(CLAUSE 31.—(Commencement of Part III.) (Hansard, 27 June 1938)

§ Mr. Hely-Hutchinson
I beg to move in page 33, to leave out lines 18 to 34, and to insert: for the purpose of assessment to Income Tax and reliefs for the year 1938–39 and subsequent years and shall apply in relation to the estate of a deceased person whether he died before or after the commencement of the year 1938–39. In our reading the Clause as at present drafted appears to treat limited income in an estate in a different way from which absolute interest is treated. As far as we can make out, limited interest will have to pay one more year's taxation than absolute interest.

§ The Solicitor-General
The hon. Member is perfectly right in his construction of the Clause. We do propose to treat limited interest and absolute interest differently. The provisions of this part of the Bill apply generally to the year 1938–39 and subsequent years, but payments in respect of limited interest and life interest are made chargeable to Surtax from the year 1937–38. The effect of the Amendment would be to put payments to life tenants on the same footing as payments to a residuary legatee. The reason why the Government felt that this 1625 ought not to be the case is this. Speaking without any intention of being disrespectful to the Court of Appeal, it is true that although the Court of Appeal made clear what the law was in the Corbett case, most people had assumed that the law was other than it was. Most laymen had assumed that when a person was enjoying a life interest in an estate, when the will gave a person the income during life, that that was all that could be said to pass to that person, and that when in pursuance of the terms of the will the executors proceeded year after year to hand out to that person sums of money which were exactly equivalent to the life interest reserved under the will, most people assumed that that represented the income of the life tenant. That situation was never challenged until the Corbett case, and what was then settled was that until the residue is ascertained there cannot be any income out of the residue, so that the sums of money paid to the person between death and the completion of administration, do not represent income, but represent something in the nature of compensatory payments made by executors for the loss of income that that person has suffered prior to the completion of the administration of the estate.
Life tenants have been, in fact, levied with tax as though these sums of money were income, and until the Corbett case that situation has never been challenged. In ordinary, plain horse sense a person who is only entitled to income and receives in fact sums of money annually is in a layman's view receiving nothing but income. We felt that, having always been in that position and always subject to such a tax, no one could complain of any grievance if that provision were continued and the Clause made retrospective in their case. We felt that people who had always been considered in ordinary language to be in receipt of income should not enjoy exemption for another year. But an entirely different situation arises as regards the residuary legatee. The provisions of Clause 25, which are entirely new law, deal with the case of a person who has an absolute interest in residue, and I want to put a complicated point as simply as I can.
In the case of a person who has an absolute interest in residue the law has been that when an estate was administered both income and capital were handed out 1626 to the person in one mixed sum, a mixed sum from which you could not disentangle income and capital, and neither during the administration period nor in the final payment was Surtax levied upon a residuary legatee. As a matter of entirely new law we are now treating a residuary legatee as being in receipt of income as from the date of death until the final ascertainment, and the individual now comes into the mesh of the Surtax as though he had been in receipt of income all those years up to the ascertainment of the residue. In these circumstances we felt that there is a distinct difference between the case of the residuary legatee and the life tenant, and we mark that distinction by making the legislation in respect of the life tenant retrospective for one year and the provisions in regard to the residuary legatee not retrospective.

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

§ The Solicitor-General
I beg to move, in page 33, line 19, after "Act," to insert: or by virtue of Sub-section (3) of the fourth section in this Part of this Act. This Amendment corrects an oversight which we noticed in the drafting. Clauses 24 and 25 deal with the two main classes of income, but there is another category of income which will be found in Clause 27, and that is income which arises under the exercise of a discretion. That is not at the present moment covered, and we include it now in the categories in respect of which the Bill will be retrospective.