mr. Graham Page
It may be a legal claim to a gratuitous benefit. That is why I used the words “trust or settlement” . May I have the Chief Secretary's assurance that it would be included as conferring a gratuitous benefit, even though it is made by legal claim to enforce a trust?
I say again that if the case that the right hon. Gentleman gives as an example does not meet the two tests that we have been discussing at length it would certainly be caught, because the example he appeared to be giving was one in which it was intended to confer a benefit. It would therefore be caught. But that is not the point that the hon. Gentleman is making in his amendment. At least, I did not think that it was. He was not saying that there was an intention to confer a gratuitous benefit under the terms of capital transfer tax.
Mr. Denzil Davies
I do not want to make life difficult. I just want to draw attention to a constituency situation in which there may be some difficulty. I have a constituent who died underground working for the National Coal Board. The cause of death was heart attack. The widow was told that there was no legal claim against the National Coal Board as the death was not caused as a result of industrial injury. The board, however, had made a payment, as it often does in such cases. In this case I think it was £500, so it would not fall within these provisions anyway, and I am not suggesting that it would. But there could be payments made which are truly ex gratia payments where there is not a legal claim, and where people, having looked at it, will say that there was not a legal claim, just as in the case I have mentioned.
I am not seeking to make life difficult for the Chief Secretary. I am not asking for an answer, But there is a possibility, albeit a fairly remote one, that there will be cases of that kind.
I take my hon. Friend's point. But in the example he gives there certainly would not have been a collusive action of the kind that would be caught. I [column 523]should not have thought so, at any rate. If I am wrong, I will let the Committee know. My understanding is that it would not be caught.
It was for precisely the same reasons that we raised the point and I asked the Chief Secretary whether he rested his assurances simply on Clause 18, because one had noticed that in Schedule 9(1)(3) the wording used about liabilities was:
“Except in the case of a liability imposed by law, a liability incurred by the transferor shall be taken into account only …” .
That wording had put in one's mind precisely the fears that the hon. Member for Llanelli (Mr. Davies) has expressed.
I was referring to Clause 18.
Mr. W. Ross
I am not perfectly clear about what happens if there is no acknowledgement of liability. What happens if payment is made without acknowledgement of liability between connected persons?
It rests on whether it is a sham claim. The point the hon. Gentleman is making is that there was no liability but it is a perfectly genuine claim; it was not a sham. They could have avoided legal liability, but it was settled out of court. As the right hon. Lady said, it was not a sham claim. It was settled perfectly genuinely. That would not be caught because it was a perfectly genuine transaction.
Mr. W. Ross
I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.[column 538] Second extract
Mr. Graham Page
I beg to move Amendment No. 442, in page 15, line 25 at end insert:
“(5) A disposition is not a transfer of value if it is made by one party to a marriage in favour of the other party or of a child of either party on the occasion of the dissolution or annulment of the marriage or of a separation of the parties, in satisfaction or partial satisfaction of a claim for maintenance” .
With this we are to take Amendment No. 697, in page 15, line 25, at end insert:
“(b) A disposition is not a transfer of value if it is for the maintenance, education or benefit of a child of the transferor” .
Amendment No. 442 is more than a probing amendment. It is an amendment of considerable substance, a subsection I seek to insert into Clause 18 to exempt a certain type of transaction, that is, a transaction which may occur on the occasion of the dissolution or annulment of marriage, or a separation of married persons, to the satisfaction or partial satisfaction of a claim for maintenance. I hope—if I may put in a parenthesis—that by using the word “maintenance” I have not excluded capital. I certainly intended to cover the transfer of capital and not merely of income. [column 539]
It has been recognised elsewhere in the Bill, in Schedule 5 paragraph 14, that where the property is put into a settlement upon dissolution of marriage some provision should be made in this respect. I suggest that it would be right in this case to exempt any settlement or transfer of property when a divorce occurs. This is perhaps more frequent now than it was a few years ago. For example, the rights of the ex-wife in the matrimonial home are recognised far more by the courts than they used to be.
Almost invariably now, upon dissolution of marriage, or upon a legal separation, there is a settlement of property, a gift from one side or the other, and it is a transaction we should recognise as being free from capital transfer tax. I do not know whether it is right to draw the simile, but we recognise gifts between spouses as being free from the tax, and it is right and proper, when a marriage breaks down, that we should recognise that a reasonable property settlement on that breakdown should be free of capital transfer tax.
I wish, first, to express my support for the amendment moved by my right hon. Friend the Member for Crosby (Mr. Page), and I wish to direct attention to my Amendment No. 697. It raises a matter which will not be unfamiliar to the Chief Secretary, as we talked about it at some length earlier this afternoon.
I remember talking to my father-in-law some years ago about the problems of educating my children. He said: “You do not have to worry. As long as you are earning enough to pay the interest on your overdraft, you are solvent” . That was before capital transfer tax. If anybody worked on that principle now, any of his school fees in excess of £1,000 would immediately, according to what the Chief Secretary told us this afternoon, move into the range of being a disposition. The whole of his income and the first £1,000 would have gone, and anything over that would be a disposition.
It is important that the Chief Secretary should satisfy our apprehensions. At present, with high rates of tax—hon. Members opposite may make a great deal of this; I see the hon. Member for Luton, West (Mr. Sedgemore) reaching for his handkerchief, and I know he is sympathetic to [column 540]people with this sort of problem—it will be more difficult for anyone to afford to pay out of income for the education of his children. It would be absurd if one were to reach the stage of having to make some sort of return. I see the Chief Secretary making threatening, or perhaps encouraging, gestures. One could find oneself wasting a lot of time, and the Revenue's time, if one had to make returns because one was spending one's income plus £1,000 and that expenditure was going towards the maintenance, education or benefit of one's child.
This is the moment that the Chief Secretary hinted at earlier in the afternoon—he can say that he accepts the point, he will set at rest the fears of thousands of parents, and tell us what we are all anxious to hear.
Mr. Joel Barnett
As the hon. Member for Hertfordshire, South (Mr. Parkinson) said when we were debating the general situation on the first series of amendments, I said that I should deal with this matter when we came to it. But let me first deal with Amendment No. 442, moved by the right hon. Member for Crosby (Mr. Page). I am again happy to tell him not that I am accepting his amendment but that it is not necessary. There is no need for it because the situation, I am advised, is already adequately covered by Clause 18 (4).
Paragraph 14 of Schedule 5 provides that:
“The making of a settlement” ——
in a situation similar to that mentioned in this amendment—
“is not a chargeable transfer to the extent that the settlement is made in satisfaction or partial satisfaction of a claim for maintenance.”
I know that the right hon. Gentleman has in mind the fear that a disposition in the circumstances he described otherwise than by way of a settlement would be taxable. If a disposition is not intended to confer gratuitous benefit on any person and is at arm's length, it is exempt from capital transfer tax because Clause 18 (4) provides that such a disposition is not a transfer of value. A disposition by which a sum was paid in full or partial satisfaction of a bona fide claim for maintenance would satisfy the test in Clause 18 (4), and the sum paid under it would not be liable to tax.
I hasten to add I am not talking about maintenance for children, which I am coming to now. But I hope that the right [column 541]hon. Gentleman is content that his amendment—I see he is shaking his head, which is a pity—but I am advised that the danger he is seeking to guard against is met. However, no doubt he will come back to it.
I come now to Amendment No. 697——
May I refer to Amendment No. 442 again? It says:
“in favour of the other party or of a child of either party” .
The Chief Secretary said that it did not apply to children. Could he clear up that doubt now?
I do not know whether the hon. Gentleman was here, but I said that I was coming back to the maintenance and education of children on Amendment No. 697, which is directly on that point.
The amount paid to maintain a son or daughter through education would as a general rule be met out of income or out of the £1,000 capital annual exemption. However, let me hasten to add that I entirely acknowledge that in some circumstances it may not be.
On the other hand, there is a clear obligation on a parent to maintain his child. It would depend on how much the parents transferred to the child and what was paid for maintenance. But in general there is a liability on a parent to meet the normal costs of the maintenance and education of a child. Therefore, this would be accepted as normal, parental responsibility, and normal expenditure of that kind would not be liable to capital transfer tax.
However, if, by some mischance, that is not the case under the present drafting, I am happy to assure the hon. Gentleman that I shall look at it to see that such expenditure is not caught. I have no wish to catch normal parental liabilities to maintain a child. I hope that that is reasonably clear, but if it is not, in any event I have promised the Committee that I shall look at it to see whether it is caught in that way, and to see if anything requires to be done. I shall certainly consider the inclusion of the amendment if it is necessary.
With that assurance, I hope that both hon. Gentlemen will feel able to withdraw their amendments.
I wish to clarify the position with the Chief Secretary. The [column 542]topic to which I particularly wanted to direct my attention was that of university fees. I know that the hon. Member for Luton, West (Mr. Sedgemore) cast aspersions on those who sent their children to Oxford or Cambridge. He seemed to assume that this problem would arise only with those universities.
As someone who has been at both a Scottish university and an English provincial university, I assure him that if one has more than one child, one can easily find oneself paying more than £1,000 a year in university fees and maintenance at any university in the United Kingdom.
The Chief Secretary has concentrated on maintenance. Perhaps this was a slip. He did not promise to look at the question again in the context of educational fees. With fees increasing every year and with the high rates of income tax at the higher income levels, it is not possible for people to meet those fees out of income particularly if they have more than one child unless they accept a standard of living well below that of those with much lower gross incomes. It is unfair to ask them to do that. I have long been a believer in the abolition of the parental means test for universities. We are not discussing that now, but it has implications.
