§ 9.46 p.m.
§ Brigadier-General Clifton Brown
I beg to move, in page 47, line 14, to leave out "or Section thirty-five." 1646 The question dealt with in this Amendment and the two succeeding Amendments—in line i8, leave out "and Sub-section (3) of the said Section thirty-five."—and in line 19, at the end, insert:Provided that this Sub-section shall not apply in any case where the transfer in respect of which the liability to estate duty arises was made before the commencement of the said Act."—is rather complicated, and I should like to ask you, Captain Bourne, whether, in moving the first Amendment, I may discuss all three together, moving the other two formally if there is any chance of getting them accepted?
§ The Deputy-Chairman
I think it would probably be of advantage if we were to have a general Debate on the first Amendment. The other two would stand or fall by the first.
The three Amendments relate to a provision in the Finance Act, 1930, at the time of the passing of which Mr. Philip Snowden was Chancellor of the Exchequer. Section 34 of that Act related to Estate Duty on unsettled property, and Section 35 to Estate Duty on settled property. Both of these Sections were to a certain extent retrospective, that is to say, they referred to private estate companies which had been started since 1918. Section 34 enabled companies to reorganise and carry out the new law, but, generally speaking, under Section 35 this was very difficult to do; and, although the transactions in question were supposed to be legal and proper at the time the companies were formed, and though, in carrying them through, large sums were paid to the Revenue as stamp duties, still the liability to Estate Duty was imposed in the Statute. At the same time, however, no doubt in consideration of these difficulties which were put upon companies which had been quite fairly formed, the concession was made by Mr. Snowden in that Act that, as regards cases coming under Sections 34 and 35, properties which were deemed to pass on death by reason of these Sections were treated as estates by themselves, and not aggregated with other property. for the purpose of determining the rate of Estate Duty.
That was thought to be fair and equitable in those days, but something would appear to have happened to induce the Chancellor of the Exchequer to consider 1647 not to be fair what was considered to be fair then, and to withdraw the concession in question by Sub-section (2) of Clause 41 of the present Bill. In view of the facts to which I have referred, it seems unfair to do this in the case of a settled estate which would come within the provisions of Section 35 of the Act of 1930, and the Amendments I have put down would have the effect of providing that settled estates falling within that Section would still receive the benefit of non-aggregation for Estate Duty purposes. If it is suggested that some estate companies have been formed with the object of getting the advantages of non-aggregation—I do not know of any, but the Chancellor may—an Amendment could be brought in to except such estates from the proposals I have made. We are only asking that the advantages of non-aggregation should be continued in the case of estate corn-panics which were perfectly fairly formed, and in their case only.
§ 9.52 p.m.
§ Sir J. Simon
My hon. and gallant Friend has put his point very clearly. I agree with him that the subject is rather a complicated one, but that is neither his fault nor mine. He is quite right in saying that in this Clause we propose to make a change in the hitherto existing provisions of the Finance Act, 1930, but I think I can satisfy him that the change is justified and necessary. Broadly speaking, subject to exceptions which do not matter now, the principle of Estate Duty is that you aggregate the estate, putting upon it its proper value as a whole, and put the duty on that total. That is very necessary, because the rate of duty is not a level rate, but increases as the estate grows larger. If, therefore, there were estates in the case of which aggregation was not required, but different parts of which were treated separately, and if to each separate portion the appropriate rate of duty was applied, a very great deal of duty would be lost. Really, I believe the omission in the Act of 1930 was largely an accident, but, whether it was an accident or not, it has worked out in a way which, I think, nobody would welcome. I will give an actual case, without making any reference by which it could be identified. It is a case in which advantage was taken of the non-aggregation provision, with the result that the existing law, designed to check avoidance, is itself being used as an 1648 instrument of avoidance, and it has enabled methods to be adopted which still further reduce the Estate Duty liability by the simple expedient of splitting the property which it is proposed to transfer and then transferring it, not to one, but to several companies, thereby securing lower rates of duty on the various non-aggregable parts. The case I shall give is not an average case, but the worst case. It might, however, happen, and indeed it has happened, at any rate in one instance. One property of the value of £800,000 was split up between five companies to which Section 34 of the Act of 1930 applies—
§ Sir J. Simon
