UNCLAIMED DIVIDENDS. (Hansard, 3 May 1939)

§ The Attorney-General (Sir Donald Somervell)
I beg to move, "That this House doth agree with the Committee in the said Resolution."
The House will not expect at this stage any detailed explanation of this Resolution, but I understand that hon. Members would like a very brief indication of the scope which it is intended to cover by the Resolution, which is necessarily drawn in very wide terms. To put it very briefly, the changes which it is intended to lay before Parliament in the Finance Bill under the authority of this Resolution are changes that affect one-man investment companies, and therefore, they are a sequel to the legislation which has now had a considerable course and which began in Section 21 of the Finance Act of 1922, which dealt with the evasion of Surtax liability by the transference of property to a company that is in effect under the control of one person.
The changes will deal with and strengthen the definition of "control" since certain devices have been adopted which have succeèded in getting round the already wide definition of "control." Secondly, they will deal with the somewhat technical case which arises when, for example, a shareholder in the main company is a second company, and will enable the interest of the tax evader to be followed through the second and any subsequent company until one comes to the person actually interested.
The third point which falls to be dealt with is the question whether, in considering investment as distinct from trading companies, one should make any allowance for the withholding from distribution of a reasonable amount of the income of the year. In the case of trading companies, whether one-man companies or ordinary public companies, it is, of course, frequently, and indeed usually, reasonable that a certain amount of the 1908 profits for the year should not be distributed in dividends; and therefore, in applying those parts of the Finance Act, 1922, to one-man trading companies, provision is made for that perfectly normal trading requirement. But as the Sections are drafted, the same words apply to an investment company, and certain submissions have been put forward which have been accepted, and had to be accepted under the law as it stands, suggesting that in the case of an investment company an amount might reasonably be withheld from distribution because the capital value of the investments had gone down, and so on. While preserving this principle for trading companies, it is not thought that it has any real application to investment companies which are of this class, namely, companies to which a person has transferred his investments for the purpose of diminishing or avoiding his liability to Surtax.
The fourth point with which it is intended to deal is to give the Special Commissioners rather wider powers than they have at present to make apportionments of income of investment companies in certain circumstances. It will be seen that the Resolution gives us power to make these provisions retrospective. This will not apply to all of the points, but it will apply to the first two, because my right hon. Friend is satisfied that as far as those two matters are concerned, we are dealing with devices which have been definitely designed to get round the intention of Parliament as contained in the earlier legislation. I am aware that my explanation may not have been entirely lucid, but I hope that it will have indicated to those hon. Members who are interested in the matter the general scope of the changes it is intended to make.

§ Mr. Pethick-Lawrence
After listening to the Attorney-General, I have a general idea as to what it is proposed to do, but I cannot say that I could pass an examination on the proposals, and I do not think many hon. Members could do so. I would like to ask the Chancellor a question relating to the speech which I made a week ago on the question of the avoidance of Surtax. I then gave several cases in which I believed the avoidance of Surtax was still being practised, in spite of the efforts that have been made to prevent it. I should like to ask 1909 the right hon. Gentleman whether he has yet had time to consult his advisers on this point for the purpose of seeing whether the practices to which I referred did avoid payment of Surtax, and if so, whether there is anything in the present proposals which will check that avoidance.
Further to the question of the methods that are adopted, I will quote another case with regard to a foreign company. Let us suppose that a man having some £250,000 chooses to incorporate a company in Canada, for instance. The directors of the company, perhaps, may be officers of a Candian trust corporation who cater for this class of work, and possibly they may be friends of the man seeking to avoid Surtax. Let us suppose that the man then transfers his investments to the Canadian company in consideration of the issue to his adult children or friends of debentures of a nominal amount of the original £250,000. The ordinary shares in the company are also issued to the same persons which enable them to wind up the company and to receive the surplus assets on liquidation. The effect of this is that the income of the investment is not liable to British Surtax, and when the company is wound up the assets, with the increment from the income which has been accruing to them, are all treated as capital. That is a further illustration. Of course, I do not expect to receive an answer to this point to-day, but perhaps the Chancellor of the Exchequer will consult with his advisers on the matter before the Second Reading of the Finance Bill, so that then he will be able to tell us whether the provisions he proposes to embody in the Finance Bill will deal with a case of that kind, and if not, whether something can be introduced to cover the matter.

