HC Deb 28 June 1939 vol 349 cc512-23

7.53 p.m.

Mr. Spens

I beg to move, in page 22, line 20, after "provided," to insert: with the knowledge and consent of the deceased. This Amendment is the first of three Amendments which should be taken together. This Clause is properly aimed at endeavouring to stop what is admittedly a very serious method of getting round the provisions of Section 2, Sub-section (I, d)of the Finance Act, 1894, but in the way in which the Clause is worded, it appears that in the case of a great number of transactions of insurance, which have nothing whatever to do with any form of avoiding Estate Duty, it would result in the increase of the deceased person's estate. If hon. Members will look at Sub-section (1) of the Clause, they will see that any annuity or other interest, which mostly consists of policies of insurance taken out on the life of the deceased, which arises on the death of the deceased, and which is purchased or provided either wholly or in part by any person who was at any time entitled to, or amongst whose resources there was at any time included, any property derived from the deceased, shall be deemed to be an interest provided by the deceased, and shall result in the value of that annuity or amount or policy monies increasing the estate of the deceased and be aggregated with the rest of his estate.

The first point I want to make is that this may be done without the knowledge or consent of the deceased. For instance, if an employer has at any time paid a bonus to an employé which that employé has thought, in his own interests, it is desirable he should expend in taking out a policy on the life of his employer, knowing that he may be very much worse off if the employer dies, that is a case of a person who has among his resources money derived from the deceased and who has provided himself with an interest to arise on the death of the deceased. The result will be that under this Clause, although the deceased may have known nothing about it, when the employer dies, his estate will be notionally increased by the amount of that interest with, which the employé has provided himself, and the result may be substantially to increase the rate of Estate Duty which has to be paid on the estate of the deceased. It seems to me that that is a point which requires very careful consideration. No person ought to have his estate, for Estate Duty purposes, without his knowledge or consent, become very much greater than he knew about, and thereby be subject to a rate which is higher than he had anticipated.

The second point I want to make is this. I do not suppose there is a wife, child, grandchild or dependant who has not had during the life of the husband, father or grandfather some of his resources handed to them. If any wife, child or grandchild thinks fit to insure the life of the husband, father or grandfather for their own purposes, those persons will be persons provided with an interest to arise on the death of the deceased. They will be unable to prove that they have not had amongst their resources during the life of the deceased money out of which it might have been provided, and the result will be that, although the father, husband or grandfather had no idea that the wife, child or grandchild was insuring his life for their benefit, nevertheless, on the death of the father, husband or grandfather, it will turn out that the estate has been increased without his knowledge by these wholly independent transactions. It is almost enough to make the deceased turn in his coffin, or at any rate to give him a nasty tremor. However, this is not the really serious point. The serious point is that if the independent transaction takes place wholly unknown to the person, the rate of death duty will be increased without his knowledge and consent and without his having made any provision for it in respect of his estate. Therefore, we suggest that while we are all in favour of the motive behind the Clause, as it is drafted it is going to catch all sorts of transactions and it must result, in the view of insurance companies and others, in very serious difficulties in the provision which wives, children and grandchildren may legitimately and properly make for themselves at present.

Therefore, we suggest certain Amendments. The first is that no transaction which is unknown and is entered into without the consent of the deceased shall come within the provisions of the Clause. The later one is perhaps more drastic, because we do not see how to deal with it otherwise, that where the person who is providing the interest to arise on the death of the deceased is either a wife, child, grandchild, or dependant, those transactions shall not come within the scope of the Clause. I realise that there may be cases where the wife, child or grandchild may be made the agent of the deceased to carry out the very type of tax evasion which the Clause is mainly aiming at. I do not, therefore, like very much the Amendment that we have suggested, but, unless the Solicitor-General can suggest something otherwise, I think it is essential that these transactions by wives, children and grandchildren should be protected, otherwise a very great deal of hardship and wrong will be done. It might be possible to alter the proviso to Sub-section (1) so that, if the transaction could be proved to be wholly independent of the deceased, it might be excluded from the effect of the Clause, but I am certain that, as worded, while the net will no doubt catch the main object whom it is intended to catch, it is going to catch a good many transactions and cause a very great deal of serious hardship in the amount and rate of Estate Duty which will be payable in the future by reason of the very numerous transactions which I am certain the draftsmen never intended to catch, but which will, in fact, be caught by the Clause.

8.3 p.m.

