CLAUSE 19.—(Provisions as to income settled on children.) (Hansard, 15 June 1936)

§ Sir A. M. SAMUEL
I beg to move, in page 18, line 32, after "is," to insert, after the twenty-first day of April, nineteen hundred and thirty-six. I formally move this Amendment, which stands in the name of my hon. Friend the Member for Cambridge University (Sir J. Withers), in order that we may have a reply from the Treasury.

§ Mr. W. S. MORRISON
This Clause deals with the question of income settled on children for the purposes of education, and is a very different class of case from those we have been considering hitherto. Whereas those Clauses which we have been considering deal with tax evasion in its most, undiluted form, when one comes to this particular form of transaction one has to approach it in a very different spirit, because you have here the element no doubt to some extent of a saving of taxation, but it is all mixed up with a highly commendable, prudential motive on the part of the parent who desires to make some provision for his children, so we have to be careful how we go about this Clause. The Amendment now before Us is one of a string of Amendments all of the same character. My hon. Friend, I think, is afraid that there may be some element of retrospection in this Clause and fears that unless the Amendment is accepted, the operation of it will go back to previous years. I can assure the hon. Member and the Committee that that is not so. The provisions of Clause 19 apply as from the current year 1936–37, commencing on the 6th April, 1936, and there is no retrospection about it.

§ Sir A. M. SAMUEL
This is a very difficult Clause. In the first place, my hon. and learned Friend spoke of settlements of income for the purposes of 738 education, but that is not quite correct. Are not these trusts sometimes made to protect a child not merely in the matter of education, but for the whole of its life? Does he mean that no income received before the 5th April, 1936, may be touched? It must be made perfectly clear that this Amendment does not affect Income Tax and that the only question is the aggregation of Surtax. I want the Financial Secretary to say for what year Surtax aggregation will be claimed.

§ Mr. MORRISON
I can assure the hon. Gentleman that it does not operate until this year 1936–37. It started to operate in the financial year which began on 5th April last. I can assure the Committee that there is no element of retrospection in this Clause.

Major HILLS
This Clause is very difficult, and it will be amended later by the Chancellor of the Exchequer. May I suggest that we have a statement on one of the Amendments as to the whole effect of the Clause? There are certain points that I can gather from the Clause, but there are certain other points about which I am still uncertain.

§ Sir J. WITHERS
I beg to move, in page 18, line 34, to leave out "commencement of that year," and to insert" time of such payment."

§ Sir A. M. SAMUEL
I think that an Amendment ought to be made to insert after "unmarried," "but only in respect of such portion of the year as the child was still an infant and unmarried." If we do not make such an Amendment we shall have an unforeseen result. This does not affect Income Tax but only Surtax. If my suggested Amendment is not made the income of the child who comes of age, let us say, in May, 1935, will be charged in the parents' Surtax to be assessed after 5th April, 1936, and paid in January, 1937.

Mr. CHAMBERLAIN
I really think that this is not a matter of very great practical importance, because the period during which the charge takes place is the same whether the Amendment be adopted or whether the Bill stands as it is. In 739 the one case the charge is taken from the time the child is born; in the other case it dates from the beginning of the financial year following the year in which the child is born. The Amendment would thus charge the year in which the child is born while the Clause would not. On the other hand the Amendment would charge the year in which the child attains its majority only until the child becomes of age whereas the Clause would charge the whole of that year. There is theoretically a good deal to be said for the Amendment, but it really involves no practical advantage one way or the other. There is this practical objection, however, that it means two apportionments, one in the year of birth and another in the year when the child comes of age, but it does not seem to me that for the sake of the correctness of the Amendment it is worth while to make these two apportionments.

§ Sir A. M. SAMUEL
This Clause bristles with difficulties. Let us take the case of a girl who marries, say, in the month of May. Her income will be aggregated for Sur-tax for another 11 months after she is married although the Clause provides that she should come out of the Clause the day she marries. That cannot be right.

Mr. CHAMBERLAIN
It does not affect her income, but only that of her parents.

§ Mr. PETHICK - LAWRENCE
Of course, after she marries her income will be joined with that of her husband. In the case of this part of her income it is not joined to that of her husband but to that of her parents.

Mr. CHAMBERLAIN
indicated assent.

§ Mr. PETHICK-LAWRENCE
The position is rather peculiar in those circumstances.

Mr. CHAMBERLAIN
It is deemed to be the income of the parents for the purposes of tax.

§ Mr. SPENS
I beg to move, in page 18, line 37, after "not," to insert: income to which such child is entitled in his own right or. I move this Amendment in order to make matters absolutely clear. This 740 Sub-section makes the income in question of the children the income of the settlor and we assume that he will be entitled to the allowances for the children. That depends on the income in question no longer being the income of the child in its own right for Income Tax purposes. It is suggested that it is desirable in order to make the position clear that any income of the child (which of course remains in law under the settlement the income of the child) should for the purpose of this Clause be expressly declared not to be the income of the child in its own right.

§ Mr. CHARLES WILLIAMS
On a point of Order. May I ask where we are, because there is no "not" in line 37? Cannot we have these words expressed in the ordinary Parliamentary way?

§ The TEMPORARY CHAIRMAN
It is line 36. The explanation is that some of the copies of the Amendments are different from the others.

§ Mr. C. WILLIAMS
If these printing errors are going to increase it will become serious and we ought to take notice of them.

§ The ATTORNEY-GENERAL
We fully appreciate the point which my hon. and learned Friend has in mind, but we take the view that it is completely covered by the Clause as drafted. The last words of Sub-section (1) are: the income of the settler for that year and not as the income of any other person. The words "any other person" are general words which would include the child, and, therefore, it would be inappropriate to insert the express words of the Amendment saying it is not to be treated as the income of the child. I hope with that explanation my hon. and learned Friend will not think it necessary to press his Amendment.

§ Mr. SPENS
I beg to ask leave to withdraw the Amendment.

§ Mr. SPENS
I beg to move, in page 19, line 2, to leave out "will or may become" and to insert "becomes."
This, again, is an Amendment which I put forward for consideration. Here we 741 are dealing with income to which the Clause is to apply, and the first type of income is income which, by virtue of or in consequence of a settlement to which the Clause applies, is so dealt with not that it becomes payable or applicable to or for the benefit of the child but that it will or may become so payable or applicable. There we are dealing with the provisions of a complicated settlement, and someone has to define what may take place when, under complicated provisions as to resettlements of real property or marriage settlements, in some circumstances the income may become applicable to or for the benefit of the child. I submit that that will cause any amount of trouble and calculation, and I suggest that the Clause should be confined to income which in fact does become applicable to or for the benefit of the child.

§ Mr. W. S. MORRISON
I have no difficulty in seeing the admirable motive which prompted my hon. and learned Friend to move this Amendment. He is thinking of a case where a child has a contingent interest only in the income, and says that until the contingency arises there is really no sort of guarantee that that income will actually be applied for the child's benefit. That is so far true. The trouble about accepting the Amendment would be that it would be almost impossible to work the Clause. The hon. and learned Member is dealing with an accumulating income, and if we had income of the year 1, and it accumulated for 10 years and was then paid in year 11, by the time the contingency had happened it would be too late to raise the assessment. That is a practical difficulty which, I am afraid, compels us to decline to accept the Amendment. As a consolation I would remind my hon. and learned Friend that this applies only in the first place to a revocable settlement, where there is always the opportunity to the settlor to revoke his settlement and redispose the settlement to some better advantage. In so far as there are irrevocable settlements the same considerations do not arise.

§ Mr. SPENS
I should accept that explanation most willingly were it not for the definition Sub-sections of the Clause to which we come later. Under Sub-section (7) the definition of an irrevocable 742 settlement is drawn up within very narrow limits indeed, and there are going to be any number of settlements irrevocable in law which will be revocable settlements under this Clause.

§ Mr. W. S. MORRISON
When we come to the definition Sub-sections perhaps my hon. and learned Friend will raise that point. At present I am dealing with the particular terms of the Amendment, and my answer to the Amendment is that it would be impossible to defer the ascertainment of the tax payable until the contingency has arisen, and I hope that he will agree with that view.