Mr. William Hamling
Is the hon. Gentleman also an advocate of the idea that people who enjoy certain things in life should pay the full cost of them?
I am not quite sure what the hon. Gentleman has in mind, and I am sure that you, Mr. Crawshaw, would not want me to follow him down that avenue.
However, it is obviously only possible to pay those fees by using capital. That capital may well have been built up over an earlier period of years out of saved income, for which people may have made sacrifices in their standard of living, recognising that with no other capital but with higher income levels, they would have to face this problem if their children went on to university.
This is an important consideration. In my view, the means test for parental contributions to universities is an unfair discrimination against the child and not against the parent. Unless the amendment is accepted and the reference to education specifically included, the capital transfer tax would also be an additional unfair discrimination against the child.[column 543]
Mr. Joel Barnett
If I did not make it clear before, let me say that the maintenance of the child by the parent—the parental liability—would include expenditure on education, because that would not be a transfer of value to the child under the terms of capital transfer tax, although I hasten to add, lest this be considered any imputation against Oxford, Cambridge, or any other university, that I have no doubt that it is of considerable value to be educated there. But it is not considered a value, as we understand it, under the terms of capital transfer tax. I hope that that answers the hon. Gentleman's point, but, as I said earlier, if it does not, I have promised—and I will meet that promise—to look at it again.
Mr. Norman Lamont
I apologise for hearing only the last of the Chief Secretary's remarks. I wanted to support my hon. Friend the Member for Blaby (Mr. Lawson) at another meeting. However, when the right hon. Gentleman said that he would look at the subject raised by the hon. Member for Norfolk, South (Mr. MacGregor), did he include when the child is over the age of 18?
Mr. Joel Barnett
This is a subject that we want to consider. Normal costs of education would be a parental liability. We want to look at how that is defined. I hope that answer satisfies the hon. Gentleman. I can see that it does not satisfy the right hon. Lady.
There may be a point of which the right Joel Barnetthon. Gentleman is not wholly aware and of which I should not be wholly aware but for having served in another Department. It arose with one of his fellow Treasury Ministers the other day during Question Time. He pointed out that a parent's duty towards his student son or daughter to meet his parental contribution was not an enforceable obligation, and therefore could not be allowed for tax. The Chief Secretary nods his head: he remembers the point. It is not enforceable on the parent to make his contribution in the means-tested operation. There are a number of students who are therefore in considerable difficulty.
The Chief Secretary rested a good deal of his argument upon the word “obligation” . There is no obligation except a moral obligation.
Parental obligation.[column 544]
There is a parental obligation, not a legal obligation. There are times when the parental obligation is not met. Therefore, if one regards it as a parental obligation fine; but taxing statutes tend to be legal obligations rather tightly drafted. Therefore, one would get a number of consequences.
First, there would be no legal obligation to maintain a child after the minimum school-leaving age. A number of problems will arise from that, and I hope the Chief Secretary will take them into account.
The second consequence concerns the situation whereby one's child is fully grown up but handicapped. Again, there is a moral obligation to maintain, and it is often expensive to do so. People go to enormous lengths and make great sacrifices to do it. But it is not a legal obligation. Either parents put aside capital, or sometimes they will set aside capital in the form of income. All of these possibilities, I believe, need to be looked at very carefully.
Mr. Joel Barnett
The right hon. Lady is on precisely the sort of area at which I wish to look, and that is why I promised the Committee that I should look at it.
While the Chief Secretary is looking he will have to look quite wide. If my right hon. Friend's definition of a parental obligation is taken seriously, it goes into all sorts of other areas. One has a parental obligation to feed one's children, and to provide a roof over their heads. If they cannot get a job after leaving university, has one a parental obligation to support them? We are getting into a much wider area than simply education. I hope that the Chief Secretary will consider it in that wide context rather than only the narrow context of school fees.
The answer is “Yes” .
Mr. Graham Page
May I go back to Amendment No. 442. It seeks to exempt disposition on the occasion of a dissolution of a marriage. I cannot see how on earth the Chief Secretary can say that this is exempted by subsection (4). There must so frequently be an element of gratuitous benefit about a settlement of this sort that I cannot see how he can say that it is cleared by that subsection.
One would have to prove the value of the ex-wife's married status to say that there was no element of gift about it, that it was a strictly legal claim that she had on her [column 545]ex-husband. Frequently, of course, these are settlements in which there is very much a gratuitous benefit given by one party to the other.
I do not think that we can rely on subsection (4) disposing of these cases. If the Chief Secretary feels that they are already covered, I assume that he accepts the principle in the amendment. Therefore, I hope that he will look at it again. It is necessary to cover those cases where there is a direct gift, a direct transfer.
I suppose that any adviser of those who are dissolving marriage in this way would say “The last thing you should do is to give anything to each other as you may well be liable for capital transfer tax” . So they resort to paragraph 14 of Schedule 5 and make a settlement, because if it were given, the ex-wife might well become liable for the capital transfer tax on the ex-husband's gifts to his mistress—I refer to subsection (7) of Clause 23. It is a little way ahead, Mr. Crawshaw, but that is its effect.
That is why it is so important that the direct gift of capital from one spouse to another on the dissolution of marriage should be exempt in the same way as a settlement is exempt. I hope that the Chief Secretary will give an assurance that he will look again at this point, particularly in view of what I have said about the impact of Clause 23 (7).
I do not wish to divide the Committee on this issue because the Chief Secretary accepts the principle. I just want to see that it is in the Bill.
What happens when such a settlement is made on the children of a marriage dissolved or subject to separation and at a later stage that settlement is divided among those children? I imagine that tax would not be chargeable on that second break-up of the settlement, just as it was not on the first granting of the settlement for the benefit of the children's maintenance. This question may not arise on the clause, but it is important to know: I am sure that my right hon. Friend will put it in the right language if the Chief Secretary has not understood what I am getting at.[column 546]
Mr. Joel Barnett
I understand what the hon. Gentleman is getting at, but it is not the point that the right hon. Gentleman is making. I was giving the right hon. Gentleman an assurance that, on the advice I am given, his amendment is covered by the subsection as it stands. I can certainly assure him, however, that if, when we look at it again—as we always do when the right hon. Gentleman makes these points, because we are very conscious of his detailed knowledge of these matters—it seems that we might have been wrong, naturally we shall look at it again. But our present advice is that his amendment is not necessary. I do not think that I can go much further than that.
If the right hon. Gentleman puts it in that way and says that he will look at it again——
We have not had an answer to my question, except for the astonishing statement that it was different from my right hon. Friend's, which was why I made it.
I do not know why it should be so astonishing that the hon. Gentleman has made a point not covered by the amendment. We are discussing only the amendment.
We must come back to that in the “Clause stand part” debate. My hon. Friend has raised an important point that I had not noticed when I put down the amendment, and it certainly ought to be dealt with.
However, if the Chief Secretary is willing to consider this again and if I am not precluded, should that consideration fail to produce anything on his side, from bringing it back myself on Report, I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Sitting suspended.[column 549] Third extract
Mr. Graham Page
I beg to move Amendment No. 608, in page 15, line 36, leave out subsection (7).
With this we are to take the following amendments:
No. 646, in page 15, line 39, after ‘right’, insert ‘over an asset’.
No. 443, in page 15, line 41, leave out from ‘right’ to end of line and insert
“if the sole or main reason for the omission was to confer a gratuitous benefit on that other person” .
No. 788, in page 15, line 39, after ‘right’ insert
“to acquire capital in relation to stock, shares, debentures or similar securities” .
No. 437, in page 15, line 23, at end insert
“or governed by provisions contained in the Articles of Association of the company by which the shares were issued” .
No. 440, in page 15, line 41, leave out ‘not’.
As you have said, Mr. Crawshaw, we can discuss conveniently and consider two groups of amendments. One group includes Amendments Nos. [column 550]646, 788 and 443, which seek to narrow and clarify subsection which is so wide and vague, and then there are our old friends Amendments Nos. 439 and 440 on the question of the burden of proof.
I start with the major amendment, No. 608 seeks to delete subsection (7), which is an extraordinary subsection. The clause deals with the definition of the transfer of value and when a disposition becomes a transfer of value and tax falls upon it, and we then have this final subsection—
“For the purposes of this section, where the value of a person's estate is diminished and that of another person's estate is increased by the first-mentioned person's omission to exercise a right he shall be treated as having been made a disposition at the time …”
With great generosity it says at the end of the clause that if this was not deliberate, the clause will not take effect. Perhaps I am not being quite accurate there. It is that if the assumed and fictitious transferor is able to show that the omission was not deliberate, the transfer does not rank for taxation.
I have a horrible feeling that when the Chief Secretary and the Financial Secretary were being briefed by their departmental chiefs on Clause 18, the Chief Secretary suddenly said “We have not dealt with the case of someone who omits to exercise a right.” He turned to the Financial Secretary and said “Just run off a clause on this.” The Financial Secretary did so, and so we get this rather vague and, I think, extraordinary subsection.
When the Financial Secretary handed back his draft to the Chief Secretary, the Chief Secretary said “We must say something about it being deliberate or nor deliberate” . Thus the last line was added straight off the cuff. That must be how this subsection got into the clause in such an extraordinary form.
