Mr. Norman Lamont
I beg to move Amendment No. 54, in page 18, line 42, after “where” , insert
“the settlement was made after 10th December 1974 and” .
With this we shall take the following amendments: No. 55, in page 18, line 42, after “where” , insert
“the settlement was made after 26th March 1974 and” .
No. 346, in page 18, line 43, after “settlor” , insert
“and the settlement was made after 25th March 1974” .
No. 792, in page 18, line 43, after “trustees” , insert
“were appointed after 26th March 1974 and” .
No. 327, in page 18, line 44, after “United Kingdom” , insert
“and the settlement was made on or after 26th March 1974” .
No. 219, in page 18, line 44, leave out “the settlor” and insert
“and the settlement was made after 25th March 1974, the settlor, if the trustees were not so resident at the time the settlement was made or if the settlor joined in an appointment of trustees who were at the time of appointment not resident in the United Kingdom” .
One of the aspects of this tax that we have found so objectionable is the element of retrospection, particularly the retrospection applied to settlements. Many people have chosen to make settlements not for reasons of tax avoidance but because it was a sensible way to provide for their children or to provide against unforeseen events, and these people have suddenly found themselves in a situation which they could not possibly have foreseen when they set up the settlements.
This objectionable feature has been compounded in a particular way: the Chancellor chose to announce his proposals without actually giving the details, so that the individuals caught did not know what they could do about their own or their children's affairs. That is a feature of it which we very much regret. [column 687]
I know that the hon. Members on the Government side take the view that settlements are made for tax avoidance, but that is just not true. People set up discretionary trusts for perfectly good reasons, to provide for their children's education and other contingencies.
I should like to have seen included in the Government's proposals at least a period wherein people who had set up settlements some years ago could rearrange their affairs. That would seem sensible. Someone may have set up a discretionary trust for precisely the same reason that someone else has set up a maintenance trust for his children. While the maintenance trust is excluded from the periodic charge under the provisions of the Bill, the discretionary trust, although it has exactly the same intention, is not. Therefore, one of the proposals that I should like to see—we may come to this on another amendment—would be a period of grace, so that people caught innocently by this sudden change in the law which they could not conceivably have foreseen when making provision for their children, could make other arrangements.
This amendment deals with the position of non-resident trustees of a settlement. Under the Bill, in that situation the settlors can become liable to tax themselves if the settlement has non-resident trustees. It does not require much imagination to see that this could be a very difficult matter for settlors now setting up a trust with non-resident trustees, who could see that they might themselves ultimately become liable for the tax. But those who set settlements up originally with non-resident trustees could not have foreseen it.
Furthermore, one has to bear in mind that people who have set up such settlements may now find that, although they are liable to tax ultimately, there may not be the money in the trust to meet such a payment. So overnight they are laden with a burden that they could not have foreseen, and one that they may not be able to meet.
The amendment would cut out in this category of settlements with non-resident trustees those made prior to 26th March 1974 when the tax was first announced. That is the only way in which one can deal with this unfair element of retrospection that has been so cavalierly introduced.
Mr. Denzil Davies
I challenge the assertion that comes repeatedly from the [column 688]Opposition—no doubt we shall hear more of it—that a discretionary trust has not in the main been a tax avoidance vehicle. In most cases a discretionary trust is a tax avoidance vehicle. The whole form of a discretionary trust has been created in order to avoid estate duty and to avoid income tax in certain instances. The idea that a discretionary trust is purely an attempt to enable a family's property to be distributed more fairly is completely wrong.
Mr. Norman Lamont
Surely, the hon. Gentleman will concede that not all discretionary trusts are set up for avoidance reasons. That was how I carefully phrased my comments. But, whatever the reasons for them, discretionary trusts are a perfectly legal method of tax avoidance, and to introduce this element of retrospection overnight is unjustifiable.
I never suggested they were not perfectly legal, but the capital in a discretionary trust is entirely at the discretion of the trustees. People who have set up these trusts know that at some future date—perhaps seven or eight years hence, as some of these trusts tie up capital for eight years or more—the law may be changed. To suggest that in such a situation those trusts should acquire an exemption from future tax when the capital may not come out for a long time does not seem to be a question of retrospection.
People who set up these trusts know what they are doing. In most cases a different form of trust could be set up to enable a person to do what he wanted, and the only reason why that is not done is that a discretionary trust is a better tax avoidance vehicle. It could be done by a life interest, or by many other kinds of settlements, but because these are detrimental from a fiscal point of view discretionary trusts are chosen.
This country is the only one that has discretionary trusts. There are hardly any in the United States, where they are all different. One reason is that they have a gifts tax, which they have had for a long time. So I hope that we shall not hear any further suggestion from the Opposition that discretionary trusts are some kind of innocent device, and that we are hitting the innocents. We are not. People who set up these trusts know well what they are doing. They know also that the law could be changed in future so as to tax capital arising from such trusts.[column 689]
Mr. Peter Rees
The Committee should [sic] let pass unchallenged the statements, however authoritatively delivered, of the hon. Gentleman for Llanelli (Mr. Denzil Davies). The hon. Gentleman might have reminded the Committee that the Government, which he no doubt would have supported had he been in the House, legislated against discretionary settlements, so that the estate duty advantages, such as they were, were not quite so obvious after 1969.
But that is not really the point to be made on this occasion. It is true that discretionary settlements up to a certain time carried certain estate duty advantages, among others. As the hon. Gentleman has pointed out, it was not illegal, and, as we on this side would say, not discreditable. It has been pointed out time and again in the courts that every taxpayer is entitled so to order his affairs that he pays the least possible tax. It is sometimes held against him by the Government, but, speaking for myself—I do not know whether I carry my hon. Friends with me—I do not find that an unacceptable proposition. No one is bound to order his affairs, if I may use the expression of a distinguished Scottish judge, so that the Revenue could put the biggest shovel into his property. He would be a fool if he did so. We should not be recognising the facts of human nature to do so.
If, with the benefit of advice, good, bad or indifferent, a man sets up settlements that carry, among other advantages, a certain immunity to estate duty, so be it. But the hon. Gentleman is pushing his case a little far when he says that they are set up for no other purpose.
In the course of a possibly mis-spent professional life I can call to mind having seen many settlements with a discretionary element that were certainly not set up even with the predominant motive of avoiding tax. Indeed, I challenge the hon. Gentleman to say whether he has not seen, for instance, residuary will trusts that have not been cast in discretionary form, but probably the testator made them in that form because he could not decide which member of his family he wanted to benefit at the time he made his will. The Opposition deprecate this entirely prejudiced approach to institutions that have been with us for about 500 years.
Mr. Denzil Davies
I do not want to go [column 690]back 500 years and raise the Statute of Uses because I should be out of order, but, as the hon. and learned Gentleman has raised the matter, I should like to point out that the device of the use, which was the forerunner of the trust, was purely to avoid feudal dues—the trust of the use was a tax avoidance device.
That shows—and I am grateful that the hon. Member emphasises the point—that one cannot work against the grain of human nature. For 500 years bad Governments have been trying to do that, and they have failed. Whether they will fail on this occasion I do not know. I suspect that they will fail, not because of the ingenuity of lawyers, but because, as my hon. Friend the Member for Aberdeenshire, West (Mr. Fairgrieve) has pointed out, there will be a wholesale evasion of tax. The country will move from avoidance to evasion, which may be a consequence that the Chief Secretary faces with equanimity. I hope that he does not do so, because on both sides of the Committee and on both sides of the House we should regret that. It has been a point of honour that most taxpayers have been, if not pleased to pay their tax, pleased to recognise it as their public duty. I believe that they will no longer regard it as a public duty.
However, I have been tempted into a byway by the capacious historical memory of the hon. Member for Llanelli (Mr. Davies). We know that with his Celtic feel for the antecedents of our race, he goes back in time considerably, but that is not the point I wish to make here.
But with all the force at my command I should like to make the point that to regard all settlements—particularly those with a discretionary element—as nothing more than a vehicle for tax avoidance is an absolute travesty of the truth. I beg the hon. Gentleman, with his great legal and historical knowledge, to take a longer and closer look at the legal history of our race. My main point is the utter unfairness of the provision. It seeks to saddle the settlor with liability for actions that have long since passed out of his control. He may have set up a settlement, possibly when he himself was domiciled and resident abroad. What more natural, in such a situation, than to set it up with foreign resident trustees? Then, in an illjudged moment, he brings himself within the control of the Revenue, presided over [column 691]by the Chief Secretary and his right hon. and hon. Friends. At other moments the settlor may have been well advised to do so, because I believe that the last Conservative administration was well on the way to making this country a tax haven, which is an objective well worth any Government of any persuasion pursuing.