§ The Chancellor of the Exchequer (Sir John Simon)
The right hon. Gentleman the Member for East Edinburgh (Mr. Pethick-Lawrence) has stated with great clearness another case, or illustration, which has been brought to his attention. I do not pretend at the moment to have followed it with any precision, although the general description is not unfamiliar to me. I would prefer to examine the case when I see it in the OFFICIAL REPORT and to deal with it at a later stage. As the right hon. Gentleman has reminded 1910 me, in the speech which he made last week he mentioned some other cases which had come to his notice, and those illustrations have, of course, been examined in the meantime. I will not deal with them exhaustively now, and indeed I am not sure that I could, because, I too, suffer from the inability to answer an examination paper correctly as well as anybody else. I am glad to be able to say that some of the illustrations which the right hon. Gentleman gave were found, on examination, to be covered by the law as we have made it, and more particularly as we have made it quite recently. I am glad that in one case to which he referred, the legislation which we passed last year would prevent what he described.
The right hon. Gentleman gave one case in connection with Surtax, and two cases in connection with Estate Duty. In the one case, he spoke of a settlor who transferred his funds to a trust to accumulate the income, but subject to a contingency which was stated, and then the contingency did not happen, and upon that being established, the funds, or money which represented those funds, returned to the hands of the settlor. That class of case is one of the cases dealt with by a section of the Finance Act, 1938. I will not argue the matter in detail, for it is very technical, but Section 38, Subsection (3) of the Finance Act, 1938, deals with that kind of case. Under that provision, which was passed after a good deal of close analysis and discussion, if and so long as the settlor has an interest in income arising under a settlement the income, in so far as it is not actually distributed in any year of assessment, is deemed to be the settlor's income for that year even though he has passed it for purposes of accumulation to the trustee. I ought to add that there is an exception, which I think is quite justified and which does not alter the substance of what I am saying. There is an exception laid down in Sub-section (4) regarding cases in which funds will revert to the settlor only by reason of the bankruptcy of the beneficiary, and certain other genuine contingencies. I think that is right, because a man may very properly make that a condition without endeavouring to escape tax at all on that account. Therefore, without wishing to be too dogmatic on the subject, I think I am entitled to 1911 say that the case which the right hon. Gentleman raised is really covered by the legislation which was passed last year.

§ Mr. Pethick-Lawrence
I have listened very carefully to what the right hon. Gentleman has said. Obviously, we cannot argue out this matter across the Floor of the House, but I think he has dealt with a case slightly different from either of the two cases to which I referred in regard to Surtax. However, this is a matter which must be pursued in detail by other means than across the Floor of the House.

§ Sir J. Simon
I am much obliged to the right hon. Gentleman and I am glad to have his help. As he said, it would not be very useful to discuss it in detail at the moment. Then the right hon. Gentleman mentioned two cases arising out of the Estate Duty. One case was of a man who transfers his property to a private company in return for shares which he receives—

§ Mr. Pethick-Lawrence
Perhaps it would be better to postpone the point until we are discussing the Resolution dealing with the avoidance of Estate Duty.

§ Sir J. Simon
The right hon. Gentleman has been good enough to relieve me of the necessity for dealing with this point now. Therefore, I will shorten the matter by saying that I am obliged to him for having called attention to these difficult matters. It is right that the authorities, and I, myself, should be kept up to the mark in regard to these points. We shall examine these instances very carefully, and it will probably be possible to deal with them more appropriately at a later stage in our discussions.

§ Sir Irving Albery
I wish to draw the right hon. Gentleman's attention to one aspect of this matter. On two or three occasions already he has had to pass special legislation dealing with the evasion of taxation, thereby adding to the complexities of our taxation law which was already beyond the comprehension of most people. I never could understand why it was impossible to find a simpler way of dealing with this subject. As the right hon. Gentleman has said himself, he introduces legislation to deal with this 1912 subject, but no sooner is the new law put into operation than new means of evasion are found and further legislation becomes necessary to deal with those further means of evasion. In all probability next year the right hon. Gentleman may find it necessary to appear before the House with a similar proposition.
What I wish to refer to particularly is the case of the private company. It has always appeared to me that it is not an essential right of the citizen to trade as a private company. It is a privilege and it is accorded to him by law, under which he gets certain advantages, in being able to trade on a basis of limited liability. I am sure it is necessary to grant that privilege, and that it is a privilege which should be continued but I cannot understand why the Government should not bring in a short amendment of companies law to put the private company on the basis of an annual licence, somewhat similar to that which now exists in the case of a public-house. There would be an automatic annual application for the licence which in normal circumstances would be automatically accorded, but it would be a simple matter, when any private company was found to be trading purely for the purpose of evading taxation, to refuse to renew the licence. Such a course would be beneficial not merely in regard to the question of taxation. We know that some of the worst frauds perpetrated in this country in connection with companies—indeed the majority of such frauds—are perpetrated through the means of private companies. At the present time I believe private companies are being formed by foreigners with English nominees to get round some of the legislation which is being passed. It is high time that those trading under the form of private companies were put under adequate control, and I am sure that there would be no more effective way of achieving the object which the Chancellor of the Exchequer has in mind.