The omission to exercise a right may arise in all sorts of instances. I suspect that what the Chief Secretary had in mind in requiring this subsection in Clause 18 was someone failing to exercise the right to take up shares in a company. That is obviously what he had in mind. He shakes his head. I do not know whether he says that he did not have that in mind, or whether he means that he had a lot more in mind. If he did not have it in mind, I commend that to him. It is the only case in which it [column 551]would be reasonable to have a subsection of this kind.
The words are, “omission to exercise a right” . There may be inumerable rights—in contract, in tort, in marriage law—all sorts of rights if we are thinking of legal rights. It may be any sort of right—a moral right, a spiritual right. We have tried in the amendments to pin this down a little more.
For example, suppose the Chief Secretary is knocked down by a bus——
Mr. Joel Barnett
—as he goes out of the House. There are buses running today, I understand. Yesterday, I could not have given this example. In his generosity, although he is knocked about very badly—he has lost a few teeth and broken a few ribs—he says, “Never mind, it might get the driver into a lot of trouble. I shall not sue London Transport for it. I shall omit to exercise my rights against London Transport” . He would be chargeable for capital transfer tax because he is omitting to exercise a right.
Let us suppose that outside the House I say some very rude things about the Chief Secretary, I slander him, or I write horrible libellous things about him. In his generous way, he says, “No, I shall not sue the right hon. Member for Crosby. I know that he did not mean it. I shall omit to exercise my right to claim damages from him.” The Inland Revenue officials will come down on him for tax on that omission to claim damages.
Next, let us suppose that the omission is not deliberate, that a person has a claim for damages against somebody and not deliberately but by omission and negligence he lets the limitation period run out for taking action. What is the position then? It is not a deliberate omission to exercise a right, although it does have some deliberation about it.
One could go on multiplying these occasions. What is the position of a child who suffers damage during birth through the negligence of a surgeon? Perhaps that child would have a claim for damages against the surgeon. If the mother gave up the right to claim damages against the surgeon, the child would have a tax claim round its neck for the rest of its life.
The Chief Secretary must look at this clause again. We have suggested in Amendments No. 646, 788 and 443 some [column 552]ways in which to restrict this vague statement “a right” . For example, in Amendment No. 788, we suggest that after the word “right” we should insert the words:
“to acquire capital in relation to stock, shares, debentures or similar securities” .
which I think is the occasion which the Chief Secretary had in mind in requiring this subsection. Alternatively, under Amendment No. 443, we say
“leave out from ‘right’ to end of line and insert ‘if the sole or main reason for the omission was to confer a gratuitous benefit on that other person’” .
This is probably the way to solve the problem of this subsection. After all, what we are looking for is a gratuitous benefit transferred by the transfer or to the beneficiary. Let us pinpoint that in this clause and say that if somebody does omit to exercise a right, and if “the sole or main reason” for it is “to confer a gratuitous benefit on another person” , it will be a transfer of value chargeable to tax. I should have expected the Chief Secretary to jump at some elucidation of the clause in that way.
Finally, we come back to our old friend the burden of proof. It is more important in this case than in the other two cases, which have amendments on the subject. It will be extremely difficult for anybody to prove a negative about whether the omission was deliberate.
The last line of subsection (7) reads:
“… unless it is shown” ——
shown, I presume, by the person who would be responsible for the tax if it is not shown—
“unless it is shown that the omission was not deliberate” .
It is asking an awful lot of anybody to try to prove a negative of that kind. That is why I have put down Amendments Nos. 439 and 440 to change “unless” to “if” and to leave out “not” . Then the subsection would read—
“if it is shown that the omission was deliberate” .
This is taking too far the rules which the Chief Secretary propounded in our earlier debates that it was a common practice in tax law to put it in the negative form and require the taxpayer, or the potential taxpayer, to prove a negative. The Chief Secretary should turn it to the positive.[column 553]
Mr. Joel Barnett
I may be able to help the Committee. The right hon. Member for Crosby (Mr. Page) gave us some examples whereby, once again, by being hit by a bus, falling over a cliff, being knocked over a cliff, or meeting my end in some way which, I am sure, no hon. Member wishes upon me, I might have a claim against somebody for causing my sad end, and he said that if I decided to waive that right to claim my generosity could result in my having to pay capital transfer tax on my waiver.
That is the burden of the right hon. Gentleman's argument, except that he gave us another example which has been quoted in various context of a man exercising a right not to vote against a motion on a board of directors or a company. But what the right hon. Gentleman has omitted to notice is that he seeks to ensure that my generosity is not subject to capital transfer tax, and I am happy to tell him that under subsection (4) that is already met.
Mr. Graham Page
It happens to be true. I am bound to say it again if it happens to be true. Subsection (4) excludes liability if there was no intention to confer a gratuitous benefit and the transaction was at arm's length between unconnected persons. If I had a claim against the unconnected person who accidentally caused my sad end and I refused to exercise that claim, I am happy to tell the Committee that there would be no liability to capital transfer tax on my refusing to exercise that right.
I can see from the look on the face of the hon. Member for Kingston-upon-Thames (Mr. Lamont) that that does not altogether satisfy him. I shall have to wait until we hear some other examples. I can see that the hon. Member for Cirencester and Tewkesbury (Mr. Ridley) and the hon. and learned Member for Dover and Deal (Mr. Rees), who I am not at all surprised is restless in his seat, are eager to give me some more examples of generosity that might perhaps be caught. I ask them to look at the way in which subsection (4) seeks to protect the generosity, of which the right hon. Gentleman spoke, apart from which there is always the right of appeal if by some mishap the inspector of taxes is not as bright as the right hon. Gentleman or the commissioners. [column 554]
Despite the readiness off the mark of hon. Gentlemen on the Front Bench below the Gangway, I hope that they will realise that subsection (4) gives the necessary protection and that the right hon. Gentleman will feel that his point has been fully met.
The Chief Secretary is again indulging in wasting time. If he intends to spell out the constituencies of hon. Members on this side who wish to speak every time he sits down that will take at least five minutes on every amendment, and it does not achieve any purpose. That sort of threat does not stop us from continuing the debate.
Tonight is the night which perhaps, apart from anything else, will be remembered, because we discovered the birthday of the hon. Lady the Member for Welwyn and Hatfield (Mrs. Hayman). I am sure that the whole Committee would like to wish her a happy birthday when the anniversary of this tax comes round again. It could become known as “the Hayman tax” .
I was interested to hear the Chief Secretary say that he did not want to hurt anybody on the hon. Lady's birthday. This is relevant to the amendment, as I have shown, Mr. Crawshaw, but it is terrifying that the Chief Secretary should in an unguarded moment after dinner—after he has eaten his sausage roll or whatever he has—admit that the tax does hurt people. That is the first time that he has done so. So we have a major milestone in our consideration of the Bill. We have at last got the Government to admit that this is a hurting tax with the motive of hurting. That is something that they have not said before. I am grateful to the Chief Secretary for at last coming clean on the motive for this tax.
If, for example, the Chief Secretary with the particular regard he has for the hon. Lady the Member for Welwyn and Hatfield, were by mistake to knock her down in the scramble to get out of the Committee room for dinner at a quarter past seven and perhaps break her leg she, out of her regard for him, might or might not sue him for damages. It could be held, as I understand it, that she was making him a gratuitous transfer by not proceeding. It would depend on motive, but she would have to prove why she had not sued him. This seems to me to put the hon. Lady in an extremely difficult [column 555]position. She is in a considerable position of embarrassment already from what the Chief Secretary has said.
Mr. Graham Page
The hon. Lady would have to prove why she did not sue the right hon. Gentleman and he, too, would have to prove why she did not sue him, according to this clause, because the transferer or the transferee may be liable. We do not know which.
I am as always grateful to my right hon. Friend for adding that degree of legal expertise to my knowledge of these matters, but I think it is likely to be caught by this clause as something which we should consider.
I should like to give another example, as the Chief Secretary said that I was going to and I always try to come up to the Chief Secretary's expectations, and that is that the Secretary of State for the Environment has said to the councillors in some place—does any hon. Member remember the name of the place?—called “Clay Cross” that they may be excused for a debt which they owed to the Revenue for not having collected rents in accordance to the law at some stage. I imagine that the right hon. Gentleman will be reaching for his cheque book to pay capital transfer tax on his failure to claim a right here in the case of the Clay Cross councillors.
I am aware that I am stretching this a little far, but it is relevant. If one is to perform an act of generosity or let people off some obligation and one's motive is political—if that is the right way to describe what the Chief Secretary has just said—it is to confer a gratuitous benefit, as was the motive of the Secretary of State for the Environment. It was to confer a gratuitous benefit on the councillors of Clay Cross because they could not afford to pay the surcharges levelled upon them. So he has conferred a gratuitous benefit upon them. I admit that this was done in his ministerial capacity, but the point illustrates the danger of the clause which the Chief Secretary is recommending to us.
The third example is that of gambling debts. This ought to be explored, because I am advised that this is one of the best ways round this tax. One either has to go to a married [sic] guidance counsellor or a tax avoidance counsellor to get round this tax. We are all aware of that, but the industry is developing fast. In fact, it is the only [column 556]growth industry that there is under this Government. I am not going to talk about marriage yet, but later in the proceedings on the Bill.