§ Mr. SPENS
I foresaw that there might be some difficulty about this, and in view of the answer which has been given by my hon. and learned Friend I beg leave to withdraw the Amendment.

§ Sir J. WITHERS
I beg to move, in page 19, line 4, after "future," to insert: but during the settlor's lifetime and whilst the child is an infant and unmarried. I submit that if the income cannot during the settlor's life be paid to or for the benefit of the child the settlor cannot get the benefit of this provision, and that the Sub-section should not extend to future provisions for adult or married children nor to income which cannot be applied for the benefit of the child during its infancy. That is the short point.

§ The ATTORNEY-GENERAL
I think the point raised by my hon. Friend is already covered by the Bill. The provisions of Sub-section (2) are, of course, directed to the case where the income is being accumulated, and nay hon. Friend's Amendment is directed to ensuring that those provisions should apply only so long as the settlor is alive and the child is an infant and unmarried, but I think on consideration he will agree that no Amendment is necessary to secure that end, because if he will look back to Subsection (1), the governing Sub-section, he will see that that makes it clear that it is only during the life of the settlor and only so long as the child is an infant and unmarried that it is to be treated as the income of the settlor. I think those words quite clearly govern the subsidiary matter dealt with in Sub-section (2), and, 743 therefore, I suggest that his Amendment is unnecessary.

§ Sir J. WITHERS
I beg to ask leave to withdraw the Amendment.

§ Sir J. WITHERS
I beg to move, in page 19, line 9, after "child," to insert: but this Sub-section shall not apply to any income which could not, or, without the consent of some person (other than the settlor and his wife) having a prior interest could not have been paid to, or for the benefit of, such child during the year of assessment in which the income is so dealt with. This Amendment deals with a rather technical point. The income ought not to be accumulated with the settlor, as the child could not be entitled to it unless the prior interest comes in. I think the Financial Secretary will see the point of this Amendment.

§ The ATTORNEY-GENERAL
I was not quite certain when I read the Amendment of the point which my hon. Friend had in mind. I think the point really refers to revocable settlements, because accumulations under irrevocable settlements are saved by Sub-section (3). I think that the hon. Member is raising the point that a settlement should not be deemed to be revocable for the purpose of the application of this part of the Clause if the consent of some person other than the settlor is necessary. That is a point which we cannot possibly accept in the form in which it has been put on the Paper, because the existing provisions which are intended to rope in revocable settlements have been got round—I use that term in no offensive sense—by making someone a trustee who, it was quite clear, in effect would never withhold his consent if the settlor asked him to give it. If there is any other evil or injustice which the hon. Member had at the back of his mind, of course we will consider it. For the reason I have given we cannot possibly accept the words as they appear on the Order Paper.

Mr. CHAMBERLAIN
I beg to move, in page 19, line 19, to leave out from the beginning, to the end of line 23, and to insert: 744 Where any income is dealt with as mentioned in the last foregoing Sub-section by virtue or in consequence of a settlement to which this Section applies, being a settlement which, at the time when the income is so dealt with, is an irrevocable settlement. I would ask the Committee to note that this Amendment carries with it no fewer than eight other Amendments which follow. There are two Amendments in line 25, one in line 33 and one in line 35. On page 20, line 6, there are two Amendments. There are two other Amendments on page 21, line 43, and on page 22, line 2. These Amendments are partly consequential and partly drafting, and they all have in view the purpose which I will now explain. As soon as it was seen that the provisions were going to apply to pre-Budget revocable settlements, but the pre-Budget irrevocable settlements would be exempt, it occurred to some ingenious person that pre-Budget revocable settlements might be made irrevocable by a supplementary deed, and I had reason to suppose that the suggestion had been widely circulated and that a number of supplementary deeds had been drawn up. The purpose of the Amendment is to ensure that no such supplementary deeds could be effective. The Amendment makes it clear that if a settlement was revocable before it cannot now be made irrevocable retrospectively.

Major HILLS
I thank my right hon. Friend for his explanation and I ask only one question. I see the Amendments to paragraph (a) of Sub-section (3), but I do not quite understand the words at the end of that Clause, in line 27 unless and except to the extent that that income consists of, or represents directly or indirectly, sums paid by the settlor which are allowable as deductions in computing his total income for the purpose of the Income Tax Act. As I understand it the amended Clause frees an irrevocable settlement from the operation of Clause 19, except as to certain income.

Mr. CHAMBERLAIN
Post-Budget.

Major HILLS
I do not quite see the meaning of that. I do not quite see why certain incomes should be excepted from that relief. The only meaning that I can attach to the words is that the settlor must not get his deductions twice over.

Mr. CHAMBERLAIN
That is not really affected by this Amendment. My right hon. Friend's question would be better addressed on the Amendment which deals with that point.

§ Mr. KEELING
I have an Amendment on the Paper which I presume will be ruled out of order if my right hon. Friend's Amendment is accepted. The purpose of my Amendment was to give the makers of these revocable trusts a reasonable time to make them irrevocable, provided that the trust was made before Budget day, and I would ask him to consider whether that is not a reasonable proposal. Up to the date of a certain decision in the House of Lords I believe that everybody who wanted to make such a trust was advised by his solicitor that he should make it irrevocable, but when that decision was given a large majority of solicitors advised their clients that it was desirable to make their trusts revocable and that the effect was identical with making them irrevocable. It was a reasonable thing for a prudent parent to be in a position to revoke a settlement when a child came of age. I can conceive the position of a man having a gay daughter who, perhaps, got in the hands of some adventurer when she was 18, and who would wish to protect her from the man when she came of age. The large majority of the trusts which have been executed since the date of that decision in the House of Lords have been revocable.
The suggestion which I made in my Amendment, which will not be called, is that the makers of these trusts should have until 1st December to decide whether they will leave them revocable or make them irrevocable. The loss to the revenue which the Chancellor would sustain in granting this concession would not be excessive, because the great majority of the people who made these revocable trusts did so with the object of revoking them when their children became 21 years of age, and they simply cannot afford to make them irrevocable, which would mean that they parted with the income for the whole of their lives. I hope that my right hon. Friend will give that point consideration.

§ Sir CHARLES CAYZER
I support the view which has been put forward by my 746 hon. Friend the Member for Twickenham (Mr. Keeling). I am sure that all hon. Members wish to assist the Chancellor, but the Clause goes rather too far. It inflicts considerable hardship upon a number of persons for attempting to alter their affairs in accordance with the existing law of the land, as determined by the House of Lords itself, and it seems to be retrospective legislation, to which this House is usually somewhat slow in giving assent. The Chancellor of the Exchequer has just explained that by Sub-section (9) of this Clause he gives exemption to any irrevocable trust entered into before 22nd April of this year, and I am sure that that concession will be duly appreciated. Many persons, however, will have a somewhat rude awakening when they discover that the trusts into which they entered in the belief that they were irrevocable are no longer irrevocable under the terms of this Clause. Subsection (7) completely alters the definition of an irrevocable trust, and the definition applies to all existing trusts just as to all trusts which might be entered into in the future. Sub-section 7, which provides: (b) for the determination of the settlement by the act or on the default of any person; or (c) for the payment of any penalty by any person in the event of his failing to comply with the provisions of the settlement, or for the total or partial indemnification or exoneration of any person, makes the settlement revocable and therefore no longer a settlement which will obtain exemption under Subsection (9). As my hon. Friend has pointed out, under the existing law both those settlements would have been regarded as irrevocable under Section 20 of the Finance Act, 1922, and are held to be irrevocable trusts by a decision of the House of Lords. It is safe to say that, since the decision of the House of Lords, trusts of this kind entered into for the benefit of children have contained this provision, but prior to that decision it is probable that all those settlements would have been irrevocable settlements and would have secured the exemption. I put the point to my own solicitors, and my solicitors informed me that they invariably advised their clients to insert a provision of revocation in certain circumstances because in doing so they retain greater power over their children.

The DEPUTY-CHAIRMAN
We had better postpone this discussion until we reach Sub-section (7).