For the first time this evening I notice that I have actually evoked a response from the Government, who have not paid close attention. But I ask them to consider the considerable benefits to this country of having lower and more favourable rates of tax than other countries.
During the time when Mr. Barber, as he was then—I was most proud to support him in this Committee—recognised that it was necessary to bring down the rates of tax, he found an inflow of capital and talent such as we had not seen for about six or seven years before, perhaps even not since before the war, and that is something that we should encourage.
I do not of course want to re-open the debate that we had just before dinner but there is something that hon. Gentlemen might ponder and we could come back to it with advantage. The point I am making is a fairly short one and I apologise for being led into interesting sideways, but there are one or two hon. Gentlemen on the other side of the Committee who take a keen interest, although they affect to mask it with a sort of spurious radical egalitarian devil-may-care attitude. I know that in their heart of hearts they really do respect the rights of property and inheritance and the general feeling that all right-minded people have for passing on intact the property that they have either gained or inherited.
Why should we not? It is a perfectly laudable and honourable ambition. Perhaps, away from the members of the Tribune Group—and I am sorry to see that the distinguished representative of the Tribune Group who graces our proceedings is out at this moment—they will now come clean with the Committee and back us up in our approach to this subject. [Hon. Members: “Hear, hear.” ]
Ah! I am always happy to welcome support from my hon. Friend the Member for Cirencester and Tewkesbury (Mr. Ridley) and my hon. Friend the Member for Aberdeenshire, West (Mr. Fairgrieve) who follow our debates with [column 692]such keen interest and who are never afraid to wear their political hearts on their sleeves. One deprecates that hon. Members opposite, who are with us on so many occasions, are frightened of what the Commissar from the Tribune Group might report back to their private committee. 10 p.m.
May I come to the technical point, which I hope we shall be able to view in an unprejudiced and unpartisan spirit? Why should a settlor, when the destiny of the property which he has settled has passed out of his control, be saddled with a liability for what has happened beyond his control when the trustees remain or become foreign residents when there has been an appointment of capital which he cannot veto. Why should he be obliged to carry the liability for capital transfer tax?
It seems to me—and I hope it will strike hon Gentlemen who are, as I said, tonight free from the trammels of the Tribune Group—that I am making a point of substance. I urge the Financial Secretary to look on this matter with an unprejudiced eye and to ask himself whether it is right that a settlor in all the circumstances outlined in Schedule 5—and they are many and various—should be obliged to carry this liability, concurrent though it may be. I see no good reason, either on precedent or in equity, why this should be. I hope that on reflection the Financial Secretary will see the force of what I and my hon. Friends have been saying.
Mr. Graham Page
It will not have escaped your notice, Sir Stephen, or that of the Financial Secretary, that Amendment No. 792 in my name differs a little from those in the name of my right hon. and hon. Friends. Mine differs in that it deals directly not with the settlement or the date that the settlement was made, but the date on which the trustees were appointed. I do that because it seems so unfair that if a settlor appoints trustees who may be resident in the United Kingdom when he makes the appointment, but over whom he has no physical control, who then leave the country and become resident outside the United Kingdom, that affects liability to this tax. He has no control of them. They may depart and live elsewhere and at the time he made the settlement he could not possibly have known the effect that their removal from [column 693]this country would have upon the liability to tax.
Order. There is such a buzz of conversation in the room that I am having difficulty following the right hon. Gentleman to whom I want to pay rapt attention.
This brings me to the humility which I did not show previously when I thought I was being cheered. Now I am not even being listened to, Sir Stephen.
May I repeat for the benefit of the Financial Secretary that it seems that there may be grave hardship on a settlor who, having appointed trustees, finds that they depart overseas. When he appointed them he could not have know the effect of their departure on tax liability. Therefore, this is a modest amendment that this clause should apply only where they are appointed after 26th March. At least he has a chance to have an assurance from the trustees he appoints that they do not intend to go out of the country. At least he knows, if he appoints those already out of the country, the liability which it may bring for tax. Having made the settlement in the past, and having appointed the trustees in the past, it seems grossly unfair to him that, by their happening to depart from the country, the whole liability to tax under the settlement has changed.
Mr. Nigel Lawson
I am very puzzled by this provision as it stands. It is manifestly unfair that in these circumstances the settlor, who knows nothing about what is going on and who has no control, as has been said, over the trustees abroad should be held liable to pay the tax on any capital transfers. I am surprised at this, because the only apparent reason for this is if the Inland Revenue feels that it would be difficult for it to get at trustees overseas.
Yet in previous clauses the Inland Revenue and the authorities have been spending all their energies saying how they can always get at transactions overseas and that there is no problem at all with transactions overseas. In various clauses about private property gifts made overseas, the Inland Revenue has said that it will get its hands on that—there will be branches of the Inland Revenue set up in every country under the sun right up and down the Persian Gulf.
Now suddenly the Inland Revenue says [column 694]that it cannot do this. It cannot have it both ways. Either it is capable of dealing with these capital transfers that go on overseas or it is not. If it is not capable, it should accept all the amendments that we have been pressing on the earlier clauses. If it is capable of dealing with these transactions overseas, it has no right to call the settlor liable in the circumstance outlined in the clause.
Perhaps I should not follow all the sparring that has taken place on the amendment, but, as my hon. Friend the Member for Llanelli (Mr. Davies) has pointed out, although it is perfectly true that discretionary trusts are legal, they are set up for a mixture of motives in most instances. I doubt whether a single discretionary trust has been set up where there has not been more than one motive involved, both the need to take care of various aspects of family life and a desire—quite legitimately, I accept—to minimise the amount of tax attracted.
No one would dissent from the basic philosophy of the hon. and learned Member for Dover and Deal (Mr. Rees) that no one has a duty to pay more tax than the law lays upon him. It is up to Parliament to decide, and that is what we are doing here, where avoidance gaps are so wide that any attempts to stop them would even involve the support of the hon. Member for Cirencester and Tewkesbury (Mr. Ridley), who has told us many times that he is against tax avoidance and that any reasonable measures to eliminate it will have his support. It is to that that we are addressing ourselves.
I must say in parenthesis that I am sorry to hear the hon. and learned Member for Dover and Deal talk about bad Governments over the last 500 years seeking to establish bad principles. At least he will have to acquit the Labour Party of that, because most Governments during the past 500 years have been principally those of the Conservative and Liberal Parties. Be that as it may, I should not have thought that the idea that because a principle had held sway over 500 years it should be enshrined for ever and not be subject to parliamentary scrutiny was particularly satisfactory. It might have commended itself to Charles I, but, under the leadership, possibly, of the right hon. Member for Finchley (Mrs. Thatcher), who knows what ancient philosophies are to be resurrected in the Stonehenge of [column 695]Finchley? It would be churlish of me not to congratulate her on proceedings that have taken place elsewhere earlier today. I hope that they do not mean she will be too distracted from our proceedings, and we are glad to see her back with us. I will not say for whom I would have voted.
Well, not on this amendment.
Mrs. Margaret Thatcher
The right hon. Lady might have misunderstood my motives. Clause 23 designates the persons who are answerable to the Revenue for the tax charged. Clause 23 (3), to which these amendments relate, deals with the liability for tax in respect of property already in settlement, and paragraph (d) extends that liability to settlors who are still living, but only in cases where the trustees are not resident in the United Kingdom. There was no equivalent liability on the settlor for estate duty, and therefore this group of amendments is aimed at excluding the settlor from liability where the trust was created after 25th March or 10th December 1974, according to which of the amendments we are considering.
Amendment No. 792, in the name of the right hon. Member for Crosby (Mr. Page), restricts the settlor's liability to a situation where the non-resident trustees were appointed after 26th March. If they were appointed on or before that date, the settlor would have no liability. The right hon. Gentleman's basic objective is the same as that of the corresponding official Opposition amendment seeking to remove the settlor from liability where the settlement is made before 27th March. For perfect symmetry it should be 26th March, but be that as it may.
The right hon. Gentleman's amendment would continue the settlor's liability when non-resident trustees were appointed after 26th March and his relief is more restricted than that proposed in the official Opposition amendment.
The provision in Clause 23 (3) (d), which the amendments would affect, applies only where the settlor is still living and within reach of the Revenue authorities—that is, in the United Kingdom—while the trustees, being not resident, are out of reach of the Revenue. If the property concerned is also outside the scope of the Revenue charge, for example, overseas, the prospects of recovering from the trustees——[column 696]
I am puzzled by the new doctrine that the Financial Secretary is enunciating, that people resident overseas are outside the reach of the Revenue authorities, because he spent a great deal of time assuring us on earlier clauses that they were within the reach of the Revenue authorities.