If I fail to claim a gambling debt from somebody to whom I want to make a gratuitous capital transfer, is that a gratuitous capital transfer for which I have omitted to exercise my right? I ask it as a question because I want to be straight about what the position will be if I win a large sum of money at baccarat, which I do not know how to play but, as is usually the way with gambling, there is always beginner's luck, and fail to collect from the croupier those heaps of beautiful marble chips which in right were mine, would I be accused of having given the croupier a gratuitous transfer and be liable to pay tax on what I had not collected from him, particularly if it was discovered that I had some connected person's relationship with this croupier? Nobody could accuse me of that! But the Chief Secretary gets the point I am trying to make.
Those are the questions I have to ask the Chief Secretary on this subject, and I hope that he will give satisfactory answers.
Like my hon. Friends, I have not been very reassured about this subsection. My hon. Friends have pointed out the obvious defects in draftmanship, but I shall reinforce the point with one or two practical examples. But before I do so I must say that I have considered, as deeply as I could in the time available, the reassurance which the Chief Secretary has endeavoured to offer us.
I am not at all reassured, because I do not quite know what the courts would require in the way of proof to demonstrate that a person did not intend to confer any gratuitous benefit on some other person. So, for the benefit of the Committee and, I hope, of the Chief Secretary, I should like to give three or four examples so that we may have the Chief Secretary's views and be reassured that this subsection has been sufficiently narrowly drawn.
Let us suppose—this may be well within the experience of hon. Gentlemen—that a widow has been left by her husband a substantial shareholding in an unquoted family company where the family are shareholders. Let us assume [column 557]that, subject to the squeeze on company profits, to which so many companies have been subject over the past year, a squeeze accentuated by the ill-judged Budget we had to endure in March—such a company proposes a rights issue.
Let us assume that the widow would like to take up her rights issue so that her share of the equity is not diluted. Upon reference, her bankers say “We cannot, alas, provide you with sufficient cash to do this.” She consults with her lawyers and accountants—perhaps even with the Chief Secretary in his moments of leisure away from ministerial responsibility—and is advised “If you do not take up the rights issue, it will mean a diminution in your share of the equity, but the other members of the company are members of your family so perhaps you do not mind overmuch.” So the unfortunate lady passes up the rights issue.
That lady will have omitted to exercise a right and it may be that she will say “So be it, but it will benefit other members of my family.” Can she then take advantage of the let-out in subsection (4) and say that she has not conferred, or intended to confer, any gratuitous benefit on any other person? I suggest not. I do the best I can with the two subsections and I am very worried on behalf of that widow. I have no doubt that one could multiply the instances.
Let me give another example so that we may canvass the Chief Secretary's views. Let us assume—this is a hypothetical case—that a Minister of the Crown, is the subject of a scurrilous attack in a newspaper which accuses him of operating a Swiss bank account, calculated hypocrisy and accepting bribes from a Communist State. On the assumption that all those allegations are untrue, the Minister would have an enormous claim in damages against the newspaper. He has a right of action.
However, supposing the Minister is advised by those skilled in such matters that if he were to go into the witness box, as assuredly he would have to do to substantiate his claim, and be submitted to the rasking cross-examination of competent counsel, he would be made the laughing stock of the country. Let us assume that the Minister does not choose to exercise his right of action against the newspaper. Can he say that he did not [column 558]intend to confer any gratuitous benefit when, quite clearly, he has conferred a benefit upon the newspaper. He has not exercised his right of action against it.
Mr. Denzil Davies
The hon. and learned Gentleman is postulating a case where a politician has a right to sue the newspaper. I suggest to him that the giving up of that right, or the failure to exercise that right, does not diminish in the least the value of the politician's estate, because that right cannot be transferred; it cannot be sold; it is personal to the politician and is worth nothing until the money comes in.
This is a very interesting point. I have no doubt the hon. Gentleman will be able to develop this. He has, perhaps, given an interesting line of thought for the Chief Secretary. Let me offer my humble view on the point. Supposing the Minister in question has been advised by his lawyers that he has a virtually cast-iron right of action—we all know that there are hazards of litigation—in other words, that he could recover a very large sum of damages. His estate has, as it were, at that particular point of time, an asset in that it has a right of action against the newspaper which might be satisfied by a very large sum in damages.
I suggest—but of course we must hear from the Chief Secretary—that such a Minister's estate has been diminished. I would suggest that, if the paper is in the hands of a personal proprietor, that proprietor's estate has been increased, because there is no longer the corresponding debt. If the Minister does not choose to exercise his right, this massive claim which would go to diminish the newspaper proprietor's estate has evaporated. I should be interested to hear the Chief Secretary's view on that.
Let me give another example, which I hope is not too fanciful. Let us assume a lady very much in the public eye who wishes to provide for her old age. Let us assume that, because she is fortunate in these matters and understands the vagaries of the property market, she takes an option to acquire a slag heap which might be suitable for reclamation as development land. Of course, this is an entirely hypothetical instance, but it is only by multiplying these instances that we can get a view of the scope of the subsection from the Chief Secretary. Let [column 559]us assume such a lady. Of course, she cannot exist in practice. I take the rather far-fetched example because only in this way can one exemplify the finer points of drafting and construction. Let us assume such a lady taking such an option, on very good advice, to provide for her old age, to acquire this slag heap at then current market prices.
No. My hon. Friend the Member for Cirencester and Tewkesbury (Mr. Ridley) perhaps makes this too absurd. We all know now the value of slag heaps, and even this lady, preoccupied though she might be, as I assume, with the great affairs of State, has such an option. Let us assume that the market soars and the advantages of slag heaps and all that may be done with them become more apparent to the general run of us. Let us assume, however, that she is so preoccupied with affairs of State that she finds no time to exercise her option.
Mr. Brian Sedgemore
On a point of order, Mr. Crawshaw. I am sure the hon. and learned Gentleman knows about the laws of libel the same as everyone else and, in addition, knows about the laws of privilege of the House of Commons. If in fact the hon. and learned Gentleman were to take his courage in his own hands, which is something that he rarely does—we have heard this sort of innuendo on the Floor of the House only recently in respect of the Chancellor of the Exchequer—the two people to whom he is alluding could readily be identified. If they were identified outside the House of Commons and the hon. and learned Gentleman were to make that statement outside the House, this would be the most vicious libel.
Is it not the function and, indeed, the prerogative of the Chair to save the reputation of individuals inside the House when that which is said would, if it were said outside, be a terrible libel and they would have a chance to answer back? Should we not at the very least invite the hon. and learned Gentleman—who takes his profession very lightly, so it would seem, and his allegiance to the Bar Council and his oath to that noble and learned profession to which he belongs—to stand outside the doors of this House, or perhaps outside on the parapet there and to make this statement and hope that as he [column 560]makes it he does not suffer from vertigo and fall into that dirty river outside.
Sir John Hall
Before you rule on that point of order, Mr. Crawshaw, would it be advisable to ask the hon. Member to state the libel of which he is complaining?
Perhaps it might save time if I speak to the point of order. Until my attention was drawn to it, I had not associated it with anybody in particular. As it has now drawn my attention to a certain person to whom hon. Gentlemen might be referring, I think that that lady is a Member of the other House, if I am right in the suggestion that is being made, and it is in that respect that I fear that perhaps we should not pursue that particular matter.
I ought perhaps to remind the hon. Member for Luton, West (Mr. Sedgemore) that I have not heard anything at all which with my frail knowledge of the legal profession seeks to come anywhere near slander or breaching the privilege of the House of Commons as far as I understand it.
Further to that point of order, Mr. Crawshaw. Before the hon. Member for Luton, West (Mr. Sedgemore) seeks to defenestrate my hon. and learned Friend, may I ask in what way it is libellous to suggest that somebody has bought a slag heap?
Order. This is nothing to do with the Finance Bill. The hon. Gentleman is dealing with something that is nothing to do with the matters in hand. The hon. Gentleman's point of order has been answered from the Chair. I hope that it will be left there and that we shall proceed with the Finance Bill. I would remind the hon. and learned Member for Dover and Deal (Mr. Rees) that perhaps he has gone far enough with his illustration. He might have more pertinent illustrations for the Finance Bill.
Further to that point of order. It is perfectly in order in citing this interesting hypothetical situation, which would give rise to a possible charge to tax, if the person my hon. and learned Friend is talking about failed to exercise her right to cash in on a profitable piece of slagheap speculation. I should like to ask how it could conceivably be that my hon. and learned Friend is veering close to any wind by suggesting that it is wrong to speculate [column 561]in slagheaps. As far as I know, there is no offence and nothing libellous about the practice by which it is perfectly possible to make money in a reputable and thoroughly honourable fashion.
The hon. Gentleman cannot have heard what I said. He has said what I said a few moments ago. There was nothing slanderous in the least that I had heard, and I hope that the hon. and learned Member for Dover and Deal (Mr. Rees) will draw his illustration to a close and give us more illuminating examples.
I am extremely grateful for your ruling, Mr. Crawshaw, and, indeed, for your protection from the gross innuendos of the hon. Member for Luton, West (Mr. Sedgemore), who we know has a fevered imagination from his long association with newspapers like Private Eye, which give him a slightly slanted and unusual view of life.
I had hoped that by taking a rather unusual set of facts so far to remove it from reality that, though I could exemplify the legal point which is important, I would not offend the delicate sensibilities of the hon. Members opposite.
