CLAUSE 24.—(Provisions as to limited interests in residue.) (Hansard, 27 June 1938)

§ Mr. Hely-Hutchinson
I beg to move, in page 22, line 43, at the end, to insert: Provided that any sum paid on account of legacy duty shall not he deemed for the purposes of this Sub-section to be a sum paid or payable in respect of a limited interest. Under the existing arrangement the entire tax falls on the estate and the purpose of the Amendment is to secure that, now that it is proposed that the part of the income which applies to limited interests shall be regarded as income of the person who holds that limited interest for taxation purposes, the person who receives only income out of the estate and not capital shall not have to pay Surtax on account of the legacy duty he has to pay.

§ The Solicitor-General
The object of my hon. Friend in moving the Amendment is to ensure that some sum paid by the personal representatives as legacy duty in respect of the interest of a life tenant shall not, for Income Tax purposes, be deemed to be the income of the life tenant. It may come somewhat as a shock to a great many members of the Committee who have not studied this subject with complete care to know that, when you are ascertaining the life interest of a person in an estate for the purposes of Income Tax, under judicial 1620 authority, you add back to the income of any year the legacy duty which has been paid by the executors before the interest has been paid. The layman might be under the impression that the legacy duty which was so deducted by the executors was no part of the income of the life tenant, but that is contrary to judicial decision. The present wording of this Clause was not adopted for the purpose of sweeping into the life tenant's income sums of money which have been paid as legacy duty in the course of the administration by the executors, but, on a strict construction of the words which have been used, it is the actual fact that such payments are treated as the income of the life tenant.
There is a good deal to be said for the view which my hon. Friend the Member for Hastings (Mr. Hely-Hutchinson) has put forward in support of the Amendment which he has moved, but the Government cannot accept it as it stands, for this reason. The effect of the Amendment would be to reduce the amount of income, in the case of Surtax payers, upon which Surtax was chargeable, but it would have exactly the opposite effect in the case of Income Tax of small taxpayers, who are entitled to reclaim tax that had been deducted before the income was handed on to them. In such cases they have been allowed to include a computation of the legacy duty, in ascertaining the amount of Income Tax they could recover. If the Amendment were adopted as it stood, among other effects it would have would be to reduce the amount of 1621 tax that the small Income Tax payer, who was a life tenant, was able to recover. There are other objections to the Amendment as it stands, but the Government propose between now and the Report stage to put down an Amendment which will preserve the position of the small Income Tax payer or will not damnify the small taxpayer and will remove the Surtax payer from the somewhat anomalous position in which, under the wording of the Clause, he was likely to be. I hope that with that assurance my hon. Friend will be able to withdraw the Amendment.

§ Mr. Benson
I am rather surprised to hear that the Government propose to accept the principle if not the wording of this Amendment, the object of which is really to set what is unquestionably a capital charge against income. In the case of a limited interest legacy duty is paid in four instalments, and from the fact that it is spread over a period of four years, it would appear to be an income charge. The spreading over of the payment in four instalments is really a concession to the taxpayer, who may have inherited merely income and no capital, to enable him to pay legacy duty out of what is inherited. The whole basis of the assessment of legacy duty is based upon the idea that, if you inherit £100 per annum, such sum has a capital value, and it has a varying capital value according to the age of the person when he inherits it. The Board of Inland Revenue or the Treasury assess the capital value of what is inherited; they impose a capital tax upon that value, but in order to ease the burden of the taxpayer they take it in four instalments. Under what general principle of Income Tax can a capital charge be set against income for the purpose of reduction of tax? The Solicitor-General on a recent Amendment corrected me on the fundamental basis of Income Tax law and philosophy. Here, he is proposing to make an irretrievable breach in that philosophy.

§ Mr. Hely-Hutchinson
I beg to ask leave to withdraw the Amendment.

§ The Solicitor-General
I beg to move, in page 23, line 26, at the end, to insert, "less the tax so borne."
1622 In Sub-section (5) we are dealing with a method of arriving at the tax which is to be levied upon the income of an estate where the estate is, within the meaning of the Definition Clause, a foreign estate. The words "foreign estate" in this Bill are used as a term of art. It does not mean that all the property is foreign. It may mean that some is foreign and that some consists of British securities. Some of the income may not have borne tax and some may have borne tax. Under Sub-section (4, b) a payment from a foreign estate is deemed to be paid as income of the amount deemed to have been so paid. In the case where you have one part of the income already taxed and one part not taxed, it is necessary to arrive at some formula according to which you can levy tax which will result in the total income bearing the appropriate rate of British Income Tax.
The matter is an extremely complicated and difficult one as to how the formula works. The words that have been put into the Bill include the word "proportion." Where the Income Tax falls to be reduced it is provided that it shall be reduced by an amount bearing the same proportion thereto as the amount of the said income which has borne United Kingdom Income Tax bears to the amount of the said aggregate income. You are there putting into comparison two things which are not alike, an amount that has borne United Kingdom Income Tax and the amount of the aggregate income part of which has borne tax and part of which has not. The only way in which you can get your figure to work out accurately is by deducting tax from both. Therefore, we propose to add the words, "less the tax so borne," in respect of each of the elements which go to make up the sum. If the Committee will accept that very inadequate explanation of a formula which really would puzzle a senior wrangler, coupled with the assurance that I have satisfied myself that the sum if worked out according to the formula would result, if we put in these words, in an accurate tax being levied, I hope they will accept the Amendment.