Mr. David Howell
My hon. Friend is right. The Financial Secretary's memory cannot be so short. Less than two hours ago, he and his right hon. Friend were telling the Committee that in circumstances arising under Clause 22 (2), if someone domiciled inside the United Kingdom had property situated outside the United Kingdom this was not excluded from the capital transfer tax and the Revenue men would get on an aeroplane to hunt down the chargeable transfer wherever it occurred and seek to levy their rightful share of the revenue. If that is possible, why are we suddenly told that it is difficult in these circumstances because it has to be pursued overseas? My own view is that it is an absurd proposition in either case, but the Financial Secretary cannot have it both ways.
I think that there may be a misunderstanding, because we were previously talking about owners of property domiciled overseas. I refer here to trustees domiciled overseas. The distinction is clear for purposes of this legislation.
In either case these are individuals overseas. I cannot see why a process of detection to find one class of person overseas, and their dealings, cannot work for others. How can one know whether the person overseas is a trustee or not until the process of detection has been completed?
Mr. Peter Rees
The Financial Secretary has introduced a new concept. I have not so far understood that the domicile of trustees is of importance. Will the Financial Secretary clarify the point he has just made?
Clearly, where trustees are domiciled overseas, and resident overseas, it will be far more difficult for the revenue to be seized of the property for which they are responsible, whereas the owner of the property has a much more [column 697]direct interest in it. I should have thought that that was obvious. I concede without reservation that there might be difficulties of enforcement. I said that on the previous clause. That is why I undertook to look at various aspects of it again. I made no secret of that. The hon. Member is on to a rather weak point.
Obviously, there will be situations where people will act in such a way as to make it difficult for the Revenue to enforce the provisions of the Bill. I did not for one moment attempt to conceal that when we were discussing the previous clause.
What is the difference between an owner of an asset who makes a transfer, being domiciled and resident overseas, and a trustee who also is domiciled and resident overseas? Why could or should there be any difference in law in the treatment accorded to them as to liability? Surely, the Financial Secretary would agree that, where it is easier to get at the settlor, he will not pursue the trustees. It is a question of expediency. If we are to go into this matter in terms of expediency, it bodes ill for the respect in which this tax will be held.
Obviously, the Revenue has to seek to get the tax payable in respect of any transaction as easily as may be. There is nothing strange or new in that principle, as far as I am aware. As I have made clear to the Committee on many occasions, there will be difficulties in getting a grasp on the assets in certain circumstances. I have never sought to conceal that. I shall say it again as many times as will satisfy the hon. Gentlemen to have it said to them. I do not think that that affects the principle with which we are dealing here.
Mr. Peter Rees
I am still astounded by the hon. Gentleman's general proposition. Does not the convenience of the subject weigh with him at all in these matters?
The hon. and learned Gentleman is riding off on one of his hobby horses, but the fact is that this consideration of how the Revenue can get its hands on the taxes due with respect to any transaction will come up in all sorts of situations—for example, where the settlor or the donor gives his entire estate away. [column 698]
The hon. Gentleman raises his eyebrows at that. Clearly, in a situation of that sort it is not sufficient for the purposes of legislation to give the Revenue recourse solely to the donor to obtain the tax. Obviously, it would have to go to the donee. There is nothing surprising about that. It is for the convenience of the Revenue. I am not establishing any new principle, and I am a little surprised at the surprise that Opposition Members are evincing in this context.
The likelihood exists that the introduction of foreign-resident trustees or the removal of a trust abroad has some scheme of tax avoidance at the back of it. The hon. Member for Kingston-upon-Thames (Mr. Lamont) will say that there will be cases where this will not happen, but in the great majority of cases of the sudden introduction of foreign-resident trustees there must be in the mind of the person introducing the foreign resident trustees the possibility of avoidance. Surely, the Committee is not so naive as to pretend that that possibility does not exist, and is not in the forefront of people's minds when they seek to introduce foreign-resident trustees.
The amendments would leave the way open—I am talking now about the official Opposition amendments and not the amendment in the name of the right hon. Member for Crosby (Mr. Page)—for the appointment of non-resident trustees in the future to existing settlements, thus perpetuating the possibility of avoidance. Very occasionally—I accept this and I am being quite candid with the Committee—there will be hard cases, and I should have sympathy with them, where the settlor had genuinely had no influence over the appointment of non-resident trustees. That is a circumstance of which I can conceive but which has not been put forward by the hon. and learned Member for Dover and Deal (Mr. Rees). I did not hear the hon. and learned Gentleman if he did say that. I apologise to him, of course. But it will be in a small minority of cases that that happens, the settlor having had no influence or no knowledge of what was happening, and the foreign-resident trustees being appointed without any influence exercised on his part, and tax avoidance being far from everybody's mind. [column 699]
I must say that in my view such genuine cases will be extremely rare. I think that hon. Members opposite who have great experience of these matters will recognise that. If one attempted to distinguish those cases where the settlor did have knowledge or did have control over such situations, it would be extremely difficult to establish whether the settlor was party to the trustees going non-resident when this event might have occurred several years ago.
I turn now to Amendment No. 792, in the name of the right hon. Member for Crosby (Mr. Page). He seeks to restrict the settlor's liability in situations where the non-resident trustees were appointed after 26th March. If they were appointed on or before that date, the settlor would have no liability. This is a much more moderate amendment than the official Opposition amendment. I have to tell the right hon. Gentleman that in the great majority of cases I still consider it unreal to suppose that non-resident trustees were appointed without any tax avoidance considerations being in the minds of those who made the appointment, or that their appointment would have occurred against the wishes of the settlor.
However, I accept that the right hon. Gentleman's amendment has some merit in so far as it ensures that the settlor will be liable if non-resident trustees were appointed after 26th March this year. I am prepared to look again at his amendment to see whether there is an argument on which we ought to make some concession on Report. I am not able to give the right hon. Gentleman a commitment at this stage, but I undertake to look at the sense of the amendment again, I am afraid that I could not recommend my hon. Friends to accept the official Opposition amendment.
Mr. Peter Rees
We may be naive on this side of the Committee, but we can smell out as well as the next man a bad principle when it is shamelessly hawked in front of us. It is all very well for the Financial Secretary to blunder on in this way and say that there may be a small number of cases of hardship. That is a thoroughly disreputable basis on which to put forward a provision for our consideration. If he cannot say with confidence that there will be no hard cases, he ought not to be peddling his wares with quite such [column 700]brazen self-assurance.
The point which the Financial Secretary has signally failed to meet—although it might be met by the ingenious amendment proposed by my right hon. Friend—is this. I know of people who have blamelessly, for no tax avoidance reason, spent their lives on what used unfashionably to be called the frontiers of the British Empire, which is now called, I believe, the Commonwealth. They have gone, perhaps, to serve the Crown, perhaps to make business careers. They come back to settle in this country, but they have set up settlements in the last place where they carried on their careers overseas. They have set them up with foreign trustees. This was long before they had heard of the Chancellor of the Exchequer, the Chief Secretary, the Financial Secretary or the capital transfer tax. They have parted with their property. They have quite legitimately set up settlements with foreign-resident trustees, and they have been rash enough to come back within the purview of the Financial Secretary. They are the kind of people who will be caught.
The more general amendment put down in the names of my right hon. and hon. Friends seems to exempt those people where the settlement was set up before a certain date, before they could possibly have known what was in store for them, which is why I think they should be exempted.
I appreciate that Amendment No. 219, in the name of my hon. Friend the Member for Kingston-upon-Thames (Mr. Lamont), goes a certain distance, but it does not cover that kind of case. I hope that I speak for others of my hon. Friends when I say that it simply is not good enough for the Financial Secretary to say that there may be one or two cases of hardship. He must frame his legislation, if he wants us to accept it, in such a way that there is no conceivable case of hardship. For him to blandly ignore the possibilities that we put in front of him, to disregard them and to say “There was obviously some element of tax avoidance there at one time” , is just not good enough. So far, he has shown no sign of appreciating how wide this subsection goes. I am not at all satisfied by the indifferent assurances which he has been offering us over the past few minutes.
In our comparatively short break this evening, and with all the [column 701]other excitements going on in this place today, I was able to look only briefly at the Evening Standard. However, I think I am right in saying that in an article on the capital transfer tax there was a particular attack on the provisions with which these amendments are designed to deal. It amazed me because it seems an extremely abstruse point for the Evening Standard. Yet the City editor of the Evening Standard has great skill——
On a point of order, Sir Stephen. As my hon. Friend has referred to a document, should not it be circulated to all hon. Members so that we can all see what it says. Could we suspend the sitting while that is done?
That is an interesting point, but not a point of order at this stage.
