HC Deb 12 July 1938 vol 338 cc1166-79

5.56 p.m.

Mr. Spens

I beg to move, in page 42, line 3, after "if," to insert "under the express terms of the settlement."

This Amendment and the following Amendment in my name raise a point which is difficult and technical, but which, in my opinion, is of great substance, and I will try to explain it to the House as clearly as I can. Subsections (3) and (4) of this Clause have the laudable object of trying to stop settlements created by a settlor which contains powers of accumulation and provisions under which the settlor during his life may make that accumulation his own. Everyone is in favour of this method of tax evasion, when it is tax evasion, being stopped, but as the Clause is worded, it applies to every settlement, whenever it is made, where the settlor is still alive, and in which the settlement contains a provision for the accumulation of any income during the settlor's life, by whoever are the trustees or whoever is the owner of that income, other than the settlor, and in which in any circumstances whatsoever any part of that income, or the property of which it is the fruit, may come back to the settlor or the settlor's wife. That drags in the doctrine with which lawyers in one particular division are more familiar than others, namely, resulting trusts. I will explain to the House what that means. A settlor makes a settlement, believing that he has completely disposed of the property which he has settled, but owing to a subsequent event, it is found that, because sombody does not attain a certain age, or because somebody does not survive somebody else, or because of some other provision of that description by which the property would pass from one to the other, the person who was intended to take the property fails to fulfil the conditions under which he ought to have taken it, and the property turns out, because of events which happen years after the settlement, to have no owner. In those circumstances the property, under this doctrine of resulting trusts, reverts back to and becomes the property of the original settlor—much to his surprise in almost every case and against his intentions when he attempted to dispose of the property.

Let me give another instance. Assume that he has settled the property by every means in his power so as to confer it upon other people, with a series of limitations and gifts, one after another, to a series of people. There, another doctrine comes into play, that is the horrible doctrine called the rule against perpetuities. Although he has those limitations depriving him absolutely of the property some ingenious lawyer may suggest at some future time, that one of those limitations is invalid, because it offends against the rule against perpetuities and in certain circumstances may succeed in establishing that case. Therefore the gift in that case will fail to take effect; the property will be found to be undisposed of, under the terms of the settlement, and then, under the doctrine of resulting trusts, back it goes to the original settlor, entirely against his expectation, he having been advised and having acted under the belief that he had deprived himself entirely of all interest in it.

As this Clause is worded, every existing settlement of which the settlor is still alive, will have to be examined at once by the Revenue Department who will have to ask the question: "Are there any provisions in the settlement, or are there any circumstances under which this property may come back again to the settlor?" A series of people concerned in the settlement may have died out in the lifetime of the settlor and, in such circumstances, the property would come back to the settlor. If it be possible to argue—although no court would ever allow it to be argued, apart from this provision, until it became a question of material fact—that some of the ultimate limitations are affected by the rule against perpetuities, or that for some other technical reason the property in the settlement, or some part of it, might come back to the settlor, what will be the effect? It will be this. If at any time during the life of the settlor, the trustees of that settlement, over whom the settlor has no control, are accumulating part of the income under the powers in that settlement, or under the direction of the owner of the income, that income becomes, under this Clause, part of the income of the original settlor.

In the cases which I have suggested he has no control over them. He has made an absolute disposition but, for one reason or another, has failed to carry it out. The property is in the hands of strangers. He cannot prevent accumulation being made but if the trustees have power to accumulate or the owner of the income directs that some part of it shall be accumulated, then accumulated it will be and he will come within the provisions of Sub-section (3). The original settlor, if he is unfortunate enough still to be alive, will find this accumulation of income added to his own income for Surtax purposes. I am certain that was never the intention of those who drafted the Clause but with very great respect to my right hon. Friend the Chancellor of the Exchequer, and my hon. and learned Friend the Solicitor-General, I submit that the instances which I have mentioned would clearly fall within the provisions of the Clause as now drafted. For that reason I desire to cut out altogether from this Clause the doctrine of resulting trusts and to strike out the words "in any circumstances whatsoever" substituting for them the words "if under the express terms of the settlement." If there is an express provision under which the settlement permitted some part of the income to be accumulated and to come back to the settlor, if there is any device expressed in the settlement by which the income would come back, then that device will be caught.