§ Sir C. CAYZER
I defer to your Ruling. I wished only to refer to the point which the Chancellor made in explaining the scope of Sub-section (9). I will therefore say that it seems a rather new principle that the Chancellor should, in this case, seem to alter the definition of an irrevocable settlement and to make the new definition applicable to trusts which have already been entered into prior to the passing of the Measure. To say that those who wish to alter their affairs cannot base their actions upon a decision of the House of Lords, the highest legal court in the land, will be a great hardship. As regards the tendency to give effect to this kind of legislation, we have a definite precedent which may be within the memory of some hon. Members of this Committee. When Lord Snowden introduced his Finance Bill in 1930, he included a provision for dealing with single premium policies and made it retrospective in so far as it applied to policies entered into prior to the introduction of the Measure.
The House of Commons took a different view. They did not think that the scope of the Clause should be retrospective. Lord Snowden bowed to the expression of opinion of the House of Commons, and reintroduced the Clause in a form which made it only applicable to insurances taken out after the passing of the Measure. I join with my hon. Friend who first raised this matter in respectfully urging the Chancellor to give the Clause some further consideration before the Report stage. It would be an act of justice to permit these persons, who entered in perfect good faith into what they believed to be irrevocable trusts, basing their belief upon the House of Lords' decision, to amend their settlements so as to bring them into conformity with Sub-section (7) of the Clause and to obtain the exemption afforded by Sub-section (9).

Mr. CHAMBERLAIN
As will be recognised by the hon. Member who raised this point I have not really had time to consider what he is putting before me. As there are Amendments on the Paper which carry out their views —

§ Mr. KEELING
There is an Amendment, but it is not called.

Mr. CHAMBERLAIN
At any rate, I have not had very much chance to appreciate the force of the point which hon. Members are putting. If they will accept my assurances that I shall be very happy between now and the Report stage to look into the point which they raise, that will give me an opportunity of seeing exactly what their proposal amounts to.

§ Mr. BENSON
I am extremely sorry to hear that the Chancellor is prepared to give way even more than he has already done—

Mr. CHAMBERLAIN
I did not say that at all.

§ Mr. BENSON
—or, at any rate, is prepared to consider doing so. When the Resolution was being discussed, the intention was that all educational settlements, the result of which was to avoid Income Tax, should be wiped out, and when the Bill was introduced the Chancellor had already given exemption to irrevocable settlements. Now there is a demand for permission to make revocable settlements irrevocable, and the Chancellor says he is prepared to consider it. I sincerely hope that he is not prepared to go any further than he has gone already.

§ Mr. ASSHETON
I think that the hon. Member for Chesterfield (Mr. Benson) has perhaps missed the point—

§ Sir FRANCIS ACLAND
On a point of Order. It is extremely difficult for ordinary Members of the House, having listened to the Chancellor of the Exchequer proposing an Amendment dealing with what people may have done after the date when the Budget was introduced, to follow a discussion by Members on both sides of the Committee, which may go on to any length, and which deals with a totally different point, raised by an Amendment which has not been called and is not likely to be called. Could we not get back to the Chancellor's Amendment, of which, when he moved it, he gave an explanation, which we shall forget entirely if we get on to these other points?

§ Sir A. M. SAMUEL
The right hon. Gentleman the Member for North Cornwall (Sir F. Acland) has not read the Order Paper. If he will look at the bottom of page 989, he will find that it is the very point referred to in the Chancellor's Amendment that is now being discussed by my hon. Friend the Member for Rushcliffe (Mr. Assheton).

§ Mr. ASSHETON
I was saying that I thought the hon. Member for Chesterfield had slightly misunderstood the point in question. As my hon. Friend the Member for Chester (Sir C. Cayzer) has pointed out, it would seem that, as the Clause is now drawn, the prudent and careful parent will to some extent be put at a disadvantage as compared with the less prudent and less careful parent who has been not so well advised by his solicitor. The Chancellor has very kindly said that he would examine the matter between now and Report, and we are very grateful to him for that undertaking.

§ Lieut.-Colonel ACLAND-TROYTE
I beg to move, in page 19, line 27, to leave out from "settlement" to the end of the paragraph.
As the Clause stands at present, a man can make an irrevocable settlement on a child by making certain securities over to a trustee, while if, on the other hand, he is a man living upon earned income, he cannot make an irrevocable settlement in the form of an annuity to be paid out of his earned income. During the last two years many people living on earned income have made such settlements on their children out of their income, but now, under the Clause, that wilt be impossible. It seems to me to be unfair that a man living on earned income should be in a worse position than one who is fortunate enough to have money invested.

§ The ATTORNEY-GENERAL
Sub-section (3) of Clause 19 deals with post-Budget irrevocable settlements, and it enacts that income which has accumulated under such settlements, that is to say, 750 which is not paid out and used for the benefit of the parent or the child, shall be outside the scope of the Clause. The Amendment raises the point that, if a man settles a capital sum on a trustee in order that the income may be accumulated for the benefit of his children, and not used for their education and so on, that is all outside his income, whereas, if a man covenants to pay a certain sum annually to trustees in order that that money may accumulate, the money is still part of his income, and he cannot reduce his liability to taxation by the fact that he has covenanted to pay it to trustees. It is right to point out, however, that, once the money gets to the trustees, the income which then proceeds from it when it is invested by the trustees will be exempt. My hon. and gallant Friend suggests that this is really an unfair discrimination against the man who can only covenant to pay an annual sum, as compared with the man who transfers a capital sum, but I suggest that, on the contrary, so far from its being an unfair discrimination, it really puts them both on the same basis. The savings in the past which have made up the capital sum have all come out of taxed income. If a man has built up a capital sum which he can transfer to trustees, it has been built up year by year out of money which has paid tax—

§ Mr. H. G. WILLIAMS
When the tax was 9d.

§ The ATTORNEY-GENERAL
That is a different problem. Unfortunately to-day many of the savings that have been made have not been made when the tax was 9d., but at a time when the tax was much more in the neighbourhood of what it is to-day. We are here dealing with the case of a man saving money out of income for the benefit of his children, and it would be wrong to put him on a different basis from a person who has saved money before he made the provision, and uses it to make a provision of this sort. The right and the fairer manner is to adopt the provisions of the Clause and not to adopt the Amendment.

§ Mr. BENSON
I support the Amendment, because it makes complete nonsense of the Clause and has the effect of taking it out of the Bill. I was rather surprised at the Attorney-General's argument. Apparently he has been reading 751 economy and has learned the good old adage that capital is one of the rewards of abstinence. The picture that he drew of capital settled upon a child having been built up by the slow process of accumulating income is all very well for a textbook, but it has no relevance so far as this Clause is concerned.

§ Sir A. M. SAMUEL
It is an actuarial truth.

§ Mr. BENSON
Is it? What about inheritance? What about the vast settlements made by owners of landed estates who inherited them? What about wealth accumulated by capital accretion? Nowadays you cannot build up great fortunes by the addition of one year's income to another. Surtax prevents that. Great fortunes are built up by capital accretions which have paid no Income Tax. The Attorney-General suggested that a man who pays an annual sum out of his earnings is not put in an unfair position as compared with a man who can settle say, £10,000 and allow the £300, £400 or 500 a year interest to accumulate. If that £10,000 had not been saved, the settlor would have had to pay Income Tax and Surtax on the £300, 2400 or £500 which now accumulates till the child is 21 without aggregation of tax, and it is in that respect that there is very definitely a differentiation against the man who cannot afford to make a capital settlement and in favour of the men who can.

§ Mr. C. WILLIAMS
I congratulate the hon. Member on having given the first real reason that I have heard for many years for supporting an Amendment, namely, that it was nonsense.

§ Mr. BENSON
I hope the hon. Member will not misrepresent me. I did not say the Amendment was nonsense. I said it reduced the Sub-section to nonsense.

§ Mr. WILLIAMS
I quite agree that that is more or less the effect of the Amendment, and I only got up to congratulate the hon. Member on supporting an Amendment which originally had very great sense and meaning, as it was intended to help a section of people who are trying very hard, often under desperate conditions, to bring up their children. I shall support my hon. and gallant Friend. I hoped the Chancellor 752 of the Exchequer might have been in rather a more forthcoming condition on this question, but I realise that he has made certain concessions. He has kindly promised to go into other points, and possibly he may consider this between now and Report. In spite of all that, I should like to congratulate the hon. Member on his speech.