If I understand aright, I can see why the City editor has done it, since he has great skill in bringing home to the public injustices which immediately strike the man in the street as grossly unfair.
The Financial Secretary referred to our great experience on this side in these matters. I confess that I have no experience whatever. But there are one or two points that I must put to the Financial Secretary. It bothers me that he concentrates upon argument that there may be some elements of retrospective tax avoidance which he intends to hit here, but he is ignoring the innocent cases. I can readily see that there could be innocent cases—people who for 10 or 20 years have been resident abroad but are United Kingdom-domiciled citizens, working for an international group or an overseas subsidiary of a United Kingdom company, who have had their children brought up overseas, and who have quite naturally looked to foreign trustees because they happen to be friends who know the children.
I can readily envisage many innocent cases in which, unless the clause is amended, unfair retrospective action will take place on those who arrange their affairs for no reason of tax avoidance.
Order. I draw to the attention of the Committee that the reading of newspapers in the Committee is not allowed, and more particularly when those [column 702]newspapers have entered the Committee in a most improper manner, which I hope will not occur again.
I was making the point about the innocent cases. The Financial Secretary ought to address himself to this and let us know whether he cares about such innocent cases, or he believes that they will not occur.
The Financial Secretary frequently says “I am advised” . Perhaps I can copy him by saying that I am advised that there could be situations where foreign trustees, either because the laws of the country would prevent them from paying the tax liability or where there are exchange control provisions applicable in the country in which the foreign trustees reside, would be unable to remit funds to the United Kingdom. Equally, the settlor, if he is back in the United Kingdom, may have insufficient funds to meet the tax liability. That seems to me to be a case of gross injustice, and I should like to hear the Financial Secretary's comment upon it. Am I wrong in thinking that situations like that could occur?
There is another anomaly which might well arise in relation to the situation of foreign trustees. Where a settlor had made a settlement with foreign trustees and no transfers were made out of that settlement, and the settlor, let us say, back in the United Kingdom, dies in the next two or three years, and the settlement was made seven years ago—seven years prior to 26th March—would I be right in thinking that in that case no capital transfer tax would be payable because the settlement had been made more than seven years ago, and the settlor simply died without any transfer out of the settlement prior to his death, whereas in the case where foreign trustees make some transfer out of the settlement while the settlor is still alive capital transfer tax would be paid?
If I am right in thinking that, and the foreign trustees either innocently or deliberately make some settlement while the settlor is still alive and do not pay the tax, it seems to me that the situation is not only anomalous for the settlor but is again unjust.
I am disturbed about these innocent cases. This sort of situation always arises where we introduce retrospective legislation, which is what we are dealing with [column 703]here. I should be grateful if the Financial Secretary could allay my fears.
I am very unhappy about the Financial Secretary's answer. I should go further than some of my hon. Friends do in condemning the whole purport of this clause.
It is easy to think of a number of circumstances where Clause 23(3)(d) could apply. What happens if an Englishman settles his estate and it so happens that the trustees are Scottish? We have had a debate in the Chamber for the last two days proposing some form of devolution. I have not been able to listen to it, but what would happen if that resulted in the trustees being severed in their Scottish residence from this country? Through no fault of anybody's, the trustees suddenly cease to be resident.
There was a candidate in Wiltshire who stood as a Wessex nationalist. If he should prevail and Wessex were to become independent—which, I must say, is an objective highly to be desired for all those who live in Wessex, because they would escape this tax—the trustees who happen to be in Wessex would become liable. What, then, if the trustees, just at the time of transfer, happen to be on holiday abroad? The clause says not “domiciled” in the United Kingdom but “resident” in the United Kingdom. The trustees have gone away and are living somewhere else for a short time at the moment critique.
In any of those circumstances the poor old settlor becomes liable for the tax. This cannot be right. If he has settled his estate, almost by definition he cannot pay any tax because he has given it all to the settlement. It seems to me that there has been a fundamental error of thought behind the clause.
What happens if the settlor himself is not resident? Clause 23(3) (d) does not state where the settlor is living at the time. It says that the trustees are not resident, but if the settlor is not resident it is just as easy to go for the trustees as it is to go for the settlor. Perhaps they have both gone to live in an igloo on the shores of the Hudson Bay in order to escape the Revenue, which is known to dislike extreme cold and to have special woolly gloves issued, perhaps for the pursuit of recalcitrant capital transfer tax payers. But the taxpayers are no easier to find than the trustees.
This brings me to the broad complaint [column 704]against the whole provision. On the very same page of the Bill—at the top of page 18, we were discussing it before the dinner break—it says that it is perfectly right and proper that persons domiciled abroad and resident abroad should be liable for the tax when they have made a transfer of value in the United Kingdom, and that the Revenue has no difficulty in finding them and squeezing the tax out of them. Let me quote the Financial Secretary's charming words when he said that he wanted to get a grasp on the assets. That seems typical of all Labour Members. All they are here for is to get a grasp on other people's assets.
Mr. Peter Rees
Asset graspers, asset strippers—however they like to describe themselves.
But we do not question their motive. We are prepared to concede that their social engineering was accepted on Second Reading. What concerns us is the clause.
If they can get a grasp on the assets of some Arab in the Gulf by going out there and getting it off him—I do not know how—they can do the same for his trustees. On the whole, the trustees are likely to be more honourable than some of the settlors.
It would be a better bet to get it out of trustees, because it is not their money, but money that is in trust for them. They are not losing personally. If I were a Revenue officer, I should bet two to one on being more likely to get the money out of trustees than out of settlors, especially if they are living thousands of miles away in a foreign country. I should have thought it was a rotten bet to get it out of settlors, and more possible to get it out of trustees.
So, where it is easier for them, they say “We shall catch the settlor if he is living here” . It seems absolutely wrong that the settlers should be included. If it is possible to catch the settlor when he is living abroad, there is no need to go for the trustees. In my opinion, this subsection is quite unnecessary. My hon. Friends would be well advised to withdraw their amendments, reserve their position and to raise the whole matter again by suggesting withdrawing paragraph (d) altogether. Not only is it [column 705]unnecessary, but it is vexatious and thoroughly provocative.
In the course of our proceedings we have had a number of debates about retrospective legislation. There have been instances, as the Financial Secretary knows, in which I have had some sympathy with his arguments. For instance, if a blatant anti-avoidance device has come to the notice of the Revenue—one knows that sometimes such devices have been running for three or four years and accounts have not been submitted and soon—and the Revenue feels that it must not wait another six or eight months to close that loophole, I do not share some of my hon. Friends' indignation about that type of loophole being closed retrospectively.
But this subsection is in a quite different category. It has never been at all improper, as my hon. and learned Friend the Member for Dover and Deal (Mr. Rees) said, to make settlements, to settle funds, for the benefit of one's children, or the employees of one's firm, and to make arrangements that the assets would be preserved and be in good hands and to make dispositions. That has been accepted as a perfectly natural and normal thing for a man to do.
I declare an interest at this point. I might, in certain circumstances, if certain people chose to do certain things, be one of a hundred people from whose names they might have to choose in the list of would-be beneficiaries. It is not something on which I have ever counted, and I have not based my standard of living on the fact that they might have a brainstorm and pick on me. But I have that interest to declare.
It has been quite proper, and provided that the disposition was made seven years before one died, those assets had been parted with and the Revenue has accepted that a perfectly legal disposition had been made.
I shall not waste time on some of the more esoteric types of non-resident trusts that my hon. Friends have conjured up tonight. We know that a number of non-resident trusts, created quite properly within the law, exist now and that they did not involve Scotland declaring independence or anything like that to make the trustees become non-resident. But it was never easy and the [column 706]laws relating to those trusts have been extremely tightly drawn already. In addition to the tax rules we had exchange control provisions and it has never been easy to make that type of disposition. It is untrue to say that by making one or two clever little manoeuvres, a whole apparatus can be set up.
To get through and be within the law the trusts had to be carefully drawn, and they were vetted and approved. It seems to me that the settlor parted with the assets and put them in the hands of people who were not accountable to him any more. It was the essence of the matter that they were outside his control.
We now have a situation, thanks to the Bill, that a settlor acting within the law who did that may have parted with his assets to trustees overseas and, as part of the trust deed, may be excluded from ever receiving any benefit—he would almost certainly have to be excluded from receiving any benefit. It might be that the laws of the country involved precluded trustees from being able to make any transfer back to a settlor in any circumstances. That would have to be so to make the trust absolute.
The settlor may have parted with the majority of his assets in making the disposition, and his motives may have been good. The Chief Secretary, who must become bored by being reminded of what a nice chap he used to be before he got into bad hands, knows that many people whose only assets were, say, shares in a private business, who had a number of children and did not want to see the business broken up and sold off, put the assets into the hands of trustees.