My hon. and learned Friend the Solicitor-General will possibly make two answers to my criticism. One I imagine will be that there are four exceptions in the proviso. I have considered them carefully and they do not cover anything like the number of cases that may arise and are not any real protection. The other answer may be that if resulting trusts are excluded, and the Clause is made to apply only to settlements which expressly provide for the income coming back to the settlor, it may open up a loophole by which clever conveyancers could apply the doctrine of resulting trusts so as to get some accumulations of income back to the settlor. I would ask my right hon. Friend the Chancellor to accept now and for this year the Amendment which I propose. Let the Clause be confined this year to the express provisions of existing trusts. The Clause, as it is drawn now, is made to apply to every existing settlement and there must be masses of cases in which you will have a situation such as I have outlined, where there is no ultimate gift and where there is in existence some possible resulting trust never intended for the purpose of evading taxation. It may be because the drafting of the settlement was bad or because the draftsman thought he had made certain that in no circumstances could a resulting trust ever take effect.

If it turns out that anybody is ingenious enough to use the doctrine of resulting trusts so as to get an accumulation back—I have not tried to do it myself but perhaps it would not be beyond the capabilities of a very clever draftsman to attempt something of the kind—it cannot result in any great loss to the revenue during the next 12 months, and a proper Clause to deal with this situation could be submitted next year. But I ask my right hon. Friend and my hon. and learned Friend to consider this point very seriously before they allow the Clause to go into the Bill in its present form. I think if they examine it they will find that, in order to catch a comparatively small number of cases of evasion, they are going to cause a great deal of trouble in regard to settlements executed many years ago, long before the question of tax evasion ever came to the front, with the possible result of causing income to be aggregated with a settlor's income in circumstances which were never intended to be covered by this legislation.

6.9 p.m.

Mr. Erskine Hill

I beg to second the Amendment.

I am bound to say I can conceive of no wider words than those words in Subsection (4): any income or property which may … become payable to or applicable to the benefit of the settlor … in any circumstances whatsoever. I take leave to doubt whether it was the intention of my right hon. Friend the Chancellor of the Exchequer that those words should have the effect which I think they will have. This Sub-section would apply in cases where intestacy has the effect of bringing back money quite unexpectedly to the settlor. As long as there is a chance of that this Sub-section applies. Take a simple example. Suppose that someone leaves money in trust to accumulate for three children, and all three children die. It is conceivable that the money might come back to the settlor or the wife or husband of the settlor. In that event the Sub-section would apply, and I feel certain that is not the intention of my right hon. Friend. That being the case, while the possibility of such an event exists the settlor must be deemed, in the words of the Section, "to have an interest in" the income. The effect of the Clause might be as if it were stated that "in all cases, a settlor, for the purposes of the foregoing Section, shall be deemed to have an interest in the property or income" except in the four cases covered by the proviso. I agree with my hon. and learned Friend the Member for Ashford (Mr. Spens) that there are many cases not covered by those four concessions made in the proviso and, subject to anything which my right hon. and learned Friend the Lord Advocate may have to say, I assume that the law of Scotland will operate in the same way as the law of England in this respect. I do not wish to enlarge further on the subject which has been dealt with fully by my hon. and learned Friend but I would ask my right hon. Friend the Chancellor of the Exchequer if he thinks the words of the Amendment are too narrow to consider making his own words less wide, and evolving some form designed to avoid the injustice which I feel certain will follow if this Clause passes as it is drawn at present.

6.12 p.m.

The Solicitor-General

We are dealing here with a type of tax evasion which was described by my right hon. Friend the Chancellor of the Exchequer and I think by myself during the Committee stage of the Bill. It is this. A kind of money-box is created. A trust is set up for the accumulation of income, and what we have provided is that, in so far as the income of a trust fund of that kind is not distributed, then if the settlor has a resulting interest in the fund, the income, so far as it is not distributed, shall be treated as his. We have made certain exceptions, which appear in Sub-section (4), but it is important to bear in mind the subject-matter with which we are dealing—the case of a fund used as a money-box for accumulation, with a power under which ultimately this fund is to inure to the benefit of the settlor.

The exceptions that have already been made are cases of bankruptcy, assignments, marriage settlements, and death under the age of 25. If the House accepts it, there is a further Amendment on the Paper in the name of my right hon. Friend designed to exclude all cases of trusts where income may be accumulated for a beneficiary under the age of 25, whatever the beneficiary's interest may be on attaining that age. We consider that those exceptions meet all the normal cases that are likely to arise. Normally, it is only where minor children are beneficiaries under the settlement that we find income being accumulated. To that extent the substance of my hon. and learned Friend's Amendment has already been met. I would like also to emphasise the fact that there could never be a resulting trust to the settlor where the property of the settlement is taken absolutely by the beneficiary. It is only where the beneficiaries have contingent interests that a resulting trust ever arises.