Mr. Benson

I hope the Government are going to resist these Amendments, because in their present form they do not merely open the door, but blast a great hole in the wall of the Clause. In fact, they make it completely nugatory. How on earth can you prove what knowledge the deceased had? With regard to his consent, all he has to do is to say in his will, "I refuse consent and I sternly disapprove of any attempt to insure my life by anyone," and all tax avoidance insurances taken out on his life will be outside the scope of the Clause. The second Amendment simply kills any attempt to catch what is at present a form of avoidance which is enormous in its scope. The annual amount of moneys paid out by insurance companies on death in this country is £60,000,000. That excludes industrial assurances and surrenders. There are certain policies included in that money which it is impossible to estimate—there is the endowment policy and the policy taken out in respect of a business partnership, —but they can only account for a very small percentage of the £60,000,000. When we look into the amount brought into review for Death Duties, instead of £60,000,000 we find that it is £25,000,000, leaving a gap of £35,000,000. That is enormous. If we look still further, we find one or two other rather extraordinary facts. Of the £25,000,000 which do come in year by year for Death Duties, £17,000,000 are on estates of £20,000 and less, so that estates of over £20,000, running up into millions, include only £7,000,000 a year in insurance. Everybody knows that one of the big motives for insurance is the payment of Death Duties. A wealthy man who is in business may have the bulk of his assets in his firm. He knows perfectly well that the firm cannot stand a reduction, perhaps, of 50 per cent. of its capital. He must insure against it. Then there is the agricultural estate, which again would be crippled if Death Duties amounting to 50 per cent. had to be found.

Testators very definitely insure their lives for the purpose of meeting Death Duties, but when we examine their estates we find no trace of an insurance policy. It is done in this way. A settlement is made on a beneficiary and the insurance premium taken into consideration, and the settlement is increased by that amount. But, when the death takes place, that is not an interest passing at death. It is the property of the beneficiary and never has been the property of the deceased. According to the Amendment of the hon. and learned Gentleman, all that is going to be excluded, although these policies are taken out largely by the children of the deceased for the purpose of meeting the Death Duties and they are paid for by money derived from the deceased. How many people insure the lives of individuals who are not their parents or their relations? Very few. The bulk of the insurance for the purpose of meeting Death Duties is taken out in the name of the beneficiaries in order that it may not attract duty, and the Amendments will allow that great and scandalous evasion to continue.

8.8 p.m.

The Solicitor-General

It may be for the convenience of the Committee, and I think it is necessary in order that the discussion that has taken place may be fully appreciated, that I should say a word or two about the scope of the Clause. By the Finance Act, 1894. property passing on the death of the deceased, that is, property which attracts duty, includes an annuity or other interest purchased or provided by the deceased by himself or in concert with anyone else. If we keep to the example my hon. and learned Friend the Member for Ashford (Mr. Spens) gave of a policy of insurance, it will illustrate the whole position. The normal case, which the hon. Member for Chesterfield (Mr. Benson) was speaking of, may be illustrated by a man who has, for example, £100,000 of fortune. He desires to insure his life, and takes out a policy for £15,000 and pays the premiums. When he dies, that policy is aggregated with his estate and it bears Estate Duty, just like his watch, his horse, his house, or any other investment that he has.

Now I will let the Committee into a secret. Those provisions are easily, and have been consistently evaded by the simplest of all possible devices. In the present state of the law, if a gentleman makes a gift of £50,000, for example, to his son more than three years before his death and then his son lends it back to him at 5 per cent, interest, and, with the £2,500 a year, pays the premiums on a life insurance policy for £50,000, the following startling results occur, that on the death of the father the provisions of the Act of 1894 do not enable the insurance policy which results to be brought into the deceased's estate. It is not, in the terms of that Act, an interest purchased or provided by the deceased. It has been provided by the son. It is to prevent that result occurring, and that clear evasion of the Act of 1894, that Clause 21 is designed. The second result: is that, when the father dies, he is indebted to his son to the tune of £50,000, and that is a debt due from his estate at the time of his death, and therefore he is entitled to reduce the total amount of his estate by that amount, and the Revenue consequently loses by a diminished aggregate of the whole estate. That is the evil which Clause 22 is designed to remedy, to see that artificial debts created of that kind shall not rank as diminishing the estate that passes at the death.

The cases that I have quoted are deliberately simple ones and, if all were as simple as that, there would be need only for a simple Clause to remedy the defect and to result in the burden of Estate Duty lying on the shoulders where it ought to lie. But, in this as in every other case of tax evasion, the inevitable company comes in, and then the matter is very much more difficult to deal with. Now it becomes a case where a gentleman settles, more than three years before his death, £100,000 in favour of his wife and children. A private company has just immediately been registered and the testator hands a cheque for £100,000 to the settlement trustees. They apply the money to taking up all the shares in the company. The directors then lend £95,000 to the testator at a net rate of interest of 6 per cent. and the company effects a policy on the testator's life, the interest on the loan providing the money to pay the premiums. So that by the intervention of the company, the situation has become a little more complicated. Those are the situations with which we are trying to deal in Clause 21 and, as regards repayment of debt, in Clause 22.