Since the hon. Member for Luton, West has shown himself to be a person of greater sensitivity than I had realised from our debates over the past year, let me immediately change the facts and say some gentlemen involved in public life and let us say, not a slagheap, but a gravel pit. I hope that this will satisfy the hon. Gentleman and that he will acquit me of any malicious intent, which was far from my mind.
It has been suggested from the other side, particularly by the hon. Member for Bebington and Ellesmere Port (Mr. Bates), that we are guilty of filibustering. When I have endeavoured with such parliamentary skill as I can command to produce an example which would enable the Chief Secretary to give us a reasoned discourse on the scope of subsection (7), to have an ill-timed interjection from the hon. Member for Luton, West is more calculated to waste time than any number of well-founded, wellthoughout points from this side of the Committee.
Mr. Alf Bates
Go home early.
I shall take my own time. The hon. Gentleman for Bebington and Ellesmere Port, who has not been noted [column 562]for his contributions, would find it tiresome indeed to sit behind Government Whips and restrain his ardour, but I am bound to say that the only intervention of his that I have heard in this Committee stage bore so little relationship to our debates that I wondered whether he was conscious of the kind of Bill we were debating at all.
It was— “Why cannot I take that £5,000 too?”
The real answer is that the industry has neither the wit, nor the enterprise, nor the capacity for taking risks that justify that kind of reward. As long as he is prepared to be a parasite on the public purse then he shall get the reward he deserves.
Now perhaps I can resume my theme, because I had hoped to outline for the Chief Secretary three examples, to which I shall expect a reasonable reply. I should like to return to my example of the gentleman in public life fortunate enough to obtain an option to acquire a gravel pit.
Let us assume that, oppressed by the cares of public life, that gentleman misses his opportunity and finds that the pressure from his bankers and their reluctance to assist is such that he cannot raise the money to take up his option. What then? He has omitted to exercise a right. The Chief Secretary may say that he does not intend by this omission to confer any gratuitous benefit on any person. Is that a complete answer? When he fails to exercise his option, he must be conscious that the person who granted the option may be that much better off because he may have then realised the possibilities of this particular asset and may wish to develop it for himself. Has he not then conferred a gratuitous benefit on the person who granted him the option?
It is to be hoped that in an uncontroversial and helpful way I have outlined three practical examples which demonstrate the extraordinary width of this subsection. My hon. Friends have suggested several ways in which it could be reduced to more realistic confines. I hope that the Chief Secretary will apply himself seriously to this problem and endeavour to give us the reassurance to which we are entitled.
Mr. Norman Lamont
I wonder if I could just briefly touch on one example of [column 563]the person omitting to take up, or waiving, a right which could have serious consequences for many small businesses. My hon. and learned Friend the Member for Dover and Deal (Mr. Rees) cited the example of someone failing to take up a rights issue. I see the argument he deployed but in such a situation the company itself is trying to raise money and the fact that someone forgoes the rights issue will not necessarily be to the advantage of the company.
The example I should like to give is one where a person omits a right with considerable advantages to the family business in question, and here I am referring to the simpler question of waiving a dividend. As the Chief Secretary will be aware, many small businesses, close companies or private businesses in which a family has a large stake are those suffering from liquidity problems at present and which have, in the past, been helped by the shareholders foregoing their dividends. That is the way that businesses have been built up and in which some businesses have managed to surmount the liquidity crisis at present.
From a reading of the clause, it appears to me that if shareholders forgo a dividend it will come as a gift to the company, which seems to me to be a serious problem for family controlled businesses. If, as I suspect, the whole thrust of the tax will be to diversify shareholdings of private companies more and more it is a problem that could become more and more serious as time goes on.
It could be argued that the waiving of the dividend was a way of avoiding tax, but surely in such cases the company would invariably fall within the close company provisions. In that situation the Revenue has adequate powers already to take appropriate action if it thinks that the waiving of dividends is being done purely for tax avoidance reasons.
I hope that the Chief Secretary will say something about this matter, because it is most serious and, although my right hon. Friend's amendment is not confined specifically to this point, there are arguments for saying that something should be written into the Bill relating specifically to dividend waivers.
I know that some hon. Members have actually taken this matter up with the Chief Secretary, and I have a reply that he wrote to one hon. Gentleman about this. The right hon. Gentleman's reply is not exactly crystal clear. He appears to confirm that a dividend waiver would in [column 564]most cases constitute a transfer for the purposes of capital transfer tax but that the exact tax position would depend on whether the person's estate was not diminished. That was how he put it, but it would appear more or less to be confirmation that in most situations of the type I have described where a family forgo a dividend in order to contribute to the development of the business or to surmount the current liquidity squeeze, they would be creating a liability to capital transfer tax.
This is a very serious problem. When one compares the Chief Secretary's reply with the reply from the Financial Secretary yesterday when he was speaking of people peeling off strips of their businesses and giving away £2,000 each year in the early stages of business, it makes one a little worried that perhaps the Front Bench does not really understand the way in which small family businesses have to be built up by retentions of cash in the early years.
Ministers seem to think that tax can be paid by peeling off bits of the business and that dividends can be paid out to the directors in the early stages. I ask the Chief Secretary to address himself seriously to the problem, because it is one which could have a very serious effect on many family-controlled businesses.
I wish to raise two examples in relation to this subsection where I think there is a justifiable reason for concern. I apologise if these points have been made before. I have not been able to follow all the exchanges in the Committee over the last few minutes.
In order that the Chief Secretary can see that I am trying to be as fair as possible, may I say that I originally felt that the amendment proposed by my right hon. Friend the Member for Crosby (Mr. Page) was justified because of a rights issue? On closer examination I am prepared to accept that it is not on that ground alone. I can see that there could be a case where a rights issue was deliberately not taken up, perhaps through lack of funds so that the value of one person's estate is diminished but the value of another person's estate is not increased.
I accept that if the rights issue is assigned in normal times there is a transfer of value. I suspect that at the moment there is not, but in normal times there [column 565]would be. I do not, therefore, rest my case on the rights issue.
There are two examples where it seems to me that perfectly harmless transactions would be hit by this clause. The first is in a case where a person has a right to dispute a will but does not take up that right, perhaps because he does not want to hurt the feelings of the person who has benefited by the will, as he thought wrongly, or perhaps because he does not even want to affect the assets of that person because, for family or other reasons, he feels that that person needs the assets.
The value of that person's estate has been diminished, and the value of the substance of the person whose legacy he could have disputed is increased. I should like to ask the Chief Secretary whether in that case it is assumed that a transfer of value takes place, and therefore the act of kindness by the person who does not dispute the will causes him to pay some element of capital transfer tax.
The second example comes fairly close to my own constituency in relation—I move into what may be a controversial area—to agricultural tied cottages. I am not going into the arguments about agricultural tied cottages, but I will apply it to this one case.
There could be and, indeed, often have been instances where a farmer would be perfectly entitled to obtain possession of an agricultural tied cottage because the particular worker had ceased to work for him and he had another worker who needed a cottage, but he did not do so out of his sense of loyalty to the worker who had retired. As far as I can see, he has a right to that tied cottage. Therefore the value of his estate has been diminished. The value of the estate of another person—namely, the tenant of the tied cottage—has been increased and by his act of kindness, again he is finding that he is liable to capital transfer tax.
These are two illustrations where, as I read the clause, somebody who is taking a perfectly reasonable approach to affairs will find, by acts of kindness, that he is affected by capital transfer tax. I should be grateful if the Chief Secretary would address himself to those two points and let me know whether my reading of the clause is wrong. If my reading is right, I am bound to say either that my right hon. Friend's amendment is [column 566]correct or, at the very least, that this subsection is defective.
I rise briefly to help the Chief Secretary by commenting on the point raised by my hon. Friend the Member for Kingston-upon-Thames (Mr. Lamont) about dividends. As I understand it, one cannot waive the right to a dividend once it has been declared, and, of course, until it is declared, one does not have a right to it anyway because it does not exist, so no CTT, as I see it, could arise in a case of a waiver of dividends, because at the time that one would have the waiver there would be no right, and once one has the right one cannot waive it. If my reading of the situation is correct, no CTT would arise, but perhaps the Chief Secretary would like to comment on that.
Mr. Joel Barnett
I shall try to deal with every point raised, and I shall do my best to deal with them as seriously as have all hon. Members.
The hon. Member for Cirencester and Tewkesbury (Mr. Ridley) gave the example of one of my hon. Friends having a claim against me because I knocked her down and she broke a leg, but she was generous enough not to claim. The hon. Gentleman suggested that she might be liable, because of that generosity, to capital transfer tax on the amount she might have forgone. I dealt with that point earlier when another example was given in which I had been brought to an untimely end—or near to an end—by an accident and I, equally, had refused to claim. I pointed out—I thought to the satisfaction of the Committee that under Clause 18 (4) there would be no question of any liability to capital transfer tax because there would have been no intention
“to confer any gratuitous benefit” .
There could in certain circumstances be an intention. The point of my analogy was that there was an intention to confer a gratuitous benefit.
That is an entirely different circumstance. With respect, all that the hon. Gentleman gave as an example was that my hon. Friend in a certain incident of which the hon. Gentleman gave us a graphic illustration decided to forgo a right to claim against me. In those circumstances, I say again, because of Clause 18(4) there would be no liability. I said exactly that. [column 567]I do not know why the hon. Gentleman is looking so puzzled.