§ Mr. H. G. WILLIAMS
I am not quite certain what the Amendment means, not because it is badly drawn but because other words have been inserted in the Bill and it is difficult to follow it, but the Proposer explained its meaning, and I will accept that it has the purpose of putting income trusts on the same basis as capital trusts. Generally speaking, when people have signed documents creating a trust which can be revoked, they did it because they were paying out of income. They feared that circumstances might arise in which they could not go on making the payments and did not want to be made bankrupt by their own children—a situation which might conceivably arise. It was not in order to dodge their obligations, but to protect themselves from that very undesirable situation. On the other hand, a parent who is in a more fortunate position, because he has substantial capital which he can transfer to trustees, would be inclined to make a permanent transfer. Therefore, we are really discriminating between the transfer of capital and the transfer of income. The Attorney-General says the capital has been built up out of income which has paid tax. That is rather an innocent remark. Honestly, does it in the remotest degree resemble the truth in a great many cases? There are vast numbers of people fortunate in t heir choice of parents who have inherited substantial sums, and they say, "This is an arrangement whereby to reduce the burdens on my income, and I will adopt this method." The man who has the satisfaction of having the security of capital behind him is able to do these things and get advantage out of them, whereas the man whose position is more precarious, because his capital resources are small, though he may earn a substantial income, is debarred.
There are many people in my constituency who are intelligent enough to 753 earn a fairly substantial income and desire to take advantage of this, but only a very small proportion are in the position that they can transfer a capital sum to trustees for the benefit of their children. If I do not understand the Clause it is not my fault, because I have not yet met anyone who thoroughly understands it, but if it means what I think it means, there is a definite discrimination in favour of the man of substance, in the sense of substantial capital possessions, as against the man whose capital happens to be his intelligence and who, through that intelligence, is earning a fairly good income. I think the Chancellor ought to look at the point again. It is one of great substance and we ought to be grateful to my hon. and gallant Friend for raising it.

§ Sir JOSEPH NALL
I was astonished at the Attorney-General's argument. It must be erroneous to suggest that, where capital is transferred into these funds, it is always the produce of taxed income. To say that at the present time, when the value of investments is high compared to what it was a few years ago, when it is obvious that, for instance, anyone who held Newfound-lands bonds when they were at the bottom and sold them after the Government guarantee was given and was able to create a surplus which could be transferred to one of these funds, has paid tax on a basis comparable to a person who now makes a trust payment out of income is perfectly ridiculous.
I hope that the Chancellor of the Exchequer will be able to review this matter. It is clear that there ought to be similarity of treatment between the trust fund created by a transfer of capital, and the trust which is solely dependent upon income. I do not quite follow the argument of my hon. Friend the Member for South Croydon (Mr. H. G. Williams), because, if a person who has contracted to make an annual payment from income finds that some day his income has so decreased that he can no longer make those payments, he is only in the same position as the man who transferred part of his capital and has since lost the rest of his capital and desires to recover the capital which he transferred.

§ Mr. H. G. WILLIAMS
The man who has lost his capital has no obligation. He may have lost everything but he is not under a liability to go on making a continuing payment. The other man may have lost all his capital, and still be under an obligation to make a payment for which he has no assets.

§ Sir J. NALL
There may be that difference, but, in fact, they are in the same condition that they have no funds with which to carry on the payment. On the main issue, I would remind the Committee that the Attorney-General, in putting the case, was entirely wrong, and for that reason I hope that the Chancellor of the Exchequer will further consider the matter.

§ Lieut.-Colonel ACLAND-TROYTE
In view of the possibility of putting down another Amendment, I beg to ask leave to withdraw the Amendment.—[HON. MEMBERS "No."]

§ Sir J. WITHERS
I beg to move, in page 19, line 35, after "paid," to insert out of income so dealt with or of assets representing it. The question arises in this way. The wording of paragraph (b) is rather wide. It says: Where any income has been so dealt with by virtue or in consequence of such a settlement, any sum whatsoever paid by virtue or in consequence of the settlement. There is a limit to the fund which is dealt with. Very often there are two or three funds, and, surely, the Chancellor of the Exchequer cannot mean that payments out of capital from every fund can be applied to the same settlement.

§ Mr. W. S. MORRISON
My hon. Friend the Member for Cambridge University (Sir J. Withers) knows that the Sub-section to which his Amendment is relevant is designed to exclude from the charge any income which has been accumulated under a post-Budget irrevocable settlement. That is the purpose of the Sub-section under review. It is always necessary to consider the possibility that 755 the trustee may, in a subsequent year, use the proceeds of the fund to make a payment to the child or to the parent. In that case the income would have respect to the first year as being accumulative, and the process might be repeated in a subsequent year. Paragraph (b) of Sub-section (3) therefore provides that any payment of any kind shall be deemed to be income, in so far as it is in the hands of trustees income which has been excluded from the child, for the reason that it was believed to be accumulating in the fund. If we accepted the Amendment, it would have the effect that the sums would be chargeable only if they could be shown to be paid out of income or dealt with out of assets. How is one to say out of what assets the sum shall be paid? That is the point. The trustees might well represent that the sums paid out were paid not out of any particular fund, but out of the original capital of the trust. The Amendment of my hon. Friend would, if incorporated in the Clause as it stands, defeat that reasonable purpose, and for that reason I am afraid that I cannot see my way to accept it.

§ Mr. McCORQUODALE
Could not this paragraph be simplified as there are about 15 lines without a full stop and only two commas?

The DEPUTY-CHAIRMAN
I do not think that that is a question which arises out of the Amendment.

§ Sir J. WITHERS
Does the Financial Secretary really mean that if you have a settlement of two or three funds you can make an advance in the way he has said?

§ Mr. W. S. MORRISON
What I said is true, if you have trustees dealing with a particular settlement. I do not think that that is what is contemplated. You may have an irrevocable settlement perhaps with the direction to the trustees that the income of the fund shall accumulate for the benefit of the children and not be paid out. In so far as the income is accumulated it is excluded from the charge in this Bill, but there may be a provision which enables the trustees to pay out the income which has accumulated. It would surely be reasonable that in such a case the income if paid should be charged. If we accept the Amendment it will be impossible to work the Clause.

§ Mr. KEELING
I beg to move, in page 20, line 23, to leave out "any person," and to insert: any settlor or trustee of any settlement to which this Clause may apply.

§ Mr. ALBERY
On a point of Order. May I ask why the previous Amendment standing in the name of the hon. Member for Twickenham (Mr. Keeling)—to leave out Sub-section (4)—has not been selected? I raise this point because otherwise Sub-section (4) is totally incomprehensible. If that Amendment is not to be called, I fail to see how we shall get any adequate explanation.

The DEPUTY-CHAIRMAN
I have not selected the Amendment.

§ Sir A. M. SAMUEL
Although it has not been selected, may I ask whether you would sectionand ask the Chancellor of the Exchequer to give us some explanation?

The DEPUTY-CHAIRMAN
The question of the selection of Amendments is vested by Standing Orders in me. I am not bound to give any explanation. My predecessors have not done so, and I propose to follow that practice.

§ Mr. KEELING
Under the Clause as drawn the commissioners are given power to require any person to furnish them … with such particulars as they think necessary. These words leave the way open to inquiries of the widest possible nature from any person, whether or not that person may be interested in the settlement. They give the Inspector of Taxes a weapon which he could use oppressively, without any great risk of being challenged. Parliament has not previously, in the Income Tax Acts, given the commissioners power to make sweeping demands of the whole world in respect of any one person's liability to Income Tax. No precedent supports the bestowal of such drastic powers. Section 139 of the Income Tax Act, 1918, 757 which is limited to cases where the taxpayer has appealed, authorises precepts only to the appellant, and Section 21 of the same Act, which deals with Supertax on the undistributed income of companies, gives the Special. Commissioners power to require particulars only of the company. Section 22 of the same Act, which deals with the Super-tax of individuals, gives the commissioners power to require particulars only from the individual concerned. I suggest that the Clause as drawn is an unwarrantable interference with liberty and an interference which may lead to grave abuses. It authorises an inquiry and gives powers which possibly were suitable for the commissioners of the Spanish Inquisition in the sixteenth century but which cannot safely be given to commissioners of Income Tax in the twentieth century, and I hope that my right hon. Friend will see his way to accept the Amendment.

