CLAUSE 34.—(Sums paid to settlor otherwise than as income.) (Hansard, 27 June 1938)

§ Colonel Gretton
My name is attached to an Amendment in page 40, line 3, after "Act," to insert: other than a settlement made before the passing of this Act for valuable consideration, or as part of a family arrangement, or by a person under the age of twenty-five years. I do not, however, propose to move it, but I beg to reserve my rights, if I should be advised that the purport of the Amendment is not already covered, or if the words of the Chancellor of the Exchequer do not cover this case, to move it again on the Report stage.

§ The Deputy-Chairman (Captain Bourne)
I gather that the right hon. Gentleman is not moving his Amendment?

§ Colonel Gretton
No.

§ Mr. Hely-Hutchinson
I beg to move, in page 40, line 14, at the end, to insert: or any sum paid to the settlor by u ay of loan on mortgage or charge of freehold, leasehold, or other property of the settlor 1643 to an amount not exceeding two-thirds of the value of the property mortgaged or charged by the settlor as security for repayment of the said loan. This is one of the Clauses which, for the purpose of enabling the revenue to escape the effects of tax evasion, regards as income what everybody has hitherto regarded as capital. It goes further than that. In Sub-section (5, a) it defines a capital sum beyond any possibility of doubt. We think that the Clause goes further than the Government intended, in that it specifically includes legitimate transactions. It may be that the maker of a settlement desires to borrow some of the money for the purpose of buying a house; so far as we can see that possibility is specifically excluded by (a, i) and (a, ii).

§ The Attorney-General
The need for this Clause, as my hon. Friend no doubt realises, is that certain people have set up machinery under which the income goes in at one slot and the same amount of money comes out below, but when it comes out below, they say it is a capital payment, whereas they deduct from their total income returns what they have put into the slot above. Therefore, that machinery, as my hon. Friend would be the first to recognise, has to be dealt with. The Clause covers cases in which money comes back to the settlor, very often exactly the same amount as the income, purporting to be by way of loan, although the settlor may never be called upon to repay it. The Amendment seeks that the Clause shall not apply to a loan if the settlor gives security by way of mortgage that the loan does not exceed two-thirds of the value of the property.
No doubt the object of my hon. Friend is to except from the provisions of the Clause cases in which there has been a genuine loan transaction, but the trouble is that it is impossible to distinguish, and that his words would not distinguish, between a genuine loan transaction and a transaction entered into to enable the moneys to be taken out without the settlor's financial position being any the worse. If he were the possessor of a loan which he did not desire to be mortgaged for that purpose, he could execute a deed of mortgage, and on the face of it the loan would be secured, but as, in these cases, he has complete control over what the trustees do, he could get a release 1644 from the loan and get the mortgaged property back. While appreciating the purpose of this Amendment, we came to the conclusion that it could easily be used by people in certain circumstances to evade the Clause.
I would call attention to the fact that the Clause applies only to loans made in current and future years, and, therefore, if there is any genuine transaction in the past the Clause does not apply to it. All that results from what I have said is that if a man genuinely desires to raise money on mortgage he must be careful not to raise it from the trustees of a settlement of this kind. He must raise it elsewhere, and not on his own trustees. I appreciate the object of the Amendment, and if I could find words to exclude from the operation of the Clause genuine loan transactions I would do so; but we have come to the conclusion that the Clause cannot be so limited that no harm will be inflicted in future. I, therefore, ask the Committee to resist the Amendment, although perhaps my hon. Friend will see his way not to press it.

§ Sir R. Tasker
This matter goes further than loans for mortgages. It relates to charges on freehold. Trustees who hold in trust property are always called upon to spend large sums of money in repair to keep the property in a proper state. It is well known that frequently when leases are running out no money is spent on the property, but with freeholds it is the reverse. The owner is called upon to spend large sums of money in restoring the property. I could give many cases where the competent authority has required property to be restored to a habitable condition. My hon. Friend the Member for Hastings (Mr. Hely-Hutchinson) seeks to enable the Inland Revenue authorities to give redress to those who at present cannot get redress. It is difficult to get redress as you have to prove everything. You have to prove that the charge which you are making is not for an extension of the premises. I would like to preserve my right to criticise this Clause on the Report stage. I hope that the right hon. and learned Gentleman will bear in mind the cases which I have instanced in connection with the repair of property.

§ The Attorney-General
My right hon. Friend has not given any undertaking 1645 with regard to Clause 34. The point which my hon. Friend has in mind is quite a different one, and I do not want there to be any misunderstanding about it.

§ Mr. Hely-Hutchinson
Does the statement of the right hon. and learned Gentleman mean that no trustee of a settlement may at any time advance money to the original maker of the settlement?

§ The Attorney-General
In cases in which the money is undistributed income, that will be done at the risk of the sum advanced being held to be income. That is clear, but I do not think it is possible to draw the line which my hon. Friend would seek to draw between the genuine transactions and the others. What my hon. Friend has asked represents the conclusion which we had in mind.

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