§ Where a debt or incumbrance has been incurred or created in whole or in part for the purpose of or in consideration for the purchase or acquisition or extinction, whether by operation of law or otherwise, of any interest in expectancy within the meaning of the principal Act in any property passing or deemed to pass upon the death of a person dying after the passing of this Act, and any person whose interest in expectancy is so purchased, acquired, or extinguished becomes (under any disposition made by, or through devolution of law from or under the intestacy of, the deceased) entitled to any interest in that property, then in determining the value of the estate of the deceased for the purpose of Estate Duty no allowance shall be made in respect of such debt or incumbrance, and any property charged with any such debt or incumbrance shall be deemed to pass freed from that debt or incumbrance.
§ Provided that—
- (a) If part only of such debt or incumbrance was incurred or created for such purpose or as such consideration as aforesaid, this provision shall apply to that part of such debt or incumbrance only; and
- (b) If a person whose interest in expectancy in the property so purchased, acquired, or extinguished becomes entitled to an interest in part only of that property, this provision shall apply only to such part of the debt or incumbrance as bears the same proportion to the whole debt or incumbrance as the value of the part of the property to an interest in which he becomes entitled bears to the value of the whole of that property.
§ Mr. J. W. HILLSMay we have an explanation of this complicated Clause?
§ Sir W. ROBSONAlthough I previously gave an explanation of the object of the Clause, perhaps it may be to the convenience of the Committee if I repeat that explanation as briefly as I can. The Clause turns upon a case recently decided in the House of Lords. This case disclosed a most important, I was going to say defect, but at all events a gap, in the system of Death Duties, which, I think I intimated before, it was really the interest of both sides of the House to stop. The practice adopted in that case really hit at the very root of the Death Duties in a way which greatly diminished, and in certain parts of England almost destroyed, the value of those duties. It was due to the ingenuity of a learned member of my own profession, whose duty it is, of course, to discover defects in the law, while it is sometimes their duty to maintain and enforce the law. A great landowner possessed an estate in Scotland worth about £700,000. He was advised that he might altogether escape Death Duties if he adopted the following device: The land of which he was the life tenant was settled land. He himself had reached the advanced age of 79. He arranged that he should purchase the interest in expectancy of his own decease. He had, as owner, a reversionary interest in the land which was worth over £450,000. Of course, owing to the great age of the gentleman himself, the reversionary interest expected upon his death was of considerable value. The landowner in question, a distinguished nobleman, agreed to purchase the reversionary interest of his own son, and the reversionary interest of his grandson. The sum agreed upon was between £600,000 and £700,000. He was giving to both of these descendants of his allowances suitable for their station—to his son £5,000 a year, and to his grandson £2,000 a year. 1536 He purported to pay the purchase money by bonds, and he gave interest on the purchase money. Of course he was not able to pay for the reversionary interest in cash. He gave a mortgage or bonds, and that burdened his estate with an incumbrance amounting to about £650,000. He lived for five or six years afterwards. At his death the interest upon the bonds had accumulated, so that the estate figured as though it was quite insolvent.
The burden substantially exceeded the value of the estate. However, on his death, the nobleman had taken the precaution of leaving all he could to his son and to his grandson upon the terms of the original settlement. Before he became the purchaser he had disentailed his estate, but he did his best to insure that the estate should be continued upon the lines of the old trust, so that the position was this, the actual situation of the parties being: The son and the grandson got their allowance after the conveyance as before they came upon the estate, and the estate appeared to be burdened with an amount beyond its value. But, of course, that value belonged entirely to the person who sold the reversion interest and had been enjoying the estate. When the Revenue came down to the son and the grandson and invited them to pay the Death Duties, they said, "No, we have got an insolvent estate." The result was the Revenue took an action, stating that the Death Duties could not be evaded with such facility as that, the object being clearly to avoid the Death Duties. The persons concerned were all gentlemen and business men, and they admitted that it was done to escape the Death Duties. The father purchased and the son sold for a valuable consideration, and therefore they entirely evaded the reversion as to gifts within 12 months. It was a transaction that might have been carried out on the eve of the death of the owner. It was not a gift. If we allowed that to continue we might as well give up the Death Duties altogether, and therefore this Clause was devised to meet that kind of case. The Clause is a little complicated necessarily by its phraseology, but the effect is this, that when a landowner creates an incumbrance for the purpose of buying out or extinguishing any interest expected upon his own death which would be the interest of the reversioner, and subsequently the person who parted with the reversion comes into possession of the property, then the incumbrance created for the purpose of that existing interest shall not come as a deduction from the value of 1537 the estate for the purpose of Death Duty. It is a strictly limited Clause. It leaves the owners still at liberty to create incumbrances for the purpose of reversion, but where the very person who sold him the reversion comes into the estate by virtue of will or deed or anything else, and then claims that the incumbrance which was created by him must be set off to save Death Duty, such claim shall not succeed. We have endeavoured to confine it strictly to the particular kind of thing we want to stop. I dare say in the course of time some fresh, ingenious lawyer may arise who will drive a coach and six through my Clause. If I happen to be relegated to a position of greater freedom and less responsibility I might myself show how this Clause could be evaded. I do not think, however, it can be done except at some risk. We have always got to run some risks in framing Acts and in endeavouring to evade them, but I think that this Clause will stand good. I am sure that I have safeguarded the case we desire to safeguard, and the particular case quoted will be adequately met by this Clause, and it will not go beyond that particular case. That was what I promised hon. Members opposite when we discussed this question on the Resolution. There are two paragraphs to the main Clause which deal with the case where part of the incumbrance was incurred for the purpose I have described. Supposing the life tenant of some great settled estate said, "I do not wish my son to succeed me, and I desire to be succeeded by my second son instead of by my eldest son." Under this proposal he would be quite at liberty to make any arrangement he thinks fit for that purpose. Although he might wish his second son to succeed him he might wish to provide that his eldest son should have a portion, and in that case it could be allocated. I think I have dealt with every practical case, and I can safely say that there will be no impediment here upon the landowner's free power of disposition, except in the one case where the intention is to evade the Death Duties, and that ought not to be possible.
§ Mr. WATSON RUTHERFORDThere are twenty-five lines to this Clause, and although there are twenty-five different ways of evading the Death Duties, you can only stop up one of them. I suppose I should be out of order in explaining what the other twenty-four are. The danger of a Clause of this kind is that every one of those lines leave a place where you can 1538 find a hole. If you cannot stop the evasion of the Death Duties in a simple manner, if you are obliged to explain your action in 25 lines you may depend upon it you will not stop it, and ingenious persons will find a way of getting out of it. I look upon the whole of this Clause as perfectly useless, except to prevent that happening which has happened. As we all know, it is not much use locking the stable door after the horse has been stolen. If the Government like to fill up the pages of the Statute Book with Clauses of this description there is no way of preventing them. I am at a loss to imagine what possible utility there will be in doing so when the case has been decided, and the Government have been beaten upon it and the evil has taken place, and other methods will be resorted to in order to evade the Death Duties. I do not look upon it as any particular gain to pass a Clause like this. The Attorney-General goes to the courts and argues it before the House of Lords, and the House of Lords take the view that some ingenious person has evaded the Death Duties. "Oh," says the Attorney-General, "I will stop that; I will put a Clause in the Finance Bill." Of course, the decision of the House of Lords was given after the Finance Bill was well under discussion. Therefore, the whole of this Clause is an afterthought, and it seems to me, with great respect, rather a silly afterthought.
§ Clause read a second time, and added to the Bill.
§ Committee report Progress; to sit again to-morrow (Friday).