Having parted with his assets, if the trustee is non-resident, such a man now finds himself with the alternatives, perhaps at a late stage of his life, of either leaving the country quickly and ensuring that his trustee never again replies to any letters from the United Kingdom, or staying here and facing the prospect of being bankrupted if people over whom he has no control decide to do something with the assets that he handed to them.
That is most unfair. It offends against all the laws of natural justice. I find it offensive that overnight, at a stroke of the pen, a person who has led a totally blameless life and who has made a perfectly respectable disposition may face the prospect of emigrating or becoming [column 707]bankrupt. If the idea were understood by the British public—I read the article in the Evening Standard tonight—it would be found offensive and regarded as unfair.
My hon. Friend's amendments say “We accept that the rules have been changed and anyone who is fool enough to make that sort of arrangement now does so in the full knowledge that emigration or bankruptcy could be the probable consequences of his action.” It is unfair to put the person who made a proper disposition before the rules were evolved in that situation.
This is the type of retrospective legislation that is in the offensive, objectionable class. We say to the Chief Secretary that it cannot be regarded as a laudable objective for the Inland Revenue to be given the power either to drive people overseas or bankrupt them just because it cannot get the vindictiveness towards overseas settlements out of its system. This is vindictive legislation. It is unfair legislation and, quite frankly, were I the Chief Secretary I should be ashamed to be associated with it.
Mr. Norman Lamont
There is a general feeling on the Opposition side of the Committee that the Financial Secretary's reply has been among the thinnest that he has given during our deliberations in this Finance Bill. He was clearly bowled middled stump first ball by the question from my hon. Friend the Member for Blaby (Mr. Lawson) and has not been able to satisfy us at all about any distinction that could exist between trustees overseas and donors overseas and the ability to raise tax from those two categories. The main issue is that he has entirely ignored the arguments about retrospection in that those who set up settlements with non-resident trustees for perfectly honourable and lawful reasons many years ago could not possibly have foreseen the circumstances prevailing today.
The Financial Secretary does not seem prepared to face up to the fact that one is putting on settlors an unfair liability that they may not be able to meet. He does not seem able to grasp that point. The settlors may have no money left to pay the tax being levied. They may have no right to collect the sum from the trustees. The trustees may not be [column 708]able to pay it and the trustees themselves may not be able to pay it under the trust law of the country where the settlement was actually made.
I am informed that in some areas—the Channel Islands is a case in point—the trustees would be liable if such a payment were made. So the settlor is placed in an absolutely impossible position.
I take other countries where there are exchange controls and money cannot be taken out of an area, such as, say, Zambia or Kenya. The trustees would be unable to remit money to such countries. So they are caught in a most unfortunate way. It is extremely unfair. It is retrospective about settlements made for most honourable reasons in the past. It may have been that the person involved was working abroad for an international company or organisation and wanted to make perfectly proper provision for his children in case he died at an early date.
Another feature not realised is that the retrospection in the clause could go back an extremely long way. If an elderly person died abroad, never having changed his domicile, and the settlement were made up many years before, there would be no liability on the settlor's estate. If, however, the trustees, prior to the settlor's death, had made a capital distribution, the settlor could be liable. In that way, the clause could be exceedingly retrospective. We have had exceedingly unconvincing replies from the Financial Secretary and he should look at this matter again.
Mr. Denzil Davies
I hesitate to intervene again, but I have looked at the subsection in detail and as I read it the primary liability falls upon the trustees of the settlement. Whether the trustees are resident here or abroad subsection (3)(a) says that the trustees are liable, and they are the persons who actually make the payment.
Therefore, when the trustees are about to make the payment they will no doubt consider subsection (3)(a) most carefully, because they are the people making the chargeable transfer. If the Revenue cannot get the money out of the trustees we then look at paragraphs (b) and (c). The Revenue will logically look at paragraph (b) and (c) because under them we have the persons who receive the payment. Under paragraph (b), if it is a life interest, the person who receives the money will [column 709]be the one the Revenue will go against. If he is not a life tenant, if he is a discretionary beneficiary, the Revenue goes against him under paragraph (c).
If the beneficiary at the end of the day is not prepared to pay up, in the last resort the Revenue would go against the settlor in this country. To talk about bankrupting the settlor in this country when the trustees he has chosen and his beneficiaries have refused to pay the tax to the Revenue, when the trustees have made the payment, when the beneficiaries have received the payment, and to say that the Revenue is acting unreasonably in going against the settlor is complete humbug.
Mr. Graham Page
The hon. Member for Llanelli (Mr. Davies) has read the clause entirely wrongly. It does not say go for the trustees of the settlement first; there is an “and” between every paragraph; there is no statement at all that the trustees of the settlement are primarily liable. If it is a settlement in which the trustees are non-resident, one looks not at paragraph (a) but at paragraph (d) and it is paragraph (d) that we are talking about. There is no question of going first to the trustees if they are not resident here. If they are not resident, one goes to the settlor.
The first people I should have thought the Inland Revenue would go against would be the trustees, because they make the transfer. It may be that the trustees would not answer letters; may be the trustees would be crooks; maybe the trustees are in Kenya or Zambia.
Logically, the next person to go against would be the person who actually received the money, and that would be the beneficiaries under the settlement. If the Revenue were unable to get it out of the beneficiaries at the end of the day it would go back to the settlor. I imagine that that is how it would be done.
It does not say so in the clause.
It does not prevent it, either.
Yes, it does. It says that if the trustee is non-resident, one goes against the settlor—that is in paragraph (d). It says quite definitely that if the [column 710]trustees are resident abroad, the settlor becomes liable. The first two sentences of subsection (3) say:
“Where the chargeable transfer is one made under Schedule 5 to this Act, the persons liable are—…
(d) where the chargeable transfer is made during the life of the settlor and the trustees are not for the time being resident in the United Kingdom” ——
it is the settlor who is liable. It is perfectly clear, when these circumstances arise, and the trustees are not resident here, that it is the settlor who is liable.
This is a point which had not been taken by the Financial Secretary, that the settlor could be personally liable for payment. As one of my hon. Friends said, if the trustees are not resident here and are resident abroad, one has to consider whether, in all good faith of wanting to pay the tax, they would be able to pay it.
I would inform the Financial Secretary that for about 20 years I have been trying to get money out of Sri Lanka—or Ceylon—for a constituent and I cannot get it out of that country. If I tried to get money out of Uganda, I should be in just the same position. If I tried to get money out of Tanganyika, at present I should be in the same position.
We shall have this situation again and again, particularly with those who have come to this country from such countries—and there are a good many quite wealthy people here at present who may well come under the clause. The settlor will then be personally liable to pay the tax out of his own pocket—not out of the trust funds—without being able to get an indemnity or being reimbursed from the trust funds.
If the Financial Secretary is not willing to remove paragraph (d) altogether, he must make some provision that, if the trustees are unable to pay, the settlor is not called upon to do so if the trustees are prevented by the law of a foreign country from paying the tax. I do not like to look a gift horse in the mouth, but I was very grateful for the kind remarks that the Financial Secretary made about Amendment No. 792, saying that he would look at the matter of the appointment of trustees after 26th March that is, that the clause would bite only if the trustees were appointed after Budget Day 1974.
In that case there will be some relief, but I still support my hon. and right hon. Friends in seeking greater relief, and I fear [column 711]that the Financial Secretary has not seen all the implications of the clause as it stands.
I am astonished at the doctrine just enunciated by the hon. Member for Llanelli (Mr. Davies). He was so caught up in humbug that he thought he had discovered that he had not read the clause properly, so my right hon. Friend's reading of it must be right. If the hon. Gentleman's reading of it had been correct, we should have had a curious situation where if liability fell only on the trustees primarily and later on the transferor, the transferor would not only have to pay, but, in a sense, would have made a gift by extinguishing the liability of the trustees. He would have made a gift to the trustees and would be liable to pay capital transfer tax on that as well. So my right hon. Friend's reading of the clause must be correct.
What astonishes me is that as a distinguished member of the legal profession, he is saying that it is fair and right to take the liability from the transferor, even though the transferor has nothing to do with it and knew nothing about it, simply because the trustees cannot be caught. By the same logic we might say that if the transferor cannot be caught, catch the transferor's brother or his daughter! This is a most absurd doctrine. The question must be whether the transferor has any control.
[Mr. Denzil Davies in the Chair.]
As I was unable to make any impression on the hon. Gentleman sitting over there, I decided to move into this Chair.
The hon. Gentleman is sitting in the Chair and I feel that the responsibility of his temporary office means [sic] at least temper some of his comments and make him a little acceptable.