My hon. and learned Friend threw out the suggestion that I might possibly say that his Amendment offered prospects of evasion, and with that part of his argument I entirely agree. But I do not agree with him that it would require a very skilful draftsman to determine how that evasion could take place, because what he is proposing really would defeat the whole purpose of the Clause. It would be the easiest thing in the world for the settlor to arrange that the income should be accumulated on a trust that he knew certainly would fail, and which indeed he could cause to fail, and thereby obtain the benefit of the income. Let me take an example. Supposing that the settlor makes his settlement in favour of a beneficiary aged 80, and the settlement provides that the income is to be accumulated for a period of 20 years, with a resulting trust to himself, it would not take a very experienced draftsman to draft a settlement of that kind. That would be perfectly legal under the provision that my hon. and learned Friend would put in the Bill in substitution for ours.

Mr. Spens

I did ask for this provision to go in this year, because, to take my hon. and learned Friend's instance, which is a perfectly proper one, it is most unlikely that the lady aged 8o would die before the next Finance Bill comes in, and unless she did, there would be nothing to go back to the settlor. I would suggest that if the hon. and learned Gentleman announces this year that any trust created after this date for the purpose of bringing about a resulting trust will be hit, it will meet the case.

The Solicitor-General

I am afraid I do not find my hon. and learned Friend's argument very attractive, because he agrees with me, I understand, that there is an enormous loophole created by his Amendment, a loophole which any conveyancer would be able to see at once, if indeed my observations at this Box were not drawn to his attention, and I cannot conceive that it can be right that, knowing there is such a loophole as this, we should leave it in existence for another year. It would simply be making trouble. Nor has the hon. and learned Member indicated how he would deal with the situation next year; he has not suggested any form of words which would prevent the difficulties that I have been describing. In the situation that I have described, the lady would be 81, and there would be 19 years to go, and still there would be the resulting trust in favour of the settlor.

I know that it is a very valuable deterrent that it should be said from this Box that if there be evasion, legislation of a retrospective character would be brought in later on to deal with it, but obviously that is a method the use of which must not be unlimited. I am bound to point out that my hon. and learned Friend's Amendment would leave this gigantic loophole, which anybody can see, and that it does not suggest any way in which it can be corrected, and in view of the fact that all reasonable exceptions have been provided for, or will be provided for, I must ask the House not to accept the Amendment.

Amendment, by leave, withdrawn.

6.20 p.m.

Mr. Spens

I beg to move, in page 42, line 23, to leave out "twenty-five," and to insert "thirty."

This is an Amendment to one of the excepting provisos. As drafted, it excepts a case where the settlor would only succeed to the property on the death, under the age of 25, of some person who is the beneficiary entitled to the property. It is true that 25 is a very common age at which to give persons their full vested rights in property, but in a very great number of existing settlements the age of 30 exists, and I would therefore ask whether it is not possible for 30 to be substituted here.

Mr. Erskine Hill

I beg to second the Amendment.

6.22 p.m.

The Solicitor-General

My hon. and learned Friend, I think, agrees that 25 is the more common age. I have no doubt that there may be one or two exceptional cases, here and there, where the age is given as 30, but all normal cases will be covered by the exception as the paragraph now stands. You have to draw a line somewhere; you cannot let the age rise to 70 or 80. If we advanced it to my hon. and learned Friend's figure of 30, we might be asked to increase it to 35, and then the 35's might think that 40 would be the more suitable age. In the circumstances, I think 25 is a reasonable compromise.

Amendment, by leave, withdrawn.

6.23 p.m.

The Solicitor-General

I beg to move, in page 42, line 26, at the end, to insert: or if and so long as some person is alive and under the age of twenty-five during whose life that income or property cannot become payable or applicable as aforesaid except in the event of that person becoming bankrupt or assigning or charging his interest in that income or property. Sub-section (4) of Clause 35, the one that we have just been dealing with, defines the circumstances in which a settlor is deemed to have an interest in the income or property of a settlement for the purposes of Sub-section (3). To this general provision, however, the proviso to Sub-section (4) makes certain exceptions. Representations have been made to my right hon. Friend by hon. Members in the House that there are some genuine cases that will not be covered by the present exception in Sub-section (4, d), which provides an exception in favour of settlements where the funds will revert to the settlor only on the death of a beneficiary under the age of 25 or some lower age who would have become entitled to the property on attaining that age. The type of case which they have in mind is where the income of the settlement is being accumulated until the beneficiary reaches the age of 25 but at that age will not be entitled to the accumulated income or property of the settlement but only to the life interest in future income of the settlement. What is suggested is that there is no reason why that case should be brought within Subsection (3) any more than the cases which are already exempted under paragraph (d).

