CLAUSE 33.—(Disallowance of deductions from total income of certain sums paid by settlor.) (Hansard, 27 June 1938)

§ Mr. Benson

I beg to move, in page 38, line 7, to leave out from the first "made," to the second "and," in line 8.

As I understand the object of this Clause, it is to strengthen a Clause of the 1936 Act dealing with accumulator trusts in which the income is paid annually under the trust deeds by the settlor. Apparently the 1936 Clause was found not quite adequate, and this seems to be a strengthening Clause, but as it is drafted it seems to catch only those trusts which are created in the future. Irrevocable trusts created in the past mainly for the purpose of tax avoidance are not caught by this Clause because it will not apply to any irrevocable trusts made before the 26th April, 1938. There is apparently a distinction between irrevocable trusts and revocable trusts in this Clause and Sub-section, because revocable trusts are caught elsewhere and irrevocable trusts are not caught except here. The objection I have is that irrevocable trusts created in the past are not caught.

The only reason I can think of for this distinction is that the present Government are taking a rather lenient view of the situation, for if anybody has made an irrevocable trust in the past and cannot get hold of the income and cannot revoke the settlement, he is allowed by the Government to escape. I think every other form of settlement we have attempted to tax has enabled the settlor in some way 1641 or another to revoke the settlement or obtain a variation of it. But here is a settlement which is irrevocable, and there is no possibility of a settlor obtaining any modification, therefore the Treasury seem to say: "If a settlor has got himself into this tangle and has settled his income permanently and irrevocably and cannot in any shape get hold of it we will not make that trust subject to taxation." If I am correct in my reading of this very complicated Clause I certainly think that trusts made for tax avoidance purposes, irrespective of their date, and irrespective of whether they are revocable or irrevocable, should be taxed.

§ The Attorney-General

By way of explaining this Clause I hope I shall be in order if I make just a passing reference to the kind of settlement with which we have been dealing. We have been dealing, as the hon. Gentleman the Member for Chesterfield (Mr. Benson) said, with settlements which in certain circumstances could be revoked. At the end of his speech the hon. Member referred to tax avoidance. The main kind of machinery set up for tax avoidance has always been machinery under which, though on the face of it the settlor parted with his income, in fact it could come back to him in certain circumstances or he could get it in some other form. In this Clause we are dealing with irrevocable settlements which are really on a different basis. When a man makes an irrevocable settlement he does in fact part with the control over the money, and therefore that is not within the category which I have attempted to describe, namely, a settlement by which in one way or another the settlor did get back the money, or get whatever was distributed. The purpose of this Clause is to see that where an irrevocable settlement is used to accumulate income the settlor in future should not be in a position to treat the annual payments, which as it were go into a money-box, as not being his income, because he will know, with this Clause before him, that he is setting up what is really a method of saving money.

Ordinary men who are not able to resort to machinery of this kind have, of course, to make their savings out of their income after it has paid tax. But it does seem to me that it would be wrong to make this Clause, as the hon. Gentleman 1642 suggests, apply to irrevocable settlements that have been made in the past. The man, by the settlement which he has made, has parted with all possibility of getting back the income. It is not a case in which the funds can revert to him, and he has ceased for any purpose to receive any income from it. I think it will be unwise to alter his tax position by making a provision of this kind apply to the past. But for the future those who make accumulating irrevocable settlements will have this Clause before them, and they will realise that the mere setting up of an irrevocable settlement as the machinery for saving money which they desire to go to their children or other beneficiaries, will not enable them to deduct from their income for Surtax purposes the annual payment which goes to their money-box.