On a point of order, Mr. Davies. Perhaps the Chair will explain. We have seen a change in the personality of the Chair and some of us are a little surprised. It would help if it could be explained to us.
I am told that a temporary change for 15 minutes is in order.
On a point of order, Mr. Davies. Some of the earlier remarks of the hon. Member for Llanelli (Mr. Davies) seemed to be on the point of veering out of [column 712]order. Can you rule, Mr. Davies, that the hon. Member who has now left his place was in order in discussing this provision?
I am advised that the hon. Gentleman should pursue that point with the Chairman when he returns.
If the hon. Gentleman the Member for Blaby has finished his remarks and no other hon. Gentleman wishes to contribute, I shall begin.
Under the passions that have been generated during this stage of our proceedings there may have been misunderstanding on a couple of points. First, the settlor can only be liable if the trustees fail to pay the tax within the proper time, that is, six months. I direct the attention of hon. Members to Clause 25(5)(b) in support of that contention.
If the settlor pays the tax, he has a right of recourse against the trust property, referred to in Clause 26(3). He may not be able to enforce it if the property is overseas, but neither would the Revenue be able to enforce its rights overseas. [Sir Stephen McAdden in the Chair].
That brings me to the most substantial point, made by the right hon. Member for Crosby (Mr. Page). We were discussing situations where the assets in the trust might be blocked abroad. There is a serious point here, and I undertake to look at that again.
The hon. Member for Norfolk, South (Mr. MacGregor) is quite right in his questions and the interpretation he gave of certain examples he gave of settlements, I do not have the details of the two cases before me, but I note that his interpretation is correct in both cases.
I do not think for one moment that the hon. Member for Cirencester and Tewkesbury (Mr. Ridley) was being serious when he raised his point, but, if he needs reassurance, one does not change one's residence merely by going on holiday.
I was a little disturbed at the lack of opportunity which your absence provided, Sir Stephen, for the hon. Member for Llanelli (Mr. Davies) to intervene on my intervention. I hope that the Financial Secretary does not think that he has replied to the points made by my hon. and learned Friend the Member for Dover and Deal (Mr. Rees), my hon. [column 713]Friends the Members for Hertfordshire, South (Mr. Parkinson), for Kingston-upon-Thames (Mr. Lamont) and, in particular, for Norfolk, South (Mr. MacGregor). My hon. Friend the Member for Norfolk, South made a number of pertinent points that have not been answered at all.
I want to give the Financial Secretary as much time as possible in which to reveal himself and to reply to our questions, I do not think he wished to mislead the Committee as much as he did when he said there may be circumstances in which the settlor has had no say in the appointment of trustees. We are not talking about the initial appointment of trustees. We are saying that once the trustees are appointed the settlor has no further control over them. He cannot remove them or dictate what they do, he is not accountable for them, and he does not even know what they are doing. He may have fallen out with them.
Mr. Norman Lamont
Will my hon. Friend agree that it might have been a much more realistic summary of the situation if the Financial Secretary had said that there may still be some settlements with foreign settlors which are controlled in this country?
That is a good point. But the settlor will not have any control over the beneficiaries. They are the beneficiaries he chose, but as they grow up and relationships change he has no control over them. He may know nothing about them.
This is yet another piece of retrospective legislation. We always feel strongly about them, and I am sorry we have not heard anything from the Liberal Party about it. The Liberal Party is usually quite good on this principle, but evidently it has lost its way, and principle is not what it was in the Liberal Party. It is grossly inequitable to hold the transferor, who has no control over the situation, responsible in retrospective legislation for acts by trustees.
Sir John Hall
I am reluctant to say that the Financial Secretary's reply is disappointing because one has to say that so often. It is becoming platitudinous, and, as we know, a platitude is a truth we are tired of hearing. I had thought that we should have an authoritative interpretation from the Financial Secretary, at least putting at rest the mind of my right hon. [column 714]Friend the Member for Crosby (Mr. Page), who spoke to his amendment with such eloquence and skill.
It is the skilled interpretation and reaction of the people who have to work the Bill and who are affected by it that matters in the end. Their interpretation if we are to judge from the extract from the Evening Standard—which I am sure, Sir Stephen, you will allow me to read—is similar to that of my right hon. Friend the Member for Crosby. If I may quote from tonight's Evening Standard—it has been referred to already—the City editor, who has a wide experience of interpreting Finance Bills of one kind and another and encyclopaedic knowledge of tax law, has this to say about the matter we are discussing:
“A further absurdity concerning trusts: A foreign trustee of a trust set up by a UK resident can bankrupt the settlor by distributing to somebody outside the UK, even though the settlor may have no control over the distribution or even knowledge of it. He will be liable to gifts tax” .
This is precisely what we have been saying. He goes on to say:
“You may think these transactions are so rarefied that they do not concern you” ——
he is addressing his readers, of course, and he continues:
“You would be wrong” .
He gives many examples of tax laws of this kind having been passed with the idea that they would affect only a few people, whereas in the end they were found to affect a very large number.
I wish the Financial Secretary would bear in mind the way in which this Bill will be interpreted if and when it becomes law. It is no use expressing views here if they are not the views interpreted by the courts when cases come before them for decision. I wish that he would give the Committee a more authoritative interpretation of the clause than he has so far given. Perhaps—as with so many of his clauses—he does not understand it fully. I can appreciate that. They are difficult to understand, except for lawyers. I am myself frequently at a loss to follow not only the meaning of the original clause but the arguments on the amendments, and I am not helped very much by the answers given by the Financial Secretary, who seems to be just as lost as I am. But on this occasion I [column 715]think he might do better to explain what the clause means and set at rest some of the deep doubts expressed by my right hon. and hon. Friends.
Mr. Peter Rees
I hesitate to intervene again but I have been stunned by the assertion from the Government side that we are guilty of humbug. At this hour of the night, I find these charges woulding. I, too, have my sensitivities, as do hon. Members on the Government side.
I want to put one short example to the Financial Secretary to convince him that there really could be hardship here. I take the case of a husband—I am building on facts known to me and others in my profession—who has set up a settlement on the occasion of his marriage, before last year, before he had heard of the Financial Secretary. Let us say that he was lucky, unlucky, enough to marry a foreign lady. He was later unlucky enough to get divorced, and the court, as was perfectly proper—very common in times past, though it may not be so common in the future—varied that settlement to extinguish his interest so that the only people remaining interested were his former wife, of foreign extraction, and his children. The former wife then returns to her country of origin, taking the children, and—this would be both convenient and be sanctioned by the court—she arranges for foreign-resident trustees to be appointed. Neither those foreign-resident trustees nor any person interested under the settlement would be very tender to the interests of the former husband, the settlor. He could be very severely affected. The trustees would not be at all concerned that what they were doing might affect him. It might not be by their design—it may be by the periodical charge—but let us imagine that the wife says to them “I want some capital” , so that there is an advance of capital, or something of that kind, which brings a charge to capital transfer tax. The husband has no control whatever over the trustees. They are probably indifferent and care nothing for his interests, nor do any of the other people interested under the settlement.
I ask the Financial Secretary to bear that case in mind. In a future situation the court may say “This is something which might happen. Therefore, we shall [column 716]not extinguish the husband's interest. We shall not sanction the appointment of a foreign-resident trustee unless there is some undertaking” . That is why I go back to the point made by my hon. Friend the Member for Hertfordshire, South (Mr. Parkinson) that it could well be that there are situations already in existence like that. Indeed, I am certain that I have come across situations like that. That is the kind of situation where there is no hint of tax avoidance, no hint of defrauding the Revenue, and no multinational companies involved—none of the emotive factors which lead Government Members to take up an opposite point of view. It is to deal with that kind of situation that I ask the Financial Secretary to take a much closer look at this provision than he seems prepared to do at the moment.
I had not intended to intervene and I shall only do so briefly. The Chief Secretary attempted to base part of his defence on Clause 25(5)(b). As I read it, that does not apply and is not relevant to Clause 23(3)(d). I am becoming used to examining rather closely what the Financial Secretary says when he produces from all over the place other clauses that are going to apply and get us out of the difficulties we are proposing. Clause 25(5)(b), as I read it, comes into operation only if tax remains unpaid after it ought to have been paid. In the case we are discussing—under Clause 23(3)(d)—nobody ought to pay it except the settlor, who is the only person concerned, as my right hon. Friend the Member for Crosby (Mr. Page) pointed out. Therefore, I cannot see how Clause 25(5)(b) applies.
The last few minutes of our discussion have been more helpful than some of the previous ones, when we have discussed individual cases rather than dealing with these matters in great generalities.