I am afraid I cannot say at the moment, but I will try to find out. Thus, instead of there being one non-aggregable estate, in the ordinary case there were five separate estates, each in the hands of a separate company. This method resulted in saving the total estate £164,000 Estate Duty. I do not think that can be justified. I propose, therefore, that:For the purpose of determining the rate of estate duty, property which is deemed to pass on the death of any such person by virtue of the provisions of Section thirty-four or Section thirty-five of the said Act shall not be an estate by itself, but shall be aggregated with other property which is to be aggregated under Section four of the principal Act; and accordingly Sub-section (7) of the said Section thirty-four and Sub-section (3) of the said Section thirty-five shall cease to have effect.The other provision, the other change made by this Clause is made by Subsection (3) The Committee have the terms of that Sub-section before them. The Amendment is an Amendment to the law providing for the valuation of shares in the companies to which these Sections apply, and the ascertainment of the notional sum of money which is deemed to pass on death under Section 34. Section 34 of the Act of 1930 imposed a duty on a notional sum bearing the same proportion to the company's assets as the benefits drawn from it by the person concerned bear to its total income. Section 37 provides that in cases where a notional sum is due to pass under Section 34 the valuation of all ordinary shares shall be by reference to the value of the assets instead of on the usual market value or principal basis. For this purpose it 1649 is necessary to find the value of the total assets of the company. There is a definition about that. In the course of that definition appears this passage:The par or redemption value, whichever is the greater, of any debentures, debenture stock and preference shares of the company.That provision was to enable the deduction of an amount not less than what would have to be paid to get rid of the debenture. The result has been, in the case of these one-man, or family, companies, that there has been an increase in the number of issues in preference shares of very low rates—say, one-quarter or one-eighth per cent.—for the sole purpose of reducing the value upon an assets basis of the ordinary shares. If you construct your company in that way, you by that means reduce—I must say artificially and deliberately reduce—the value that is going to pay tax. The largest case arising out of that Section 37 that has been discovered relates to a company with £5,000,000 capital, part of which was in one-eighth per cent. preference shares of £1. Following the ordinary practice, by reference to the formula in Section 37, these one-eighth per cent, preference shares must be deductable at their par value; but it is only on their much smaller principal or market value that they pay duty. Subsection (3) provides that where ordinary shares are to be valued on the assets basis, the deduction to be taken from the gross value of the company's assets for preference shares, etc., shall be ascertained by reference to their principal value: that is to say, the value at which they will be assessed for Estate Duty.
It is estimated that the combined effect of these two flaws which have been discovered in the Act of 1930—Mr. Snowden's Act—is to cause a loss of duty to the Exchequer of £250,000 a year. Unless we deal with it, it is a loss which may very easily, in the next few years, considerably increase. Consequently, I have no hesitation in asking the Committee to agree to my Clause, which I think, with all respect, is a distinct improvement on the provisions proposed by the Chancellor in 1930. In answering the question of my noble Friend, as to whether it was a case of land or a series of estates, the answer is that it was not a case of land, it was a case of funds. They were deliberately divided into five 1650 parts, in order that they might be spread over five separate individuals.
§ 10.2 p.m.
§ Lord Apsley
My right hon. Friend the Chancellor's explanation shows that he is very considerably at variance with the plea put forward by my hon. and gallant Friend. This Amendment is not designed to assist any companies to avoid taxation. Estate companies are not formed with the idea of avoiding taxation, but of running landed estates in a proper way. My right hon. Friend quotes two examples. He admits himself that one example that he quoted has nothing at all to do with a landed estate or with agriculture. It is purely an arrangement made by some rich man to avoid taxation by splitting up funds among individuals. My hon. and gallant Friend says, "Certainly they should pay; that is just." The object of the Amendment is to prevent landed estates from being mulcted of money which it is proposed to use for the benefit of agriculture. I doubt whether the Chancellor knows how much money is being taken out of agriculture in this way. I had it calculated that some £300,000,000 is being taken out of agriculture, and being returned in the form of subsidy, which is increasing every year, to repay the amount of capital taken from it in former years. That process goes on, and if it is allowed to continue it will ruin every farmer in the country, be he freehold or tenant, be he large or small farmer.
