§ (1) It shall be the duty of the trustees of any estate or fund, in whom is vested a discretionary trust as to the payment or distribution of the income thereof to or among beneficiaries, or the application of such income for the benefit of any beneficiaries, to retain out of any income or sum which, by virtue or in consequence of any exercise of such discretion, any beneficiary or object of the trust shall become entitled to receive, or to have applied for his or her benefit such a sum as will be sufficient to answer any claim of the Commissioners of Inland Revenue in respect of the Sur-tax payable upon such income or sum.
§ (2) The trustees shall give notice to the Commissioners of Inland Revenue of such retention, and shall supply to such Commissioners all such details and information as the Commissioners shall require with reference thereto, and shall continue to hold the sum retained until either—
- (a) the Commissioners shall state in writing to the trustees that all claims for sur-tax in respect of the income or sum above referred to have been paid and satisfied, in which event the sum retained shall be paid or applied in accordance with the trusts affecting the income or sum out of which such retention was made; or
- (b) the Commissioners shall state to the trustees that, default having been made in payment of such surtax, they require payment to themselves of the sum retained, in which event such sum shall be paid to the Commissioners, and shall be applied in or towards satisfaction of the
2070 sur-tax due from the beneficiary in question.—[Sir G. Hurst.]
§ Brought up, and read the First time.
§ Sir GERALD HURST
I beg to move, "That the Clause be read a Second time."
The purpose of this Clause is to provide a check against the abuse which exists at present by which beneficiaries who enjoy income under a discretionary trust, particularly in cases where there is also a protected life interest, have proved themselves to be able to avoid payment of Surtax over a number of years. This abuse claimed a good deal of publicity in the case of Sir Thomas Beecham in the courts on 30th April last. The facts were that the beneficiary, under a discretionary trust and with a protected life interest, was found to be enjoying an income of £18,000 a year and to have run up arrears exceeding £71,000 in respect of Super-tax and Surtax. Owing to this being a discretionary trust, the trustees had absolute power as to whether or not they would pay the income derived from this trust fund to this particular beneficiary. Owing to there being a protected life interest, the policy of the Inland Revenue authorities had been not to make the beneficiary bankrupt, because they feared they would lose all the arrears owing to the State. The result was that this particular debtor, who owed the State over £71,000, was able with absolute impunity, and without any interference or check by the authorities, to enjoy an income of over £18,000 a year. It is true the Attorney-General said that the Government hoped to arrive at some composition, something like 10s. in the £, but that did not carry with it the full rights, which the Crown should enjoy, and in all these different cases of discretionary trust the Crown has no power of control in regard to Surtax. The trustees may be liable for Income Tax, but the beneficiary, who is the only person liable to Surtax, has been able, and is able, to avoid payment.
A week after that case there was another one, the Whitburn case, which came before the Court of Appeal, and in which Lord Justice Scrutton said it was a matter of legitimate inquiry how the State could allow a reckless spendthrift to run up an enormous debt of £63,000 while other people were struggling to pay Income Tax and Surtax. It is an extra- 2071 ordinary instance of the way in which some beneficiaries under trusts can avoid Surtax that these two debtors should owe the State over £134,000 Surtax while the great mass of the population are made to pay their taxes. One has to compare that impunity with the annual return of over 2,000 persons going to prison for non-payment of rates, and nearly 100 every year for non-payment of taxes. Of course, a more enlightening contrast is between these debtors and people who do, in fact, pay the tax. In every part of the country you have people pinching themselves, making sacrifices, to find the money to pay taxes, whereas these debtors avoid payment altogether. The object of the Clause is to provide simple machinery by which in some cases this avoidance of a national obligation to pay Surtax can be checked.
The idea of the Clause is that it shall be the duty of the trustees to impound a certain amount of the income derived from the trust estate with a view to having funds available in the event of the beneficiary not paying the money himself. When the trustees are satisfied by the Commissioners of Inland Revenue that the beneficiary has paid the tax, the impounded income is released and goes to the beneficiary. This Clause is one which, I believe, is watertight. It does not go the whole way, but at all events, it would prevent the avoidance of Surtax in a very large number of cases. It may not go as far as one would wish, but it goes a certain way, and I think it would prevent a considerable number of the abuses which have scandalised the country. People feel that there is inequality before the law—that, while some are making great sacrifices, these splendid debtors are able to avoid those sacrifices with impunity. I hope that the Chancellor of the Exchequer will seriously consider this Clause with a view to accepting it and if possible enlarging it to cover a greater number of cases. It in no way increases the charge upon any taxpayer, but simply avoids the present inequality and unfairness.
I beg to second the Motion.
My hon. and learned Friend is well qualified to speak from the legal point of view, and I desire to speak as a layman 2072 appealing for the simple taxpayer. The ordinary taxpayer like myself had never heard of the discretionary trust until some six weeks ago, when the Beecham case was before the courts, and he knows very little about the details now; but he knows that he is honourably and honestly doing his best in difficult circumstances to pay his share of the crushing burden of direct taxation, very often realising capital for the purpose of paying what is a recurring charge, and he resents it very much when he finds that richer men than himself are able, by such means as this, to escape their liability in regard to Surtax.
It is obvious that in these difficult financial times the Chancellor of the Exchequer must be seeking in every possible way to mend any hole that there may be in his tax-gathering net, and I hope, as will other taxpayers, that he will be able to accept this Clause in the spirit in which it is offered—because it is meant to be helpful—or, if he cannot accept it in the precise form in which it is put down, that he will at any rate take up the idea and clothe it in words which he may be advised are preferable, because I am sure it ought to be possible to prevent such trusts from enabling spendthrift beneficiaries to escape their liabilities.
§ 11.0 p.m.
I have given careful consideration to this Clause, with a great desire to meet my hon. Friends. I have every sympathy with the purpose they have in view, but I cannot agree with my hon. and learned Friend the Member for Moss Side (Sir G. Hurst) that it is watertight or is a simple piece of machinery. I do not think it is possible for me to accept it, for the simple reason that it appears to me to impose upon the trustees of these discretionary trusts a duty which they cannot carry out. Consider what they are asked to do. They are asked to set aside, from the income which is to come to the beneficiary, a sufficient sum to meet any claims for Surtax which may be made upon him by the Commissioners of Inland Revenue. How on earth are the trustees to know what the claims for Surtax are going to be. They will depend, of course, upon the whole income of the beneficiaries, and the trustee will have no means of knowing what that income is going to be. It is 2073 quite possible that a particular individual might not only have income apart from the income derived from the discretionary trust. He might have not only income derived from investments of his own but he might be the subject of a second or a third beneficiary trust. It would seem to be quite impossible to ask the trustees to carry out the duty, which it is sought to impose upon them by the Clause as drafted. Having said that, I would say to the Seconder that I agree, that there is here something that requires to be remedied and I do not think it should be beyond our powers to devise some means of remedying it. But I do not think the thing is very simple or easy. It will require careful consideration and all I can promise at the moment —and I promise this—is that we will give our earnest and careful consideration to the subject and to the purpose which my hon. Friends have in view and will endeavour to find a Clause which shall be watertight and which shall not impose upon trustees anything that they are not able to carry out.
§ Sir G. HURST
Having regard to what my right hon. Friend has said, which is satisfactory to everyone interested in the cause which the new Clause is designed to promote, I beg to ask leave to withdraw it.
§ Motion and Clause, by leave, withdrawn.