To come to the last point of the hon. Member for Gloucestershire, South (Mr. Cope). I think there is a misunderstanding here. I thoroughly agree with his interpretation of Clause 25(5)(b). We were talking there about a situation in which the tax has not been paid within the six months, but I cannot follow the hon. Member in his interpretation of Clause 23. As far as that is concerned, I think my hon. Friend the Member for [column 717]Llanelli (Mr. Davies) has got the construction of that clause correct on this occasion and the right hon. Member for Crosby has not. It is very unusual, but I suggest that the right hon. Member for Crosby has not got the sense of the clause correctly. I shall certainly study it again. I give the Committee that assurance. But my hon. Friend's interpretation is the right one.
I shall certainly look at the case put forward by the hon. and learned Member for Dover and Deal (Mr. Rees) and see whether there is anything we can do to meet that, just as I have undertaken to consider the other point made by the right hon. Member for Crosby in respect to situations in which trust assets are blocked and the settlor who has been caught cannot possibly get satisfaction for enforcement of his rights against the trust property under Clause 26(3).
I shall also examine the points raised by the hon. Member for Norfolk, South (Mr. MacGregor), but I cannot go any further to help the Committee.
I am glad that the Financial Secretary is going to look into the question of which interpretation of Clause 23(3)(d) is right—whether it is that of the hon. Member for Llanelli (Mr. Davies) or that of my right hon. Friend the Member for Crosby (Mr. Page) and most of us on the Opposition side.
If it should so happen that the Financial Secretary is right and the construction put on the clause by the hon. Member for Llanelli is correct, can he point to which clause in the Bill assures that if a settlor discharges what is primarily the liability of the trustees that is not in fact a chargeable transfer by the settlor to the trust for which the settlor will be responsible to pay capital transfer tax on? That is a very serious point.
I shall certainly look at that point as well when I consider whether my hon. Friend or the right hon. Gentleman is correct. But I do not think the situation arises.
It seems to be a disjointed debate, with people appearing in different rôles at different times. I think enough has been said from the Opposition side to show how doubly obnoxious we believe both the provision itself and [column 718]the retrospective element to be. But in the light of what the Financial Secretary said—that he will look at four points, even though we know the retrospection element is not among them and we feel very strongly on this—I do not advise my right hon. and hon. Friends, at this stage, to press the matter to a Division. We shall return to this matter on Report—and before Report we shall return again and again to the deeply obnoxious retrospective element which appears, yet again, in the amendment.
The Financial Secretary has been saying all evening that he will look at something again. We are grateful for this. As my hon. Friend said, the Minister intends to look at four points on this clause.
From my previous knowledge of Committee stages of Bills I know that one gets a lot of “I promise to look at” and when we reach Report and there is a great hustle and bustle if no amendment is on the Order Paper, nothing happens. Will the Financial Secretary undertake to tell the Committee—or the House, later—the result of some of his “lookings at” ? If nothing appears on the Order Paper there is little that the House can do to return to the matter. It is put in a difficult position because of the pressure to get the Bill through on Report, and the day the Government amendments are put down will leave little time for us to check through all the things he is looking at, to see what he has looked at successfully and straight and what he has failed to look at properly and has done nothing about.
I shall be grateful if the hon. Gentleman will give us an undertaking that he will tell us the results of all his deliberations at one stage or another.
Without accepting the correlation that the hon. Gentleman seeks to establish between what one adduces proposals for and has got right, and what one does not adduce proposals for and has not got straight, in the hon. Gentleman's terminology, where my right hon. Friend and I are persuaded, just as our predecessors on the Government Front Bench were persuaded, of the merits of a case and practicability of introducing amendments, Government amendments will appear. The hon. [column 719]Gentleman is well aware of that. If we are not so persuaded, Government amendments will not appear, and it is up to the hon. Gentleman, clearly from a look at the Order Paper—there is nothing extraordinary in that doctrine—to put down his own amendments, as it was open to us in opposition——
Mr Graham Page
I do not know what the habit of the Treasury is, but speaking from the time when I was a Minister, we always informed the Opposition when we were not going to put down an amendment on which there had been an undertaking.
I have not finished yet. The right hon. Gentleman is uncharacteristically impatient. I have already the intention of writing to hon. Gentlemen on several matters that have come up in respect of which I have been unable to meet the point that they have sought to press upon us but where I have undertaken to re-examine the matter. I hope to be able to do that with respect to all the points. I cannot make them affirmatively, because there may be instances where the drafting would not get through in time. But that certainly would be my intention.
Perhaps I may add a word. Two points arise on the amendment. First, the clause is doubly obnoxious to us because the settlor ought never to be liable under some of the circumstances that have been raised, regardless of when the trust was made. He ought never to be liable. Those instances have been given by my hon. and learned Friend the Member for Dover and Deal (Mr. Rees) and by other hon. Members.
The second question is the retrospective element. Both are fundamental.
I am anxious to make progress, which is why I advise my hon. Friends not to press the matter to a Division, if [column 720]the John GilbertFinancial Secretary genuinely intends to look at the fundamentally obnoxious provisions. But if he intends only to look at the ancillary points, taking the separate examples rather than underlying reasons for their having been raised, I feel that we should proceed to a Division. What I really want is an assurance that the hon. Gentleman will consider the underlying reasons for what we would describe as obnoxious provisions.
I do not think that the right hon. Lady could have been listening to me very closely before her hon. Friend got up and gave rather contrary advice to her right hon. and hon. Friends. I undertook to examine the four points that I enumerated, and beyond that I did not go. If that does not satisfy the right hon. Lady, when a moment or two ago it satisfied the hon. Gentleman, I am sorry, and it is open to the right hon. Lady to divide the Committee. I think that I was quite clear in the undertaking that I gave, and I am not attempting to resile from it in one degree.
There are two ways of looking at this. One is as limited specific examples. The other is as examples of a fundamental principle. Which one is the Financial Secretary adopting?
I am sorry. I was not intending to undermine the fundamental principle contained in the clause. I am sorry if I gave the right hon. Lady a different impression. I certainly did not intend to do so. I thought that I made it quite clear by my remarks that I was looking at the four sets of circumstances that hon. Gentlemen had pressed upon me.
Question put, That the amendment be made:—
The Committee divided: Ayes 15, Noes 16.
Cope , Mr. John
Hall , Sir John
Hordern , Mr. Peter
Howell , Mr. David
Lamont , Mr. Norman
Lawson , Mr. Nigel
MacGregor , Mr. John
Newton , Mr. Tony
Page , Mr. R. Graham
Pardoe , Mr. John
Parkinson , Mr. Cecil
Rees , Mr. Peter
Ridley , Mr. Nicholas
Ross , Mr. Wm.
Thatcher, Mrs. Margaret
Barnett , Mr. Joel
Bates , Mr. Alf
Boothroyd , Miss Betty
Callaghan , Mr. Jim
Davies , Mr. Denzil
Dunnett , Mr. Jack
Gilbert , Dr. John
Graham , Mr. Ted
Harper , Mr. Joseph
Hayman , Mrs. Helene
Hoyle , Mr. Douglas
Hughes , Mr. Mark
Shaw , Mr. Arnold
Tomlinson , Mr. John
Ward , Mr. Michael
White , Mr. Frank R. [end p1]
[column 721]Question accordingly negatived.
[column 738] Second extract
Limitation of Liability
Mr. Graham Page
I beg to move Amendment No. 796, in page 21, line 4, at end insert—
“(2A) A person shall not be liable for tax as settlor except so far as the tax is attributable to the value of the asset, settled by him, at the time of settlement thereof.”
We are now embarking on something far more serious than the mere drafting amendments with which we have been dealing in the previous clause. I was hoping that at this late hour the Chief Secretary would be leaping to his feet and relieving us of further discussion, thereby allowing me to get not to that very large bed which holds five people but to my ordinary bed at home.
This amendment deals with a new subsection to Clause 25, which limits liability to the tax. I note that, although it limits the liability of particular persons, it does not limit the liability of a settlor. Even if one considers the definition of settlements in the first paragraph of Schedule 5, there is still no limitation in the case, for example, where a settlor of certain property is not necessarily the settlor of the whole of the property settled.
Let us take as an example a settlement of £1 million, to which a relative [column 739]contributes £10; he is also a settlor. This frequently happens. The settlement is made for the wife, the father-in-law puts some money in it, so does the mother-in-law, several relatives contribute, and they are all settlors. Under the clause, if I understand it correctly, any one of those persons may be liable for the tax arising out of the whole settlement. If it was a settlement for £1 million, as I suggested, and one person contributes £10, that person might be liable for the tax arising on the whole of that £1 million, for there appears to be no limitation on the liability of the settlor.