We are seeking to do it in this way. First, under Clause 21 we bring into charge all annuities, policies and so on which are purchased or provided by any person who has at any time had any property from the deceased. These are the first words of the Clause and obviously they are too wide because they cover anybody who at any time has had a watch or any other property from the deceased. "Property" we define as including any property which was the subject matter of any disposition. That would include any annual payment made by the deceased to anybody, so that we have still to limit it. We have not attempted to approach the problem by linking the property provided by the deceased, with the money that is used to provide the annuity because if we did that it would simply invite evasion. It would never be possible to associate the two transactions. What we rely on doing is establishing, in the first instance, identity between the purchaser of the annuity and the possessor of the property that is derived from the deceased.

The second stage is to make- exclusions so that the method shall not operate unfairly. That is necessary because, clearly, there are cases where properly which is traced as going out of the deceased's hands to the purchaser, would not even suffice to purchase the policy. If a man left somebody a gold watch and the person to whom he left it, took oat a policy, the gold watch would not cover the payment, so that we must, to begin with, make an exception there. We then proceed to exclude from the charge the amount by which the value of the policy actually provided exceeds the value of one which the whole of the property derived by any one from the deceased would have provided. That, again, leaves too wide an area of charge. It is necessary because, if you do not do that, you get evasion by transfer to somebody who is, apparently, in no contact with the person who takes out the policy; but this is obviously too wide because it would cover the case, for example, of a man whose son took out a policy, the testator himself having in his lifetime given £. 10,000 to a hospital. Obviously you do not want to set off the £. 10,000 against the amount provided by the son to purchase the policy.

So, the third stage is reached in the proviso to the Clause, and it is at this stage that my hon. and learned Friend the Member for Ashford takes objection to the proposal. You reduce the sum which is chargeable by deducting property which, although it has been derived from the deceased, did not pass three cumulative tests. First it never entered the pocket of the person who took out the policy—still thinking of the son. The money that the father has given to the hospital would clearly fulfil that test. Secondly, it was never in his resources at the time when the policy was taken out. Again the money given to the hospital would pass that test. Thirdly, and this is cumulative, the son would have to satisfy the Commissioners that the property in disposition had no connection with the provision of the policy. Each of those conditions could be fulfilled in relation to a gift of property in the lifetime of the testator, which went, as I have said, to a hospital. But they do not cover the kind of case which my hon. and learned Friend has put to the Committee.

I think my hon. and learned Friend put his case rather too highly. He gave the instance of an employé of the testator receiving a bonus. I think by our definition of "property," we would exclude that case, so I am not very sympathetic to my hon. and learned Friend on that account. But in the Clause as drafted we would still cause to be aggregated with the father's estate, a policy of the following kind. A testator is dependent on his earning power. He has a son to whom he makes an allowance of £200 or £300 a year in order that he may qualify as a doctor or a barrister or in some other profession. The son, being a prudent young man, takes out a policy on his father's life to ensure that he shall be able to continue his professional training. The son has done this without any pre-arrangement with the father, as a matter of prudence and out of the resources with which his father has provided him. That my hon. and learned Friend argues ought not to result in the son finding on his father's death that the policy taken out independently of his father's volition, has been aggregated with the father's estate to bear the charge of Estate Duty.

I agree with my hon. and learned Friend and I hope the Committee will agree that as the Clause is drafted, we have drawn the net a little too tightly, because the son in that case could not pass through the cumulative tests which I have described. He could not establish that this was never included among his resources and that the disposition was not with a view to enabling or facilitating the purchase or provision of the annuity. The burden is placed on the person who took out the policy, of establishing to the satisfaction of the Commissioners, that the disposition of which it, or the property which it represents was the subject matter, was not made with a view to enabling or facilitating the purchase or provision of the annuity. If he can satisfy that condition then, clearly, in equity, he ought not to be required to aggregate a policy which he has taken out himself, with the resources of the person who is devising the property. We therefore propose at a later stage to eliminate the first two of the tests contained in the proviso, in other words to cut out that the person aforesaid was not entitled thereto, and that it was not included amongst his resources at the time of the purchase or provision of the annuity or other interest. That will make the test in every case that the person deriving the property should not be brought within the Estate Duty of the testator if he establishes the fact that that disposition was not made with reference to or with a view to enabling or facilitating the purchase or provision of the annuity or other interest.

I am conscious that this does not go as far, or anything like as far, as my hon. and learned Friend's Amendment would seek to go, but as to that I must express my complete agreement with the hon. Member for Chesterfield. This Amendment, as it stands, would make the Clause quite inoperative. So far as the second Amendment is concerned, it would simply exclude the very cases which we want to catch, and so far as the first Amendment is concerned, it would make the scheme unworkable. As the hon. Gentleman pointed out, in many cases, the testator being dead, it would be an impossible burden to put upon the Revenue to establish the intent of someone who had long since perhaps vanished from the scene.