Sir John Hall
I am a little puzzled. The clause, says that the transfer “was not made in a transaction intended, to confer any gratuitous benefit …” .
First, the hon. Lady damaged in an accident and having a right to action—probably a successful right of action—intends to confer a gratuitous benefit. I agree that this might be covered by the next part of the same subsection which refers to connected persons, but the situation might be very different if the lady concerned were the right hon. Gentleman's niece, for example.
I should be delighted if the lady, my hon Friend, had been a niece, a sister or a cousin of mine, but she is not. We are talking about the incident that was graphically described. The question was put to me with serious concern that the person in question might be liable to capital transfer tax. I have been able to assure the Committee that it is not so. I do not know why that should worry the hon. Gentleman. I am telling him that that is not so under the clause.
I understand that in certain instances the hon. Gentleman's interpretation of this subsection may be different from mine, but, with the advice of those who help me on these matters, I can only help the Committee as best I can by assuring it that in the circumstances described there would be no liability to capital transfer tax.
I move on to the second example, the serious case of the Revenue failing to exercise its right against any number of councillors against whom it could claim because they had offended against a particular section of the law. That [sic] the Revenue would not be liable to the tax in any case. We are talking about individuals liable to tax, not about bodies such as the Inland Revenue. I am sure that the hon. Member for Cirencester and Tewkesbury (Mr. Ridley) and the Committee will be delighted to know that it would not be affected.
The third and most interesting example given was the failure to collect a gambling debt from a croupier. I am happy to say, that quite apart from anything in the capital transfer tax, failure to collect a gambling debt would not apply—I hear the right hon. [column 568]Lady muttering—because there is no enforceable right. There would be no liability.
Mr. Graham Page
The clause nowhere says a “legal right” —only a “right” .
It may be as the right hon. Gentleman says. But there is certainly no enforceable right. We are talking about an option and a right to give. There is no right to accept or receive. There can be no legal right as regards the croupier.
If the croupier gives me a cheque for my winnings and it bounces, there is a right and I can pursue the issuer of that cheque in law until I collect it. If I refrain from pursuing that right in law, I make the croupier a gratuitous transfer.
What I like about the hon. Gentleman is the way he rapidly moves from one point to another. He has now moved to an entirely different point. In certain circumstances—it would depend on the case—the hon. Gentleman, being the generous man that he is, was seeking to make a donation, a gift, a transfer that could be caught under the Act. There is nothing fresh or new about that. If the hon. Gentleman seeks to give his money away to croupiers, far be it from me to prevent him.
The hon. and learned Member for Dover and Deal (Mr. Rees) told us in his affable manner that he has no wish to waste the time of the Committee, and certainly I have no wish to accuse him of misleading the Committee in any statement that he cares to make. I accept that, and I shall deal seriously with the points that he raised.
The hon. and learned Gentleman said he has not been reassured so far. I know that he will accept from me, in the best possible spirit, that I have found it over the years extremely difficult to satisfy or reassure him. If I do not manage it this time, I hope he will forgive me. However, I shall try my best.
The first case the hon. and learned Gentleman raised was the failure by a widow to take up a rights issue, let us say, because of the lack of ready funds. Again, in those circumstances there would be no intention to confer a gratuitous benefit on any person, and there would be no liability to capital transfer tax under Clause 18(4). I may, with luck, have reassured the hon. and learned Gentleman on that point. [column 569]
The second point concerned a claim for damages against a newspaper. Perhaps the hon. and learned Gentleman has a right of action against a newspaper which he gives up. He decides generously not to proceed against the newspaper—or perhaps not generously, because he feels that he does not want to go to court and pursue the case because the newspapers may have some facts he does not like brought out, or for some other reason——
Supposing the newspaper is run by his son.
If I may finish the comment I was making, I think it will entirely meet the point raised by the hon. Gentleman as well as that raised by his hon. and learned Friend. When he gives up that right of action against the editor of some great paper, who happens to be his son, if it is not a transaction intended to confer a gratuitous benefit it will [sic] be liable to capital transfer tax. If, on the other hand, there is such an intention, he will be caught by the capital transfer tax.
I take the starting point that the hon. and learned Gentleman fairly did, that he does not like the tax but we are debating it. If the transfer had been made gratuitously with the intention of conferring a benefit it would be liable to the capital transfer tax. But in the type of case he described to us I am happy to say that it would not be caught.
Let me turn to the interesting instance of a man who had a right to a gravel pit and did not exercise the right to take it up. I could think of some interesting other examples, but I do not wish to burden the Committee with them because they are on precisely the same issue. I know that the hon. and learned Gentleman did not wish to make any innuendoes, as he told us, and I believe every word he tells me. I am that kind of naive person, and I know that he would not tell untruths to the Committee.
Mr. Peter Rees
That is putting it too far.
I am sure that he will agree that he would not wish to tell untruths to the Committee. I see that he is nodding, so we shall assume that there was no innuendo intended. I am glad to have his agreement. We are talking now [column 570]about a fictitious person who had a right to a gravel pit which he failed to exercise.
I am happy to tell the hon. and learned Gentleman, who he would not wish that person to be liable to capital transfer tax unnecessarily, that if there was no intention to confer a gratuitous benefit he would not be liable to capital transfer tax, and, indeed, the example he gave, as with a number of others, is on all fours with many of the examples put forward this evening.
The hon. Member for Kingston-upon-Thames (Mr. Lamont) gave us the example of a person who waives a dividend. As he fairly said, in the case of close companies it happens frequently. It certainly happened with the companies that I advised from time to time in the past—those marvellous days in the past. It was certainly true that it was reasonable to advise such a company from time to time, in certain circumstances, not to declare dividends, properly and quite honourably, and therefore save certain tax liabilities.
Mr. Norman Lamont
I am sure that the right hon. Gentleman did not wish to confine himself to declaring dividends.
I take the point. What frequently happens in a family company is that it would not get to the point of declaring the dividend. It simply would not declare a dividend at all. More often than not, it would not get to the point of declaring one and waiving it. I see the hon. Gentleman nodding assent.
But if a dividend had been declared in a close company and the company waived it to save tax, I assure the Committee that because it did it for that reason and was not intending to give any gratuitous transfer, there would therefore be no liability to capital transfer tax. As I said in my letter, for which the hon. Member has the advantage of me—I send one or two letters out from time to time and I cannot recollect the one to which he referred—if the estate is diminished in giving the gratuitous transfer, there would be liability to capital transfer tax, because that is what it would be—a transfer caught under capital transfer tax. That is an entirely separate matter, as I am sure the hon. Member will understand. He talked of the waiving of a dividend, or not [column 571]declaring a dividend for the purpose of saving tax.
I am pleased to see that the hon. Member for Norfolk, South (Mr. MacGregor) in his customary reasonable manner, noted the arguments that I deployed a little earlier. The first case he put to me was that of a man or woman who did not want to take up a right under a will. Again his or her estate would be diminished but there would be, I assume, no intent to convey a gratuitous transfer. In those circumstances, I am sure there would be no liability to tax.
The second example was the agricultural tied cottage where, out of the kindness of his heart the hon. Gentleman sought to give up that right. In certain circumstances, one can see that his estate would be diminished and that he could be giving a gratuitous transfer. But every case will depend on the circumstances.
I was raising the case of the possible right to dispute a will in the first case. The Chief Secretary has just said that there would be no intention to confer a gratuitous benefit. But my point is that there would. The person was not taking up his right to dispute the will because he wanted to confer the benefit on the person who had benefited under the will, for the reasons I gave.
The answer is clear. Many gifts are given out of pure kindness of heart. In the instance the hon. Gentleman has given, it would be a straight transfer with the intention of having his estate diminished and giving a gratuitous benefit. In the instance he now describes it would be on all fours with any other gift or transfer.
It is a most unfortunate consequence of this parliament of the Bill that acts of kindness are adversely affected in that way, and probably are thereby prevented. The response the Chief Secretary has given on the first point shows that this is a serious defect in this subparagraph of the Bill.
Next, the agricultural tied cottage, which is relevant to later parts of the Bill. The Chief Secretary said that the Inland Revenue would look at each case individually to judge whether it was a gratuitous benefit. From the answer he [column 572]has just given on the right to dispute a will, it appears that the Inland Revenue has no possibility of taking a beneficial view. In the case of an agricultural tied cottage, if the farmer needs that cottage for somebody else but allows the original tenant to stay on for as long a period as possible after his retirement, that must be the conferring of a gratuitous benefit.
But if I am wrong in that and if the Chief Secretary is saying that the Inland Revenue has discretion to take a view, is he saying that under Clause 36 a deliberate decision to let someone live in a rent-free cottage for fair and generous reasons is one on which the Inland Revenue has a discretion to decide whether it is a transfer of value or not?
As I said at the beginning, in every case the matter will have to be decided separately, because it is not easy to decide whether there has been a transfer of value. If there has been a transfer of value, and all the other conditions apply, he will be caught.
On the question of the will, perhaps I can help the hon. Gentleman here. But let me hasten to assure him that a transfer is often made for kind and generous reasons. It is not always so, but it is often the reason under the estate duty, and that is why estate duty in many instances simply was not paid. That is one reason why we are to have a capital transfer tax.
Where there is a dispute under a will, there are two years to give up a legacy under that will. I assume the hon. Gentleman takes the point, and I know the right hon. Lady does because of her knowledge of the law. As there are two years in which to disclaim a legacy, there would be no question of the Revenue claiming tax on an omission to exercise the right to dispute the will in that sense. The example given by the hon. Gentleman was a totally different one and I think he shifted his ground.