It frequently happens that a substantial settlement is made by one relative and others join in and contribute towards that settlement. As I say, I do not think the definition of “settlement” in Schedule 5(1) relieves the part settlor in those circumstances from having a possible liability for the tax on the whole settlement. That is why I should like to see the words of the amendment incorporated in the clause—
“A person shall not be liable for tax as settlor except so far as the tax is attributable to the value of the asset, settled by him, at the time of settlement.”
This cannot be said to be an avoidance of tax. It is mere fairness as between settlors. I should not have thought that there could possibly have been any objection to a subsection of this kind.
Like any draftsman of a subsection, I think that the wording is perfect, and I am sure that the Financial Secretary can accept it exactly as it stands. However, if he wants further time to look at it with his draftsmen I shall not object as long as he accepts the principle. But it is such a simple amendment and so fair that he is bound to accept it.
I have a difficulty about accepting the principle put forward by the right hon. Member for Crosby (Mr. Page). As I understand it, what we are talking about is where a settlor has made a small addition to a substantial overseas settlement by some other person, antecedent to his own contribution to the settlement where he as a result, if the fears of the right hon. Gentleman were realised, would find himself liable for tax on the whole of the settled property, including the part settled by other persons. I am glad to have the right hon. Gentleman's assent. [column 740]
I am informed that this fear is unjustified. The question of the meaning of “settlement” where there are different sets of trusts in one instrument, or where additions are made to the assets held on one particular set of trusts, comes under Schedule 5.
I am also advised that when different persons have contributed to the property held on a single set of trusts, each contribution will be treated for the present purpose as a separate settlement.
I hope that that assurance is adequate for the right hon. Gentleman. This matter will be discussed on Schedule 5, but if the right hon. Gentleman is not satisfied with that—I know this is another Law Society representation—I shall be happy to look at it again. There is no point of substance between us whatsoever. As I am advised at the moment, I do not think his amendment is necessary.
Mr. Graham Page
I am much obliged to the Financial Secretary. I should have been happier if he could point out to me the words which deal with the separate settlements in that way. If it will delay the proceedings in any way, I am quite happy to have it from him in a note of some sort later. But if he could put it on the record now, it would be a great help.
I think it would be best if I look at it again, if that is agreeable to the right hon. Gentleman. But I undertake to meet him on that.
In those circumstances, I beg to ask leave——
We looked at this schedule with this point in mind, in particular paragraph 1(2). What we read there did not encourage us to think that the settlor would be liable only for his part, but might be liable for other parts as well. I understand that it may be the construction of the entire schedule upon which the legal advisers are relying. If the Law Society feels that that is not adequate, that is something that we should take into account, and we should have a specific subsection to make it clear that the settlor is liable only for his part of the settlement.
I believe that there is an amendment to Schedule 5 which encompasses the right hon. Lady's purpose. There is no difference between the two [column 741]sides on this matter. Therefore, I undertake to meet the points raised by the Opposition side.
I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Mr. Norman Lamont
I beg to move Amendment No. 215, in page 21, line 24, at end add—
“(5) Where the transferor and the transferee (within the meaning of section 23(8) of this Act) agree that the transferee is to bear the tax on the value transferred and the transferor informs the Board of such agreement in the account delivered under paragraph 2 of Schedule 4 of this Act, subsection (5) above shall not apply and the persons other than the transferee shall be liable only if the tax remains unpaid after it ought to have been paid.”
The purpose of the amendment is to remove the immediate liability of the transferor. If the transferee agrees in writing at the time of the delivery of account of the transfer to the Board, in accordance with Schedule 4, paragraph 2, it would seem that in many circumstances the transferee might have the greater means of payment. I cannot see why the method of payment should not be allowed as in the amendment, provided one has the transferee's agreement in writing. I do not think this affects in any way the tax paid, the grossing-up, and does not provide any scope for avoidance. There is nothing in the amendment which would prevent the Revenue, if the tax was not paid when due, from going through all the elaborate procedures, as laid down in Clause 23. If we could have a late-night “goody” from the Financial Secretary it would be an acceptable note on which to go home.
I am not entirely clear as to the thrust of the hon. Gentleman's remarks on the amendment. It seems to me that he is trying in certain circumstances to reverse the proposals in the Bill for allocating the liability for capital transfer tax payments. Clause 23(2) and 23(5) provide that, in the case of a lifetime transfer not affecting property already settled, liability to pay the tax rests primarily on the transferor, as the hon. Gentleman knows. Only if the tax remains unpaid after due date does the liability spread.
The amendment proposes to alter that in a case where the transferee is to bear—that is, actually pay—the tax by putting the [column 742]primary liability on the transferee; in other words, to reverse the positions envisaged in the Bill of the transferor and transferee.
It may be for the convenience of the Committee if I establish, first, that bearing the tax is a separate notion from liability for it. The first—bearing the tax—connotes the incidence of the tax—that is, who finds it at the end of the day—and this is something which will affect the measure of the chargeable transfer and therefore the measure of the tax itself. The second, liability, is a matter of who is answerable to the Inland Revenue for payment of the tax; and in that connection, under Clause 23(1), once the persons primarily and secondarily liable have become concurrently liable each is answerable to the Revenue for the whole amount of the tax.
Given that it is not apparently intended to disturb the existing accounting responsibility, and given also that it contemplates the spread of the liability to the persons other than the transferee once the due date for payment of the tax is past, I am not altogether clear about the point of principle the hon. Gentleman is raising. At the end of the day, the important thing from the Revenue's point of view is that it can have recourse against anybody connected with the transfer who has the means to satisfy the tax charge. It would be unsatisfactory if it could be disturbed merely as the result of agreement between transferor and transferee about the terms of the transfer. An agreement between the parties that the transferee is to bear the tax on the value transferred means that the value of the transfer is itself affected for the purpose of the tax and will be measured by what goes from the transferor to the transferee and no more—that is, there will be no question of the chargeable transfer including the grossing-up provisions. I hope that satisfies the hon. Gentleman.
I am sorry. It is a little late and I think we are getting a little puzzled. The point arises in this way. Perhaps the John GilbertFinancial Secretary would tell me if I have it wrong. Supposing that all the donor, which is a shorter word than transferor, has is a business worth £100,000. He gives that in its entirety to his son and they agree that the son as donee shall bear the tax. The sum total of the gift at that moment is £100,000. I have forgotten what the rate of tax is, but let us suppose the tax is £50,000. They agree that the son shall be liable for £50,000. [column 743]
If the son, being the donee, is liable, surely the Revenue should only have powers to go against him and not against the donor. That is what I believe the amendment is intended to achieve. Whether it does I do not know.
Mr. Norman Lamont
It is not trying to turn it into an accessions tax. We are not trying to drive a coach and horses through the entire basis of the tax. We are accepting the rates that would apply on a particular transaction such as my right hon. Friend has described.
We are saying that, where it had been agreed between the parties, the primary and immediate liability would be removed from the transferor to the transferee. If it did not work out—in case the hon. Gentleman gets it in his head that I am creating some artifice by which evasion can take place—all the procedures of Clause 23 could come into effect for recovery of the tax.
This is a situation in which I have not understood the hon. Gentleman, because I do not see the need for the amendment. In a situation such as that referred to by the right hon. Lady, where there is transfer of a business and it is agreed that the recipient, the donee, shall pay the tax, that affects the value of the property transferred, which affects the total liability to tax. Where the Revenue goes to collect that tax is another matter. If the donor has no assets, the Revenue could go to the donee. At any time it is up to the donor and donee to make such arrangements between them as they see fit about who is to bear the tax. The decision that they jointly arrive at will, as the right hon. Lady and I agree, affect the value of the transfer.
I am at a loss to see the thrust of the hon. Gentleman's remarks beyond that. The £100,000 business is all the assets. The Revenue will have the right to go to the donor. The donor will not have any assets. Thus the Revenue will go to the donee for an amount that will reflect the agreement made between the donor and the donee as to where the tax should be.
This is another point. If my memory is correct—at this time of night it is likely not to be—and the donee is going to pay the tax, he has the chance to pay by instalments. He will not know whether the tax is going to be paid for a [column 744]number of years. It seems to make nonsense if, after seven or eight instalments. The Revenue can go against the donor. Ought the Revenue, in those circumstances, to have the right to go against the donee and exhaust its right to go against the donor?
The Revenue has always the right to go against either to get satisfaction and payment of the tax.
I suggest that the Financial Secretary has another look at it. We can see whether the amendment fully reflects what we intended it to reflect. We are in a slight muddle about when the donee can take liability for the tax and when he cannot. We should get that clear.
I do not think that there is any substantial controversy between us.
Mr. Norman Lamont
In view of what has been said—the Financial Secretary has made a substantial point—I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.