§ The ATTORNEY-GENERAL
My hon. Friend has painted in rather high colours the possible effect of the Clause. The general scope of the powers of the Special Commissioners is very different from that of the commissioners of the Spanish Inquisition. However, my right hon. Friend appreciates that the words "any person" may be unnecessarily wide, in the sense that they would appear to confer powers which there is no desire to use and which it would not be necessary to carry out for the purpose which my right hon. Friend has in mind. We think, however, that the words of the Amendment might be a little too narrow. My right hon. Friend will undertake between now and the Report stage to consider this matter and seek to get a form of words which, without hampering the commissioners and while meeting the wishes of the Committee, will not confer upon the commissioners unnecessarily wide powers. I hope, in view of that undertaking, that the hon. Member will withdraw the Amendment.

§ Mr. FOOT
The Attorney-General has been discussing the wide powers proposed to be given the commissioners by the Clause. If the Government are considering amending the Clause in order to limit the number of persons to whom the commissioners may apply for information, will they also consider at the same time 758 leaving out the words "of such particulars as they think necessary." That would make them the sole judges of what is necessary, and I suggest that an Amendment on that line might be desirable.

§ Mr. BENSON
What are these powers which the Government are so afraid of giving the commissioners; and what are the investigations they might carry out? What are the dangers of the commissioners finding anything out? The only thing that an inspector of taxes can find out is income, and if everybody declared their income, as they ought to do, there is no reason why an inspector of taxes should not have every facility afforded him. I would remind the hon. Member who referred to the Spanish inquisitors that they investigated souls not the pockets of men. I do not see any reason why any person who has made out a correct Income Tax form should fear any powers which are given to the commissioners.

§ Mr. H. G. WILLIAMS
The hon. Member for Chesterfield (Mr. Benson) does not appreciate the dangers of this Clause. If later on we have people of a very different brand as Special Commissioners, nothing can stop them sending inquiries to the tradespeople or the domestic staff of any person in order to find out how well he does himself and then deducing certain information as to his income. That is entirely improper, and I do not think we ought to have this kind of inquiry.

§ Mr. GARRO JONES
The hon. Member for South Croydon (Mr. H. G. Williams) has not shown his usual diligence. He should know that no person can be compelled unreasonably to give this information. In a later part of the Clause it says that if a person can offer a reasonable excuse there is no penalty attaching to his refusing to give information.

§ Mr. WILLIAMS
Suppose the demand was: "Will you please say what was the total amount Mr. Smith paid for groceries in the last 12 months?" The person on whom that demand is made knows the answer and there is no reasonable excuse for not giving it.

§ Mr. GARRO JONES
The hon. Member has completely misinterpreted the meaning of the Clause. It is not sufficient for him to know the information. He is only compelled to give it if he has no reasonable excuse for not giving it. That is an entirely different matter. I want to be of assistance to the Chancellor of the Exchequer. By promising to consider this question he is surrendering what may prove to be to him very useful information on the collective scale. That is a principle which, in the case of dividend warrants, for example, saves the Treasury an enormous amount of expense and trouble and puts it on the track of a large amount of income which perhaps would not otherwise have been disclosed. We know that in connection with this particular practice there are bodies of people, solicitors in particular, who make a regular practice of drawing up these transfers and deeds, and since the only object of getting the information is to prevent their clients from evading the law, surely there would not be any very serious objection to asking them to give a complete list of people who have effected these settlements upon their children. Therefore, it would be very easy for the Chancellor of the Exchequer to get at one stroke information which would otherwise cause him a great deal of trouble and expense.

§ Sir WILLIAM DAVISON
With reference to the remarks of the hon. Member for Twickenham (Mr. Keeling) may I read one sentence from a letter from the Law Society, representing the solicitors of the country, which I have received since the Amendment was put down? The sentence is: The Council of the Law Society are of opinion that the words 'any person' are too wide and that only settlors or trustees of any settlement to which the subsection applies should be compellable.

§ Mr. KEELING
I wish to thank the Attorney-General for the assurance he has given that he will reconsider the wording of the Clause, and I beg to ask leave to withdraw the Amendment.

§ Sir J. WITHERS
I beg to move, in page 20, line 35, to leave out paragraph (a).
760 I think this provision is far too wide. It makes each of the following settlements revocable. First, a fund irrevocably settled on trust to pay an annuity to a child for the life of the child and to balance of income to the settlor. Secondly, a fund irrevocably settled on trust to divide income equally between wife and child during their joint lives and to pay the whole income to the survivor for life. Thirdly, a first fund settled on the settlor for his life or the joint lives of himself and a child and a second fund irrevocably settled on a child for life or on trust to accumulate the income during the life of the settlor for the benefit of the child. I think the provision is far too wide and ought to be deleted.

§ Mr. W. S. MORRISON
We are now dealing with the definition laid down in the Clause to distinguish between a revocable and an irrevocable settlement. The injustice of the Amendment is that it would mean that where a man has made an irrevocable settlement, and has locked up his money in the form of capital, he would have the worst of two worlds. To give effect to this saving Clause for irrevocable settlements it is necessary to make sure that they are really irrevocable in fact and not merely so by legal definition. From that point of view I suggest to the Committee that it is right to exclude from the terms of the Clause an irrevocable trust which provides by its terms for the payment back to the settlor of the proceeds of the trust. One would be apt to get into grave difficulties over such a question as how much was to be paid back out of the proceeds and how much was to go to the children. That is a question almost impossible of solution. It would depend in each case upon circumstances of the family and it is surely better for the purposes of this Clause which deals only with this particular form of trust; to accept the proposal in the Bill, to accept, broadly, the principle that if the terms of the trust provide for the benefit of the trust to inure to the settlor himself or his wife, then it is not an irrevocable settlement within the meaning of this Clause. That is to say, it is not a settlement which should receive the special treatment now being accorded to pre-Budget irrevocable settlements.

§ Mr. SPENS
In my view this is the most important Sub-section in the Clause. I am sure the Committee realise that the effect of the Clause is to divide settlements and trusts not into two categories but into three. There are revocable trusts; there are those which are irrevocable in law and in fact, and now we find that the pre-Budget irrevocable settlements, which we understood were to be excepted from the provisions of the Clause, are to be whittled down by the taking out of certain settlements, irrevocable in law and in fact but for the purposes of this Clause deemed to be revocable. Starting with that proposition, the Committee will realise that a great number of these pre-Budget irrevocable settlements were made years ago for purposes utterly unconnected with tax evasion or anything of the kind. Some of them are marriage settlements, some separation deeds, and some are settlements made on wards of court. Yet if, in complete ignorance of any future legislation of this description, the draftsman has inserted in any of these settlements—which cannot be altered now by any means—any provision which happens to bring them within paragraphs (a), (b) or (c), then that document becomes for the purposes of this Clause a revocable settlement and the income is to be treated as if it were the income of the settlor. The Committee will appreciate that it was for that reason that I put down a series of Amendments to this Sub-section. Take for instance one very common instance in regard to which I think there is an Amendment on the Paper. In a settlement, say a marriage settlement, under which the income of the trust fund is to be payable to a child it may be thought desirable to insert a provision to deal with the contingency of the child at some future time becoming a bankrupt.

The DEPUTY-CHAIRMAN
There is an Amendment on that subject which will be taken, and we had better not anticipate the discussion on it.

§ Mr. SPENS
In those circumstances I will deal with the matter generally by saying that there are innumerable settlements made years ago which have nothing to do with tax evasion, in which you will find the provision that in certain 762 events, at some time during the life of the child, the whole or part of that child's income may go back to the settlor or his wife. Every one of those settlements, however long ago it was made and for whatever purpose, is a revocable settlement for the purpose of this Clause, and the exception at the end of the Clause has whittled it down enormously.