The Chief Secretary misunderstood me.
Perhaps I misunderstood the hon. Gentleman. I am sorry. I thought that he was telling me that [column 573]the person in question was seeking to give a gratuitous benefit. It was not a question of a dispute, but that he was seeking to give that benefit. That is slightly different, but if there is any misunderstanding between us I apologise to him.
However, I hope that all hon. Gentlemen will agree that I have done my very best to help them on the excellent examples they have given to us. Under subsection (4) most of the examples, if not all of them, would be saved from the rigours of the tax.
Sir John Hall
There is just one point I should like to take up with the Chief Secretary. During the course of our exchanges one interesting factor that has emerged goes far wider than perhaps the Chief Secretary realises. In his explanation as to the effect on tied cottages and possible liability to capital gains tax, he said that the Inland Revenue would have to decide the various cases on their merit. That would seem to indicate to me that there could be occasions, perhaps many occasions, when a liability to capital transfer tax would arise. This is a very serious statement to make, because it leaves farmers all over the country in considerable doubt as to what action they might take.
We have a great deal of discussion from time to time about the tied cottage system, and there is no doubt that many farmers allow retired workers to stay on in their cottages, for all sorts of very good reasons. We ought to encourage that. If there is going to be the fear that farmers who do that might become liable to a capital transfer tax this will be most discouraging and have an effect that this Government would not wish to create.
Therefore, I think that the Chief Secretary ought to be a little clearer in answer to the point so cogently made by my hon. Friend the Member for Norfolk, South (Mr. MacGregor) on this issue of the tied cottage, because we do not want the message to go out from this Committee that there is a possible risk of a farmer incurring a capital transfer tax liability for doing something which everybody else is encouraging him to do.
Mr. Peter Rees
I am grateful to the Chief Secretary for endeavouring to [column 574]answer the point that we put to him. Even though I sketched out—with, I hope, a light touch—certain hypothetical examples, none the less the underlying legal point was a very serious one. It seemed to me that in almost every case the Chief Secretary was forced back to the position where he said that the words in subsection (4)
“to confer any gratuitous benefit on any person”
took that particular transaction outside the scope of capital transfer tax.
I would not wish to interrupt the deliberations which the Chief Secretary is having with the hon. Member for Welwyn and Hatfield (Mrs Hayman) because the point which I wish to make is quite a serious one. I would never wish to come between the Chief Secretary and the hon. Lady. If he wishes to confer with her then, Mr. Crawshaw, with your permission, I shall wait and try and catch your eye in a moment or two. If he wishes to listen to me, then perhaps I may proceed.
The point I am making is a serious one and I want a serious answer. I am prepared to stay here just as long—[Interruption.] If hon. Members opposite do not appreciate the points made from this side, it is simply because, as has become very apparent, with one or two honourable exceptions they have not applied themselves one whit to the Bill. I believe that that reflects upon the occupants of the Government benches. They are putting through a Bill which can do incalculable damage to the economic and social structure of this country, and to go like sheep into the lobby behind their Ministers without knowing at all in detail what the Bill attempts to enact reflects no credit on them whatsoever. If they wish to make the point that I am arrogant, let them get up and make it in a standing position and I will give way to them.
I wish to make a serious point and I hope that I shall get a serious answer, uninterrupted by uninformed comments from a seated position by hon. Members opposite. In almost every case the Chief Secretary—does the hon. Member for Luton, West (Mr. Sedgemore) wish me to give way to him?
I was just wondering, Mr. Crawshaw, whether the Committee really has to put up with the defence mechanisms of the inferior.[column 575]
If I may resume, the Chief Secretary in every case was forced back on to subsection (4) and he was compelled to say in almost every case that the omission to exercise that particular right would not confer any gratuitous benefit on the person against whom the right subsisted.
The point I wish to put to him is this. Would he please define what he understands the words “gratuitous benefit” to mean? Do they mean that some positive, quantifiable benefit in money or money's worth has to be conferred on a person? Or is it intended to cover, for instance, the mere conferral of what I will call a negative benefit? If one does not inflict upon the person the trouble and expense of litigation, leaving aside the possibility or probability that damages may result, in that situation, if one does not exercise a right, does one intend to confer a gratuitous benefit upon the person against whom the right of action subsists?
This is a very serious point, although it may have eluded the attention of hon. Members sitting on the Government benches. I should like a comprehensive and intelligible definition from the Chief Secretary of that very important phrase. May I suggest to him, in a constructive and helpful spirit, that, if there is any doubt on the point we should return to this on Report when he should attempt either to redefine the phrase “gratuitous benefit” , or alternatively to redefine the term “right” .
He will have noticed, for instance, that an amendment in the names of my right hon. and hon. Friends seeks to limit the term “right” in subsection (7) to, for instance, rights over property. That is just one suggestion. It is perhaps a probing amendment. But I should like the Chief Secretary first to attempt to define “gratuitous benefit” , so that we may understand just how much of a safeguard subsection (4) provides. If he is in any doubt about the subject, will he consider a redefinition of that on Report? As an alternative proposition, would he consider defining the word “right” for the purposes of subsection (7)?
Mr. Graham Page
It is possibly the fault of this side of the Committee that we have confused two separate subjects in discussing the amendment. The amendment and subsection (7) deal with a disposition, and only with a disposition. [column 576]We have been led, perhaps through our own fault or perhaps through the Chief Secretary's endeavours to explain it, into considering the gratuitous benefit. What the subsection says is that any omission to exercise any right—neither the omission nor the right is defined—shall be treated as a disposition It does not say that it shall be treated as a gratuitous disposition or as a disposition that attracts tax. But once it has said that statutorily there shall be this fiction that an omission to exercise a right is a disposition, the citizen is thrown back on to subsection (4) to prove positively that disposition is not a transfer of capital value which attracts the tax. But once it has said that statutorily there shall be this fiction, that an omission to exercise a right is a disposition, the citizen is thrown back on to subsection (4) to prove positively that that disposition is not a transfer of capital value that attracts the tax.
There are those two steps. I do not think that we are discussing the second step except that it is something into which the potential taxpayer is driven by this statutory definition of disposition. The clause is bad in this respect in defining what is an omission, or what is a right. We have given many examples that could come under the term “right” . But we ought not to be asked to create the statutory disposition in this way, which will put great liability on the parties concerned to prove negatives in order to escape tax.
Although I agree entirely that there may be instances when subsection (7) would be right and proper—an omission to exercise a right would be rightly described as a disposition—the description is so bad in this clause that the subsection ought not to stand part of the clause. I hope that my colleagues will join with me in voting against this subsection.
The agricultural tied cottage brings out one of the anxieties about this subsection. On later clauses I proposed to raise the subject of the agricultural tied cottage, because that is relevant to the giving of a benefit in property at less than the commercial rental value. But it comes out very strikingly here. It brings out the anxiety that there is a difference between the non-exercise of a right and the giving away of positive assets. [column 577]
If one says that all non-exercises of rights are the same as giving away positive assets, one seriously affects the way of life of many people, for this provision introduces a new element into acts of kindness. People have to start to put a financial calculation into specific acts of kindness.
If the Chief Secretary is worried about the non-exercise of rights in relation to, say, rights issues, he should accept Amendment No. 788. It would deal with the point that he has in mind, but it would not produce all the other detrimental effects, which many of us are beginning to recognise to be in this subsection.
Mr. Joel Barnett
I am beginning to think that the major difference between the hon Gentleman and myself is that I can see that if this clause and some of the subsections that we have been debating were not in the Bill, there would be substantial loopholes—as I think the hon. Gentleman recognised—whereby the capital transfer tax could be avoided.
The hon. Gentleman tells me that I have constantly been forced back on Clause 18(4). I do not know why that should concern him. I am trying to show the Committee that that is to the benefit of the person who is genuinely not seeking to gain a transfer of value for benefit. At last I see the hon. and learned Member for Dover and Deal (Mr. Rees) nodding. I am delighted. Therefore, the reason why I constantly go back to Clause 18(4) is that that subsection helps taxpayers who might otherwise have been caught under the capital transfer tax when there was no intention to make a gratuitous transfer.
Mr. Peter Rees
I know that the Chief Secretary has been under great strain for 24 hours. However, he seems to have missed my point.
I do not complain that he constantly goes back to subsection (4). But he has not convinced me as to the precise meaning of “intending to confer” any gratuitous benefit. It is that point on which I want him to focus.
Sitting suspended for Divisions in the House. [column 578]
10.26 p.m. On resuming—
Mr. Joel Barnett
May I perhaps try again to deal with two matters that were raised. The first is the tied cottage, which I know genuinely concerns hon. Members, and I shall try my best to help them. The other matter was raised by the hon. and learned Member for Dover and Deal (Mr. Rees) and concerned the definition of gratuitous benefits for value.
If a farmer allowed a tenant to live in a tied cottage rent free, by the very nature of things that would be out of income. Because it is part of his rental income, it would be out of income. I think that was the burden of the argument. If a generous man allowed the tenant of a tied cottage to live there rent free, would he be caught under the capital transfer tax? The answer is that because it is rent free, it would be out of the income of the owner of the tied cottage and therefore, exempt from capital transfer tax. I hope that that answers the point.