My right hon. Friend feels that there is a great deal of substance in that suggestion and this Amendment has been drafted to cover not only that case but also any other case where income is being accumulated for a beneficiary under 25, whatever his interest on attaining that age, provided that the funds cannot revert to the settlor during the beneficiary's life, except in the event of that person becoming bankrupt or assigning his interest in the income or property.

Amendment agreed to.

6.26 p.m.

The Solicitor-General

I beg to move, in page 43, line 15, at the end, to insert: "and (c) the provisions of this Sub-section shall have effect, in relation to a settlement made before the twenty-seventh day of April, nineteen hundred and thirty-eight, subject to the provisions of Part 11 of the Third Schedule to this Act, and in that Part of that Schedule this Section is referred to as 'the relative Section.' This Amendment is put down in pursuance of a promise given to my hon. and gallant Friend the Member for Clitheroe (Sir W. Brass), on the Committee stage of the Bill, that an Amendment would be introduced to ensure that in the case of really genuine revocable settlements, where there was no intention to evade taxation, if prompt steps were taken to make those settlements irrevocable those settlements should not be treated as revocable settlements under the Bill. This Amendment as it stands only gives authority for the inclusion of the detailed provisions which are now made in the Third Schedule to the Bill, but if it would be for the convenience of the House and not passing beyond the Rules of Order, I would propose to refer to the substantive part of the Amendment, which appears in the Schedule.

Mr. Speaker

I think it would be for the convenience of the House.

The Solicitor-General

These words enable us in the Schedule on page 60 of the Bill at the end of line 31 to insert the provision appearing on page 1916 of the Order Paper. The first paragraph of that provision deals with settlements which are for annual payments and the second paragraph deals with capital settlements. Paragraph I dealing with annual payments provides that in the case of revocable settlements of this kind made before the Budget date the provisions which are in the Bill should not in general apply provided that certain conditions are satisfied. Those conditions are (1) if the settlor has released his power of revocation at the expiration of three months from the Finance Bill becoming law, or (2) if he has already made continuous annual payments for at least seven years, or (3) if it has been revoked and a new settlement made for a total period exceeding six years; in other words, the person who has in fact acted upon the settlement as though it were a perfectly irrevocable one and has not derived any benefit for himself is now given the opportunity of putting the matter in order and making it for the future irrevocable so that he shall not be subjected to the penalties of the Clause. To put it another way the settlor having treated his settlement as being irrevocable is now given the opportunity of making it in law irrevocable and saving it from the provisions of the Bill in regard to revocable settlements. Those are the provisions as regards the annual payment settlements.

As regards the capital settlements dealt with in paragraph 2 of the provision to be inserted in the Schedule, similar provisions are made provided that the settlor has released his power of revocation so that the settlement is in fact completely irrevocable and that he has not received any consideration in respect of his release. The concession does not extend to the type of accumulator case with which we have been dealing where accumulated interest may be charged if the income or funds of the settlement may revert to the settlor. An Amendment was put down to this effect on the Committee stage, but not moved, and we felt that different considerations obviously applied in that case.

By paragraph 3 there is the further condition that the concession shall not apply in the case of a settlement where since the beginning of 1937–38 the settlor has received any capital sum from the trustees of the settlement or any company connected with the settlement. Capital sum is later defined to include any sum which he obtains by way of loan or repayment. That is in order to see that nobody shall use what we characterise as tax-evading devices by which the settlor uses any provision of the settlement to get money back and pay no tax on it. Paragraph 4 is really explanatory, and paragraph 5 provides that in cases where the settlor has himself an unqualified power to revoke the concession under paragraphs 1 and 2 shall not apply. What we feel in regard to these cases is that they are really not settlements at all. It is one thing to have a settlement in the case of a charity revocable in certain circumstances; for example, a settlement in favour of a parish which shall continue for seven years, but is revocable with the consent of somebody. That consent would normally be given if a particular incumbent left or the character of the religious practices changed. It is another thing where the settlor himself has power to revoke the settlement, and we do not think that is a proper case in which to give him power to put the matter right. Paragraph 6 provides that husband and wife are to be treated as one, and paragraph 7 provides that the years to which Part 11 applies are 1937–38 and 1938–39.