§ Sir W. DAVISON
I cannot help thinking that the Chancellor of the Exchequer has overlooked Section 33 of the Trustee Act of 1925, by which the Legislature provided a comprehensive formula for those who wish to settle property or income upon children and at the same time to protect those children from improvidence. The settlor can settle the property or the income upon what are known as protective trusts, and the object of that is to secure that the child retains the income until it suffers or commits, or attempts to commit, some divesting act, in which case its absolute interest in the income ceases. Thereafter the trustees of the settlement have a discretion to pay the income to any one or more of certain defined persons mentioned in the settlement. The provisions of Section 33 (1, b), to the effect that the defined persons shall include those persons to whom any arrear of the annuity would be payable were the child dead, brings in the father and mother of the child while it is an infant, because if the child died while an infant, it would die intestate, and the father and mother would share its personal estate equally. Inasmuch then as the father and mother of the child are among the persons to whom the trustees could, under the protective trusts, pay the income in the event of the child committing or attempting to commit some divesting act, the Revenue would be able to argue, in the case of every protective trust effected by a parent that Clause 19 (7, a) of the present Bill makes the income the income of the parent. This is a most startling result, and I cannot believe that it can have been foreseen by the Chancellor, or he would have agreed either to the omission of the Clause or to the insertion of words qualifying the trust and providing that this Clause should not apply to settlements of the kind which I have mentioned.

§ Mr. W. S. MORRISON
We could never agree to an Amendment to leave 763 out the paragraph, but my right hon. Friend is well aware that there are particular cases in this trust business which deserve looking into. My hon. and learned Friend the Member for Ashford (Mr. Spens) and my hon. Friend the Member for South Kensington (Sir W. Davison) have mentioned particular cases, and my right hon. Friend is prepared, through me, to assure the Committee that they will be looked at between now and the Report stage. There is no desire or intention to cause any injustice, but it is necessary to ensure that the law cannot be abused. These cases will certainly receive attention between now and the Report stage.

§ Mr. H. G. WILLIAMS
We are delighted to hear the statement of my hon. and learned Friend, but is is somewhat in general terms. He said that there are a number of hard cases which must be considered. Some of them are on the Order Paper, and perhaps he will complete his statement by indicating which are the hard cases at which the Chancellor is looking. We should be much more comfortable if we left out this paragraph so that a more satisfactory provision could be brought in on the Report stage.

§ Mr. MORRISON
I was dealing with these matters in a general way because they are raised in a general way. When the Amendments dealing with particular grievances are moved, my right hon. Friend will indicate which, if any, he can accept.

§ Sir J. WITHERS
On the understanding that the Chancellor will consider the matter, I beg to ask leave to withdraw the Amendment.

§ Mr. SPENS
I beg to move, in page 20, line 40, to leave out "life," and to insert "minority."
This is the first detailed Amendment to this Clause. Hon. Members will see that if the old settlement provides that in any circumstances whatever during the life of the child any income finds its way back to the settlor or the settlor's wife, it becomes a revocable settlement. If all we are dealing with is a question of income during the minority of the child 764 being aggregated with that of the father or mother as the settlor, why should we have to deal with the provisions of a settlement which go a long way beyond minority? Would not it be possible, if a settlement provided that any event during minority might send the income back to the settlor, instead of at any time during life, that that settlement should be revocable for the purpose of this Bill? It is important because one of the chief causes which are provided in settlements for bringing income back to a settlor is if a child becomes bankrupt at any time during life. We find in almost every well drawn marriage settlement, or any other settlement which I have mentioned, that in a large percentage, if there is a settlement on a child of income, the parent provides that if the child becomes bankrupt the income shall go over in some form, and we nearly always find a class among which is the father or mother. No child can become bankrupt before it has attained its majority. Therefore, if the events on which income can go back to the parent are events which can occur during minority, you would find one of those common and proper clauses which ought to occur in any properly drawn marriage or other settlement.

§ The ATTORNEY-GENERAL
In so far as my hon. and learned Friend had in mind the question of bankruptcy, that question, as well as the question of charging interest, is dealt with in the Amendment in the name of my hon. and gallant Friend the Member for Tiverton, (Lieut.-Colonel Acland-Troyte). I hear my hon. and gallant Friend asking me whether the Government will accept it. I cannot go so far as to say that, but I think it will be found in due course that my right hon. Friend will give an undertaking to consider the point. In so far as my hon. and learned Friend's Amendment is meant to put into the irrevocable class all settlements, even those for accumulations which are irrevocable until the attainment of majority but are then revocable, it goes very much too far. In those circumstances one could have a trust in which the money was rolling in until the child was 21, and as soon as the child was 21 the settlor could revoke it and get all the money back.

§ Mr. SPENS
I was assuming that there was no power of revocation at all.

§ The ATTORNEY-GENERAL
I am much obliged to my hon. and learned Friend. Then I think the proper way to deal with the cases is to consider what are the circumstances which could not occur during minority which would be proper circumstances to take the settlement out of the irrevocable definition and to deal with them serratim. They are the subject of other Amendments.

§ Sir A. M. SAMUEL
Would the hon. and learned Gentleman include in that category the likelihood of an improvident marriage by a minor?

§ The ATTORNEY-GENERAL
I am not sure whether that point is the subject of an Amendment on the Paper. I do not think it is.

§ Sir A. M. SAMUEL
My hon. and learned Friend referred to certain cases which are to be included. Will that be included?

§ The ATTORNEY-GENERAL
My right hon. Friend will no doubt state at the proper time whether he considers that is a point which should be dealt with.

§ Mr. GARRO JONES
It seems to me that the Attorney-General is lending countenance to a very unworthy principle. If I understand the proposal of the hon. and learned Member aright, he wishes to save in the class of irrevocable settlements a settlement which contains a provision that it reverts to the settlor in the case of the bankruptcy of the person upon whom the money is settled. Is that a principle to which the Committee would wish to give support? It is saving for the benefit of the settlor money which in truth should belong to the creditors of the bankrupt. Why should the beneficiary of such a trust be able to surrender in form only and not in reality to the settlor those monies under the trust in order to protect—

The DEPUTY-CHAIRMAN
Does the hon. and gallant Member for Tiverton (Lieut.-Colonel Acland-Troyte) wish to move his Amendment?

§ Lieut.-Colonel ACLAND - TROYTE
Yes.

The DEPUTY-CHAIRMAN
In that case I must tell the hon. Member for North Aberdeen (Mr. Garro Jones) that his remarks will be more appropriate to that Amendment.

§ Mr. H. G. WILLIAMS
I do not understand any of this Clause very clearly, but suppose this trust is a permanent one and provides that after the child reaches the age of 21 the trustee shall remain in control for some substantial further period. When the father is So and the child is 60, is that income which the child is spending and of which he has complete control to be regarded as aggregated to the father's income?

The DEPUTY-CHAIRMAN
I hardly think that that arises.

§ Lieut.-Colonel ACLAND-TROYTE
I beg to move, in page 21, line 2, after "settlement," to insert: unless the interest of the child in the income or assets shall have been forfeited in consequence of the bankruptcy of the child or of an assignment thereof or a charge thereon having been executed by the child. Under this Clause as it now stands a trust cannot be irrevocable if under any circumstances any benefit can accrue to the wife of the settlor. It is a common practice in these deeds to insert a condition to the effect that in the case of bankruptcy of the child the trustees shall apply the income to other members of the settlor's family one of whom is usually the wife. This condition is inserted for the protection of the child and to prevent him from assigning the money. There is no ulterior motive and the cases in which it has been used must be very rare. It seems very unfair that a common form such as this should prevent the deed being considered irrevocable and I hope the Minister will be able to correct this hardship.