It seems to me that that argument applies if one lends someone money interest free. It would, by the same argument, be out of income.
We have a provision dealing with precisely that matter, as the right hon. Lady knows, and we will be looking at it. But we could be talking about a much bigger amount. One could give £1 million as a loan tax free, and there could certainly be some gratuitous transfer. I see the right hon. Lady nodding.
But here we are talking about a tied cottage where the rent, anyway, would be modest and exempting it from rent, giving it generously rent free, I am assured—I hope this pleases hon. Gentlemen—would make that out of income. The right hon. Lady is nodding. I hope that she can persuade her hon. Friends that that is the case.
Sir John Hall
If the tenant had been paying a modest rent and continued paying that rent, although allowed to continue after the farmer had the right to repossess the cottage, would the same situation arise?
Certainly. It would be [column 579]out of income. In any case, he is getting an income as he was before. There is no gratuitous benefit. There is no transfer. I hope I have satisfied everyone on that point.
Mr. Jack Dunnett
I follow my right hon. Friend's reasoning so far, but let us suppose that the farmer, who would not otherwise have utilised this tied cottage for another tenant, decides to capitalise and sell it—I understand that cottages in some parts of the country have a high value. Would the same argument apply?
I doubt whether the value would be high with the tenant in the cottage.
That is not the point.
Whoever owns it, I presume that there would be a contract from the original first owner whereby there was no rent payable, otherwise we are not talking about anything. We are discussing a case where a farmer allows a tenant to live in a tied cottage completely free of rent.
After his employment is terminated?
Yes. That is the point. My hon. Friend says that it would be out of income and therefore exempt under another part of the Bill. The owner of that cottage then sells it to another gentleman.
My hon. Friend has not understood my contention. We get to the point where the owner of the cottage has the right to have possession because the service tenant has ceased the employment. Out of the goodness of his heart, the employer permits his former servant to remain and thereby losses the rental income he might have received if he had taken possession and re-let.
But let us suppose that he decides not to re-let the cottage, having exercised his strict rights and not been kindly, and it is advertised by one of the larger West End agents who sell it for “X” thousand pounds. Would that make any difference to the view that my right hon. Friend is now propounding?
My hon. Friend is [column 580]seeking to take two entirely separate transactions. The first transaction is quite clear, and I see that he accepts the argument. Even though the farmer has the right to sell, he decides not to do so but to let the tenant live rent free. He is not giving a gratuitous transfer of the value of the cottage to the tenant. He has given to him only the benefit of living there rent free. He has not given the tenant the benefit of the cottage. He is not giving a gratuitous transfer of the value of the cottage to the tenant, because the tenant does not have the right to sell it. His only right is to live in the cottage rent free. There is, therefore, no liability for capital transfer tax, because that would be out of income.
Now we come to the second point. The owner of the cottage then proceeds to sell it for market value. I assume that is what my hon. Friend is saying.
Suppose he dies?
We arrive at the same situation. Somebody else then owns the cottage and the only benefit is that the tenant is living there rent free. There is no gratuitous transfer other than the rent. That would be out of income and exempt from tax. That seems quite clear to me.
I regret to say that it is not clear to me. I am sorry to pursue this matter, but, having started, I must finish.
I thought we were taking the case where the owner of a cottage had the right to possession but deliberately did not exercise that right because he had a certain feeling for his former employee and gave him a gratuitous benefit by allowing him to remain in the cottage rent free. The alternative for the tenant would be either to buy or rent accommodation elsewhere. The farmer is therefore giving a gratuitous benefit. However, he chooses not to do that and his alternative gives him a benefit. The alternative is that he either rents it to someone or sells it.
May we take it in turn.
It is all one transaction.
Yes, but let us take it in turn it may be easier. The only benefit given to the tenant of that tied cottage—he does not have the benefit of the [column 581]cottage or the right to sell it—is the right to live there rent free. He has no other right. My hon. Friend has made the point that this farmer will sell the cottage to somebody else. Clearly, the tenant of the cottage is not receiving any benefit.
Mr. Denzil Davies
Could it not be said, following these arguments, that the value of the tenant's estate has not been increased. To come within subsection (7) the value of the landlord's estate is to be diminished and the value of the tenant's estate is to be increased. I should have thought that the value of the tenant's estate was not being increased. He is merely being allowed to live there rent free.
Surely it is increased to the extent of the rent that he would otherwise have paid.
My hon. Friend is absolutely right. His estate has increased to the value of the rent that he would otherwise have paid. That is the transfer. It is the transfer out of income and therefore is exempt. I do not know why hon. Gentlemen are so upset because I told them it would be exempt. If that does not satisfy them, I shall try to find a way of making it taxable. I do not know what more I can say.
The point is surely that the cottage has two values. If it has vacant possession it is worth, say, £10,000 and if it is rented to a service tenant it is worth £1,000. If the owner dies, is the successor to the freehold, who is nothing to do with the tenant, to be sued for the difference? That surely is what we are talking about. It is nothing to do with the tenant.
The successor to the owner of the cottage will not have made a gratuitous transfer to anyone, except if he still continues he will have given the rental income of the cottage to the present tenant. It is not a question of getting it with vacant possession. There is a contract, we assume, or an agreement with the first owner that the tenant shall stay there without rent. That is his right. Under that right the only benefit he gets is to live there rent free. Under the terms of the Bill, there is no liability to tax. If the owner sells the cottage, the next owner sells it, the owner after that [column 582]sells it and it is sold 75 times in the same year, there will still be no liability to capital transfer tax on the rental income that has been forgone for the tenant. I hope I have satisfied my hon. Friend.
My right hon. Friend has completely satisfied me. I shall now be able to see it in black and white. He has cleared up the point for me.
I turn to the point made so lucidly by the hon. and learned Member for Dover and Deal, who has waited patiently for me to come to it. He gave us a number of examples of cases, but the one about which he was particularly concerned was a claim for damages. He was especially concerned about a——
Mr. Wm. Ross
I am not altogether happy about the cottager. As the right hon. Gentleman is aware, it is proposed that capital transfer tax shall be charged on agricultural land at 20 times the annual rental value. Will this apply to the cottage which has no rental value whatsoever?
The rental value of agricultural land will be assessed for value of the land. We shall be coming to that later. The value of the land is usually low for rental purposes, but it is an entirely separate point.
I am sure I shall please the hon. Gentleman by making it clear to him that if the farmer seeks to give generously the tied cottage free of tax for life, or whatever, to the former employee of that farmer, there will be no question of capital transfer tax. The whole question of the relief we are proposing for land for particular types of working farmers is something we shall be coming to, and I shall be happy to deal with that point when we do.
The hon. and learned Gentleman and I are finding it very difficult to get together on this matter. He is concerned about the definition of gratuitous benefit for value. I understand his concern. I have tried to explain it on the many amendments we have discussed on the clause for some time now, but I have not been able to satisfy him.
It is also possible that I have not been able to satisfy the right hon. Lady and other hon. Members. May I therefore say, to circumvent the situation, that I shall be happy to look at the matter of [column 583]the definition with a view to seeing if I can help him and others on Report. Perhaps with that assurance the hon. Gentleman will feel that he can withdraw the amendment.
Mr. David Howell
I know the Chief Secretary is anxious to make progress, although that may not be immediately apparent from the rather prolonged explanation he has just given. I know it was a difficult point, and the Chief Secretary's difficulty is that he is trying to deal with a clause which is riddled with nonsense.
At every point, it emerges that normal life is pot-holed with potential gratuitous benefits. We have just touched on one we accept uneasily the reassurance of the Chief Secretary on the question of tied cottages. I think we shall want to return to this subject as we may find that rather larger potential gratuitous benefits arise from arrangements of this kind which are borne—as are many other arrangements that can be imagined—not out of the desire to avoid taxes, [column 584]but simply out of that rare thing which sometimes the hon. Gentlemen opposite seem so determined to legislate out of existence, human kindness.
The Chief Secretary wants to make progress, and so do we. He is wading around in a quagmire in this clause. He has said that there is a vast range of cases in which the Inland Revenue would arrive, by rules totally unspecified and on criteria which are vague in the extreme, at an assessment on whether a gratuitous disposition or gratuitous benefit had been intended. This is not legislation, but vague obscurity, and for that general reason, added to all the other specific points that my right hon. and hon. Friends have made, I strongly advise this side of the Committee to press the amendment to a Division.
Question put, That the amendment be made:—
The Committee divided: Ayes 14, Noes 15.
Division No. 12.]
Cope, Mr. John
Hall, Sir John
Howell, Mr. David
Lamont, Mr. Norman
MacGregor, Mr. John
Newton, Mr. Tony
Page, Mr. R. Graham
Pardoe, Mr. John
Parkinson, Mr. Cecil
Rees, Mr. Peter
Ridley, Mr. Nicholas
Ross, Mr. Wim.
Thatcher Mrs. Margaret
Wiggin, Mr. Jerry
Barnett, Mr. Joel
Bates, Mr. Alf
Boothroyd, Miss Betty
Callaghan, Mr. Jim
Davies, Mr. Denzil
Dunnett, Mr. Jack
Gilbert, Dr. John
Graham, Mr. Ted
Hamling, Mr. William
Harper, Mr. Joseph
Hayman, Mrs. Helene
Hughes, Mr. Mark
Sedgemore, Mr. Brian
Tomlinson, Mr. John
Ward, Mr. Michael
Question accordingly negatived.