By these concessions the ordinary deeds for payment of charities as to poor relations will, we are satisfied, be properly safeguarded, and the promise that was given by my right hon. Friend to my lion. and gallant Friend the Member for Clitheroe (Sir W. Brass) on the Committee stage will be fully implemented.

6.33 p.m.

Captain Sir William Brass

During the Committee stage my right hon. Friend promised that he would bring this suggestion forward as he did not accept the proviso which I suggested. He did not want to penalise any of the genuine cases, and I certainly did not want to encourage any tax evasions. I was only anxious that the genuine cases should be treated in the way in which my right hon. Friend has treated them, and I should like to thank him for what he has done. I am sure it will be felt all over the country that he has done the right thing and that all the genuine cases will be allowed to go on in the same way as they are at present, once they have made the deeds irrevocable.

6.34 p.m.

Mr. Benson

This Amendment is an excellent answer to the suggestion made by the hon. and learned Member for Ashford (Mr. Spens) on a previous Amendment, that we should proceed by giving a solemn warning that next year any particular settlement of an evasive character should be dealt with by retrospective legislation. Last year the Chancellor gave us a warning and in the Finance Bill the legislation was made retrospective for one year. Here, owing to pressure from the back benches, he is revoking that retrospective legislation and is giving a considerable and, I think, unwarranted concession. There are two effects of this Amendment and the Amendment to the Schedule. They will take out of charge to tax the Surtax income which will be due next year, and there are some considerable concessions in respect of the revocable seven-years' settlement. It is fair to say that every seven-year settlement that has a revocable clause in it is a bogus settlement.

Sir W. Brass

That is quite wrong.

Mr. Benson

It has been founded solely for the purpose of evading tax. A seven-year settlement of income which has a revocable clause in it is not a settlement; it is merely an annual gift cast in the form of a settlement. The third-party clause in a settlement by which you must have the permission of a third party to break the settlement is no safeguard. In one of the cases brought by the Board of Inland Revenue on this point there was a settlement which could be broken by the consent of any third party. The judge put it to the Attorney-General that it meant that the settlor could go down the street asking one person after another whether they would agree to the revocation of his settlement, and as soon as he found some person who said, "Yes," that was an adequate and legal reason for breaking the settlement. When you make a settlement and you put in either some unspecified third party or a specified named party, you put it in in order that you may break the settlement and get rid of the binding clauses. The Chancellor in Committee referred to the instance given by the hon. Member for Central Leeds (Mr. Denman), who said: I give the case of a wealthy man who was able to settle over £1,000 a year for a period of seven years on a certain number of charities. He did so by means of a revocable settlement not because of any desire to evade taxation but simply because his income was subject to fluctuations and as a prudent man he foresaw that it might not be possible for him to arrange his support of these charities for a considerable period ahead."—[OFFICIAL REPORT, 27th June, 1938; col. 1631, Vol. 337.] The man referred to makes a seven years' trust and makes it revocable because he is never sure what his income will be. That is a bogus trust. He can break it any time he wants if he thinks his income is inadequate to give £1,000 to charity. What difference is there between that form of trust and an annual gift? There is none. What is the purpose of forming a trust of this kind which you can break at any time? The purpose is that if you cast your annual gift in the form of a seven-year trust you can set it against your income for tax purposes.

The concession which the Chancellor proposes to make is that anyone who has one of these revocable trusts, can, if he drops the revocable clause continue the trust for the broken period that is left of seven years. If it is a revocable trust having run for three years, by eliminating the revoking clause it will be allowed to continue as a valid trust for the next four years. That means that those trusts which have been formed solely for the purpose of tax avoidance and where the revocability has not been exercised are to be allowed as valid trusts for the length of the period for which they were established. Let me give an example of two neighbours each of whom decide to give £100 a year to a given charity. One does it by an annual donation out of income which has borne tax, and the other does it under a seven years' trust which is revocable and which he can revoke by consent of any third party he likes to name with the exception of his wife. They have both paid for three years. Under the Amendment the man who has made the tax avoidance trust and who has collected tax back on his £100 can establish his trust for the next four years and still avoid tax. If the man who has paid on an annual basis and has paid full tax wants to establish a tax avoiding trust, he cannot do it under less than a seven-years' trust. In other words, the annual donor is penalised and the donor who has established a tax avoiding trust is put in a favourable position. We should not agree to legislation which gives a favour to people who have established trusts for the purpose of avoiding tax.

Amendment agreed to.