§ Mr. GARRO JONES
I very much hope that the hon. and learned Gentleman will not accept this Amendment. Let me attempt to give the Committee a typical case. A father settles on a child a sum, say, of £500 or £1,000 per annum. At the age of 25 the child, having lived on that standard, becomes bankrupt. Immediately that income is nominally stopped and reverts to the father and he gets the benefit of revocability under this Clause. But everybody knows in such a case that the standard of living of that child will be precisely the same as before. All that will happen is that instead of the child receiving it under the formal settlement 767 he will get it in £10 notes and in other ways not traceable. All that will happen is that the creditors of the child will be robbed of the amount, which the child will go on receiving. It is a pernicious principle and I hope the Committee instead of adding to the difficulties of the bankruptcy laws will endeavour to restrict them.

§ Mr. SPENS
May I point out that the point which we are dealing with is not actual events in the future but the form of old pre-Budget settlements. The point of this Clause is that if some innocent draftsman acting for my hon. Friend opposite made a settlement for him 10 or 15 years ago in which his children were concerned and happened to put in a clause that if the child became bankrupt there would be provision under which income went to the father, that settlement is a revocable settlement for the purpose of this Clause. If the draftsman happened to omit that clause then the settlement is an irrevocable settlement. If made in the former form the income of the child is the income of the father. For these distinctions to take effect now in respect of settlements made in one form or another 10, 12 or 15 years ago, is illogical and unfair.

§ Mr. W. S. MORRISON
In view of the contention of hon. Members, I am bound to say that a clause guarding against bankruptcy is a very common occurrence in trusts which give power to the settlor to resume control of the assets by his own act. My right hon. Friend has asked me to say that he will consider this matter very carefully, and will try to meet it by the Report stage if he can. It should be made clear that the wording of an Amendment for this purpose would require very careful consideration, as there would be a number of repercussions from an unwary choice of words.

Major HILLS
I quite agree with what has just been, said by the hon. and learned Gentleman. It might be possible to bring into the irrevocable class settlements where bankruptcies were guarded against and in which the assignment would give to the parents any benefit. I understand, from what the Financial Secretary has said, that the Chancellor will reconsider 768 the matter. I think the Amendment of my hon. and gallant Friend the Member for Tiverton (Lieut.-Colonel Acland-Troyte) would go rather too far, but I am very glad that the Financial Secretary has promised that the point will be considered. It is a very serious point.

§ Mr. BENSON
I hope that the Chancellor of the Exchequer will not allow any of these exceptions. When the trusts were originally set up there was no mention of avoiding tax. [HON. MEMBERS: "Hear, hear!"] All right then; if they do not avoid tax, the people who established them have nothing to grumble about. Hon. Members opposite are trying to have the best of both worlds. They say that the trusts were set up by virtuous people who had no intention of avoiding tax, but they object to the Chancellor of the Exchequer helping them to carry out the intention of not avoiding tax. I am aware that there was no question of taxation when these settlements were made, but why are hon. Gentlemen opposite raising the question of taxation now? Hon. Gentlemen cannot have these trusts as virtuous and established for other purposes than avoiding taxation and, on the other hand, say that they shall be made into trusts which enable the settlors to avoid taxation now. That is what is being asked for, and it seems to me to be an entirely illegitimate demand.

§ Sir W. DAVISON
The legislation which the Committee is discussing gives certain privileges in the way of tax remission to persons who have irrevocable settlements. Why should they not have these privileges, when, to all intents and purposes, the settlements were intended to be irrevocable settlements, and there was no idea of their being terminated for the benefit of the settlor? These clauses were put in for the protection of the children.

§ Mr. BENSON
So far as we on this side are concerned, the hon. Member has got hold of the wrong end of the stick. We are not concerned with the privileges; we want to know why irrevocable trusts are allowed these entirely illegitimate privileges.

The DEPUTY-CHAIRMAN
Mr. Dingle Foot.

§ Mr. H. G. WILLIAMS
May I ask, Captain Bourne, whether you are not going to call the Amendment of my hon. and learned Friend the Member for East Leicester (Mr. Lyons)—in page 21, line 2, after "settlement," to insert: except in the case of a settlement made in contemplation of marriage where neither the settlor nor the husband or wife of the settlor is a trustee of the settlement.

The DEPUTY-CHAIRMAN
In the first place it is now too late; and, in the second place, there is a somewhat better Amendment in the name of the hon. Member for Cambridge University (Sir J. Withers)—in page 21, line 16, at the end, to insert: but does not include any settlement made by or under the provisions of a separation agreement, or an order of any court, nor any settlement made by way of compromise of legal proceedings, or any settlement made for the benefit of an illegitimate child before or within one year after its birth, or any settlement made before and in consideration of marriage or pursuant to an agreement so made"— which I propose to call.

§ Mr. FOOT
I beg to move, in page 21, line 4, after "person," to insert: in such a way that any part of the settled assets or income or any interest therein reverts to or becomes payable or applicable to or for the benefit of the settlor or the wife or husband of the settlor. This Amendment would enlarge the words which appear in Sub-section (7, b). The paragraph as it now stands reads: For the determination of the settlement by the Act or on the default of any person. It seems to me that the meaning of these words is somewhat obscure, and particularly it is not quite clear what is intended by the word "determination." May I put to the Committee the effect of these words, as I read them, in one or two cases? If a settlor provides a sum of money of which the income is to be paid to the child or for the education of the child up to the age of 21, and at the age of 21 the capital is automatically to be paid over to the child, as I read the paragraph it would have no application at all, because the settlement would not be determined by the act or default of any person, and the payment over of the capital on the child reaching the age of 21, or whatever the age might be, would not be a determination in the sense that is meant here, but would 770 merely be a coming to the end of the settlement.
A somewhat different kind of settlement, and one which I believe is fairly common, is that in which all the income is paid to the child until a certain age, and the trustees have a discretion to pay over the trust fund, either at the age of 21 or at some later age as they may determine. That would be caught by the words of paragraph (b) as I read them. Therefore, we have the rather strange result that these two settlements, each of which is intended to be irrevocable in the sense that in neither case will anything revert to the settlor at any time, nevertheless in the one case the settlement is treated as an irrevocable settlement within the meaning of the Bill, while in the other case it is treated as not being irrevocable.
To take another case, it is quite a common practice nowadays, when money is settled on a daughter, for it to be handed over to trustees on terms that the daughter is to enjoy the income, either until she marries or until she reaches a stipulated age, and upon marriage the trustees have power to pay over the trust funds to the trustees of a marriage settlement arranged by the daughter herself. That also is a fairly common arrangement. As I read it, there also you would have a determination in the terms of this paragraph even though there again there could not be any question of any part of the sums that were settled reverting to the settlor. I do not think the sort of case that I have mentioned was really intended to be caught by those who drafted this Bill. It is obvious that the case that was aimed at was where you have a settlement that may be determined in such a way that something may come back to the settlor or to the wife or husband of the settlor, but I do not believe it was intended to catch this form of settlement where the period during which merely the income is to be paid is to be determined at the discretion of the trustees but where in fact nothing will revert either to the settlor or to the husband or wife of the settlor.

§ The ATTORNEY-GENERAL
I have directed my attention particularly to the words that the hon. Gentleman put on the Order Paper. So far as those words 771 are concerned, they would have effected the results which I imagine he desires, but if these words were inserted and the person who had made the settlement was in a position to transfer the benefit of the settlement to someone else and might make that someone else anyone he thought fit, that would be making it irrevocable by a side wind. What the hon. Member is really concerned about is the meaning of the word "determination." His first case is covered by paragraph (a). The second case he puts is where under a settlement the trustees are enjoined, on the daughter's marriage, to pay over the capital to the trustees of her settlement. That is clearly a case where there is no question of the settlor getting any benefit. All these points require careful consideration in the light of whether the form of words can be used to meet the particular point one desires to meet without having other consequences. I will certainly undertake that that class of case will be considered before Report.