But there is an alternative argument which may influence my hon. and learned Friend to withdraw his Amendment, and that is that if that view is not correct—and he seemed to doubt whether it was, with his great experience of proving after people are dead what they thought while they were alive—it is very difficult to conceive of a person taking out a policy on the life of someone else with any responsible insurance company without getting that person medically examined, and it is extremely difficult for anyone who has subjected himself to a medical examination at the hands of an insurance company to say that he had no knowledge or consent with regard to the process. So it may be that my hon. and learned Friend's safeguard would not in fact prove a safeguard when it came to be more closely examined. For these reasons we cannot accept either of my hon. and learned Friend's Amendments. But I hope the Committee will feel that the kind of case that I have given is one that clearly ought to be excepted from the operation of the Clause and that that hard case should be dealt with at a later stage of the Bill.

8.28 p.m.

Mr. Pethick-Lawrence

Before the Amendment is withdrawn, as I imagine it will be, I should like to make this caveat, that I hope the Solicitor-General will not so modify the Clause, even in the way that he proposes to do, as unduly to limit it. I quite understand that the case that he put forward is worthy of some consideration, but if he is going to withdraw some safeguards, will he do so only so far as comparatively small sums are concerned? He sketched a figure of a couple of hundred pounds a year, and while not asking him to be too precise, I would like him to give some limit for this remission.

8.29 p.m.

Sir John Wardlaw-Milne

I think my hon. and learned Friend who moved the Amendment made it clear to the Committee how very difficult it was to cover the points that he wanted to raise and at the same time not go further than any of us want to go in amending the Clause. We are all grateful for the concession, such as it is, which the Solicitor-General has made, but what I am a little afraid of is that, while the example which he gave may well be covered by the alteration proposed, the change will not deal with all those cases which in every part of the Committee, I think, we should like to see covered by an alteration in the wording of the Clause. I would, therefore, ask him to take into account another example. Take the case of a policy taken, out under the Married Women's Property Act. A takes out a policy under which the money cannot revert to himself and in which he has no interest. He cannot raise a loan on it, and he has no interest in it in any way, yet if his wife has settled any sort of annuity or payment to a third person derived from that policy, when A dies that annuity under the Subsection will form part of the estate of A and will have to pay duty.

It seems to me that that and similar cases which could be brought up—I admit that they are very complicated, and I do not want to claim special knowledge about them, although I can assure the Committee that I have taken a great deal of trouble in trying to understand them myself—are cases of possible hardship. After all, the Act of 1894, to which my hon. and learned Friend referred, gave a very definite concession, and that concession, as I understand it, was that property in which the deceased had never had an interest—that is the important point—should be treated as a separate estate. As I see it now, from the example which I have given and the example which my hon. and learned Friend himself has given, if no further concession is made, it may well be that some third person who is getting some benefit, say, in the form of an annuity, will find that the annuity granted to him forms part of the deceased's estate, although the deceased had no personal interest in the grant in any way. Therefore, what I rose to say was that I think there are other cases which will have to be taken into consideration, and I hope that between now and a further stage my hon. and learned Friend will consider the matter again. He may then find that the Clause will require further widening than he has suggested to-night.

8.33 p.m.

Mr. Spens

It seems very ungrateful to put a concession under a miscroscope, but I hope the Committee realises that the concession which my hon. and learned Friend has promised does mean that in the case of every insurance taken out by a wife, mother, child, or grandchild on the death of the husband, father, or grandfather, such a person will, under the concession, have to satisfy the Commissioners that it was an independent transaction and that the policy was not provided out of moneys derived from the deceased. It is very important to remember that we are dealing with Estate Duty, which goes down to very small estates, and I would venture to suggest that, in regard to certain very limited classes of relations, the boot might be put on the other foot, and, where you find that a policy has been taken out by a wife, mother, child, or grandchild, it should be for the Revenue to satisfy the Commissioners that it had been provided out of resources provided by the deceased. I put forward that suggestion only because otherwise it seems to me that we shall burden a very large number of perfectly ordinary family transactions with the obligation on the subject of having to go to the Commissioners and satisfy them that it was an independent transaction and not done out of moneys provided by the deceased. As I have realised, my Amendment went rather too far, and I am very grateful for the concession, but I hope that my hon. and learned Friend will still further consider the matter between now and Report stage and, if possible, alter the wording in such a way that an ordinary family transaction will not fall within the scope of this Clause. Subject to those remarks I beg leave to withdraw the Amendment.

Amendment, by leave, withdrawn.