Unless something is done to check the process, agriculture in this country is going to be in a very sorry plight within this generation. Hon. and right hon. Members of this House make speeches advocating a proper agricultural system, but not a single thing is done to check this drain on agriculture. But individuals have done their best to see that agriculture shall be run in a proper way. There are at present only two forms of agriculture likely to succeed; one is a properly run landed estate, and the other is the co-operative form, which also does not have to pay this taxation. I hope that my right hon. Friend will look on it in this way and will not consider this a means of avoiding taxation, but will realise that the estate companies that have been formed already are running their estates in a proper way and giving the best value to the tenants, and are doing the repairs that are necessary from time to 1651 time, continuously, properly and up to date, which the wretched, unfortunate landowner is unable to do, for he has not the funds.
The same applies to the freeholder. Every year we see the freehold farms going back and back, and repairs which should be done neglected because they have not the funds. They have to pay Income Tax, and rates upon agricultural buildings which have become much heavier since there was de-rating on the land. They have not the means themselves to pay Death Duties, and they go on in this happy-go-lucky way trying to do the best they can. Agriculture is not a business which can be run in one generation, but you must look three or four generations ahead. In order to do that, you must have a landowner who knows that his son and grandsons will run the business properly, or you must have a company well managed—and cooperative companies do their bit in that way also—to run it properly. I hope that my right hon. Friend will consider this matter very carefully and not reject it offhand. I hope that he will go into the subject between now and the Report stage to see where the difference lies between any arrangement made between financiers; that he will consider the difference between the idea of avoiding duty and the idea of running an estate properly so as to give the best and the fairest rights to the landowners.
§ Amendment negatived.
§ Motion made, and Question proposed, "That the Clause stand part of the Bill."
§ 10.8 p.m.
I would draw the attention of the Chancellor of the Exchequer to the last Amendment in my name—in page 47, line 19, at the end, to insert:Provided that this Sub-section shall not apply in any case where the transfer in respect of which the liability to estate duty arises was made before the commencement of the said Act.I understood the argument of the Chancellor of the Exchequer was that these companies had been transferred since the Act of 1930. We think that what Lord Snowden thought at that time was that the proposal should apply to these companies and not to any others. We are willing that any companies guilty of the 1652 practice which has been-referred to should be excluded. I shall be obliged if the right hon. Gentleman will look at the proviso and consider the matter again in another place. I should be very grateful at any rate if he would at least consider the matter. In the light of what my noble Friend has said, and having done our best to put a very complicated point, I think there is a great deal more in it than the right hon. Gentleman gave us credit for. He based his speech on quite a different aspect of private companies. Land companies should be treated in a different way. If Lord Snowden found it right to do this—and the right hon. Gentleman has given no reason to show that things have changed since 1930 in this respect—I ask him to consider the matter a little further and to see whether there is not something in the case we have, perhaps very badly, put before him.
§ 10.10 p.m.
§ Sir J. Simon
I understand the question is that the Clause stand part of the Bill, and I am afraid that I can say only a word or two. I would like to assure my hon. and gallant Friend and my Noble Friend that certainly they may be sure that the Government will give very careful consideration to what they have said. I am not in the least blind to the difficulties of those who are endeavouring to carry on the essential agricultural needs of the country. I can well appreciate that the burdens of Estate Duty and its operation are very severe; I have no doubt that they are. But I cannot help thinking that what was said by my Noble Friend was really rather a general assault on the principle that Estate Duty should be paid on agricultural land than in support of any particular Amendment. I will most carefully look at what my hon. and gallant Friend and my Noble Friend have said. I do not want to rule out the matter without consideration at all, but I think that it will be found that what I have said is the right view. At the same time, I will look again at what they have been good enough to say, and on the question that the Clause stand part of the Bill I invite the Committee to agree to it.
§ Clauses 42 to 45 ordered to stand part of the Bill.