§ Mr. SPENS
I beg to move, in page 21, line 5, leave out paragraph (c).
This is the paragraph to which I have the greatest objection of all. It deals with two entirely different things. It provides that any settlement containing a provision for the payment of any penalty by any person failing to comply with the provisions of the settlement makes an irrevocable settlement revocable. With regard to that part of paragraph (c), I confess that I do not know what the words mean or to what they refer, but I believe, from a letter which I have received, that they refer to some provision which occurs fairly commonly in settlements made in my native land of Scotland. I have personally never seen any settlements which contain any provision such as that, and I do not know what sort of gentlemen it is intended to catch. As regards the second part of paragraph (c), you have a provision which applies to every well-drawn settlement made in this country. You will not find any settlement made in this country which does not contain some partial indemnification or exoneration of trustees. The Committee will remember that we have in fact a statu- 772 tory exoneration of trustees under the Trustee Act. We have passed a provision that any trustee who does not perform his function but has acted reasonably and honestly is to be excused. That is a statutory provision which applies to every settlement in this country, either expressly or by implication. Moreover, in every other settlement you nearly always have some provision under which in certain circumstances and in respect of some act or other the trustees may be excused if they do not perform that particular act. To come down to the type of settlement dealt with in this paragraph, you will find in a very large percentage of settlements which contain a provision for the receipt of funds and the investment of income some express exoneration or indemnification in respect of investments of settled funds. If in any such clause as that which has anything whatever to do with tax evasion is found in a settlement, then such settlement becomes an irrevocable settlement for the purposes of this Clause. In the payment of an annuity you nearly always find a provision that if the trustees have not their costs provided or if the result of taking action would be to bankrupt the parent they shall not take action. These are clauses that are found in every settlement made years ago, and they have nothing to do with tax evasion. I submit, therefore, that paragraph (c) ought to be omitted.

§ Mr. W. S. MORRISON
My right hon. Friend proposes to meet the substance of the views expressed in the powerful speech we have just heard. My hon. and learned Friend and the Committee understand the reason which prompted the drafting of the Clause in its original form. It was that these provisions, necessary as they are in many cases for the total or partial indemnification of trustees, were in fact being used as a cloak to enable, in many cases, the settlor to avoid the obligations which he purports to be undertaking. The purpose of paragraph (c) is intended to exclude these irrevocable settlements. Since the Bill appeared in print it has become increasingly evident that there are many cases of quite innocent provisions. In the law of Scotland, the Trust (Scotland) Act, 1921, there is an actual statutory form of partial indemnification which it would not be consistent with practice 773 to cut out from irrevocable trusts. The undertaking which my right hon. Friend gives is to introduce on the Report stage a redrafted series of definitions which will have the object of excluding the innocent cases of indemnification from the provision and leaving it as far as we can in such a form that it renders revocable only such forms as fulfil the description which I gave at the opening of my remarks.

§ Mr. SPENS
That is all that I ask. I have no desire so to amend the provision as to allow settlements designed for tax evasion. All I desire is that innocent settlements should be protected. In the circumstances I beg to ask leave to withdraw the Amendment.

§ Sir J. WITHERS
I beg to move, in page 21, line 16, at the end, to insert: but does not include any settlement made by or under the provisions of a separation agreement, or an order of any court, nor any settlement made by way of compromise of legal proceedings, or any settlement made for the benefit of an illegitimate child before or within one year after its birth, or any settlement made before and in consideration of marriage or pursuant to an agreement so made. The purpose of the Amendment is that certain bona fide settlements shall be exempted from the Clause.

§ The ATTORNEY-GENERAL
By his Amendment, my hon. Friend proposes to exclude an order of the court, among other instruments; but an order of the court is not within the purview of the Clause and therefore is already excluded. So far as the categories of other instruments are concerned the Clause is not directed against instruments for tax dodging, as we were dealing with them in Clause 16.
The hon. Member will recognise that many of these instruments have as part of their proper motive the making of arrangements for their children on the basis of the Clause but as transactions solely for the purpose of diminishing his tax liability. But there are persons whose resources are such that they are able to make a provision of this kind for their children and it is therefore reasonable that their taxable capacity should not be diminished by the fact that they have made this arrangement. The point of the Amendment is that a person has 774 entered into this transaction under a separation agreement or order of the court. If under a separation agreement a father or mother is in a position to provide that there shall be £300 a year for the benefit of a child, why should they be in a better position than someone who has not had the misfortune to have had matrimonial troubles which have led to a separation agreement?
Why should my hon. Friend say that a person who makes this provision voluntarily, without any matrimonial troubles, shall be in a worse position than a man who has to make this provision because of a separation agreement? The child gets exactly the same benefit, although in the one case it is because of a matrimonial dispute. You have two parents who are able to make a provision of £300 for a single child. The hon. Member desires to give an advantage to the parent who makes this provision under a separation agreement. I cannot see why there should be any discrimination drawn in favour of those who have made such a settlement as a result of any matrimonial trouble. I really think that the hon. Member's Amendment is based on a misconception. Whatever may be the object of the arrangement as far as I see it, it should be brought within the general proposal of the Clause.

Mr. CHAMBERLAIN
I beg to move, in page 21, line 28, to leave out "where it last," and to insert "in the third and fourth places where it."

§ Mr. KEELING
I beg to move, in page 21, line 39, at the end, to insert: (e) a child shall be deemed to be an infant only if such child is either under the age of sixteen years or is over the age of sixteen years and under the age of twenty-one years and receiving full-time instruction at any university, college, school, or other educational establishment. It is obvious that a child in any walk of life may go out into the world and start earning his or her own living long before he or she is 21. The child may drive a car at 17; a youth may join the Army at 18; and I believe there are cases on record, in war, of a young man attaining command of a battalion before reach- 775 ing the age of 21. It is difficult to see why income settled on such a person should be treated as his parents' income. If a man settles money on his child and then dies before the child reaches 21 and the child starts earning his own living at 18, it seems utterly unjust that the widow should have to pay Income Tax on the settled income of that child. The Clause as drawn will produce this extraordinary anomaly, that whereas when a man is separated from his wife their incomes are treated separately, yet if a boy of 20 earning his own living is separated from his father the settled income of that boy is to be treated as his father's income. The Financial Secretary during the Second Reading Debate used these words: The income arising from the invested funds in the trust, if that income is paid out to the parent for the maintenance of his child, will be treated as the parent's income for the purposes of tax, but if it is accumulated within the trust and not laid out it is not income and will not be aggregated. I think that the case for not aggregating that income is equally strong if the income is retained by the child and never goes to the parent. The definition in my Amendment is, of course, the same definition as that which fixes the parent's eligibility for the child allowance of £60 a year. I submit that it is reasonable that when the parent ceases to get that allowance he should cease to be liable to have the child's income aggregated with his own for purposes of Income Tax. I hope the Chancellor will accept my Amendment.

§ Mr. W. S. MORRISON
The hon. Member who moved the Amendment did so, I think, to draw attention to an anomaly which he considers exists in the proposals of this Clause. The fact is that if one adopted my hon. Friend's definition of infant and child I think it would lead to even worse anomalies than exist at the present time. The provisions of the Clause only apply during minority. My hon. Friend's definition of minority would mean that a parent who was self-sacrificing enough to continue his child's education beyond the age of 16 would be prejudiced as against the parent who did not. If a parent who desired to continue his 776 child's education beyond 16 settled an income upon that child, he would be caught under the Clause by the definition which my hon. Friend proposes to insert. If he did not desire to continue the education of the child the parent would, as soon as the child was 16, if we adopted this definition, be entitled to settle an income on that child and not to have it aggregated with his own income. That surely would be a grotesque position. I suggest that the Committee would be well advised to adopt the well-known definition of minority and infancy which is in the Bill rather than embark upon the definition now suggested. The purpose of the suggestion is a very proper one, and perhaps my hon. Friend will find another opportunity of making his point, but I think that to alter the definition in the way suggested would be to create fresh evils rather than to provide a cure.

Mr. CHAMBERLAIN
I beg to move, "That the Chairman do report Progress, and ask leave to sit again."
I understand that the next Amendment on the Paper is one to which the party opposite attach a great deal of importance and no doubt they would prefer an opportunity of discussing it at an earlier hour of the evening than this. They will, however, bear in mind that we count upon getting the Committee stage of the Bill finished by Wednesday night. The time table does not leave us any alternative. However, the Committee has made extremely good progress, to-day, and I think we might now agree to the Motion to report Progress.