§ The Attorney-General
I beg to move, "That this House doth agree with the Committee in the said Resolution."
1913 I will try to give a brief and, I hope this time, a more intelligible explanation of this Resolution. The House is probably aware that under the ordinary Income Tax law, if a trading loss is made in certain years, it can be carried forward and set off against profits made in subsequent years. That is a natural and just principle and it was intended to apply it to the liability for National Defence Contribution and the relevant part of the Schedule regulating this matter provided that losses as computed for Income Tax purposes could be carried forward and set against profits in subsequent years, in the same way as they can in respect of ordinary Income Tax liability. As far as ordinary trading companies are concerned, the intention of Parliament has been carried out and no trouble arises. Trouble has arisen, however, in connection with certain concerns of which insurance undertakings are the best example. In those cases there may be a loss as computed for Income Tax purposes which is not a trading loss at all.
That arises in this way. A very large proportion of the income of these concerns is from investments. That income comes to their hands taxed at the source. They therefore suffer tax in respect of that amount of their income before they get it. In the case of life assurance companies it is frequently the case that they suffer tax, in respect of their investment income, on an amount of income which is greater than their profit for the year on their business. They may, in fact, suffer tax on an income, say, of £100,000 whereas the profit for the year is only £90,000. The statutory provision made to adjust that, regards the £10,000, the amount by which the income on which they have paid tax exceeds their actual trading profit, as a loss for Income Tax purposes, because they have paid tax on an amount larger than the amount of their profit, but that loss is not a loss in the ordinary trading sense at all and it was not the intention of Parliament that that loss should be carried forward and deducted from profits for the purposes of the National Defence Contribution. The Clause which will be based on this Resolution is a Clause to put that right. My right hon. Friend has discussed the matter with the representatives of the insurance societies and others concerned, and I do not think there is any dispute that this is a reasonable provision, and 1914 that Parliament did not intend losses which are only losses in a technical and statutory sense, to be covered by the principle embodied in the Act of Parliament.

§ Mr. Bellenger
I take it this would apply to Schedule D. If so, what is to be the procedure? Will the companies re-claim the amount of the excess tax which has been paid by deduction at the source on their investments?

§ The Attorney-General
This Resolution does not raise that point. The exact method of adjustment at present under Income Tax law is not a matter which is touched by this Resolution. The effect of the Resolution is to provide that these technical losses, in the sense in which I have described them, are not to be brought into account for National Defence Contribution. Broadly speaking, the adjustment is rather on the lines which the hon. Gentleman indicates, but the Resolution simply says that the difference between those figures which I indicated representing a technical loss, according to a statutory definition, should not reduce the liability for National Defence Contribution.

§ The Attorney-General
I beg to move, "That this House doth agree with the Committee in the said Resolution."
This Resolution deals with a method of reducing liability to Estate Duty which was never contemplated, and I think it is best to approach it by considering a not infrequent form of provision which is made by a family man for his family in the event of his death. A man takes out a policy or policies with the view that the policy moneys payable on his death, should be available as provision for his family. He may settle the interest in the policies on trustees and the money which will be payable after his death will be there for his wife and children, or his surviving dependants, according to the terms of the settlement. The position will be that, year after year, he will pay the necessary premiums to 1915 keep up the policies, and when he dies, the policy moneys will go to his family. If he does that, he cannot deduct for Surtax purposes the sums paid year by year and the value of the policies when he dies, under the existing statutory provisions, of course pays Death Duties, because the policies represent an interest arising on his death and the ordinary law at present applies to a provision of that kind.
Some people have arrived at the same result as far as their dependants are concerned, by a different route They first settle, say, £100,000 on trustees. The trustees transfer that to a company. It is the company which takes out the insurance policy. The company having got £100,000 lends back £95,000 to the prospective deceased. The result is that the prospective deceased at that moment is only £5,000 out of pocket. The legal position is that he owes the company £95,000. The policy is taken out by the company, and the premium paid out of the original £5,000 and the £5,000 comes in every year from the prospective deceased as interest on the loan made. Under the present law, when the prospective deceased actually dies, the policy moneys do not pay Estate Duty because although in fact coming out of his pocket, the premiums are not paid by the deceased within the meaning of the Act, the policy having been taken out by the company. The artificial debt of £95,000 arising from the company lending the man back that amount, is a debt which again diminishes the value of the estate of the deceased. The purpose of the Clause which will be founded on this Resolution is to put the estate in the same position as if that sort of transaction were done by the normal method. Broadly speaking, that is the device that the Clause to be founded on this Resolution is intended to defeat.

§ Sir I. Albery
I am not quite clear what the effect will be. Is this another case of evasion? Is this one of the cases in which I understand the company's licence would not be renewed?

§ The Attorney-General
We shall have every opportunity of considering the matter in detail on the Clause, but I thought it would be convenient that at this stage we should indicate the general nature of the Clause, but it is impossible to go into too much detail. So far as the 1916 company here is concerned, it is no doubt a company which is formed simply for the purpose of enabling this transaction to be carried through, the obvious purpose of the transaction being solely to diminish Estate Duty.

§ Sir I. Albery
The object of the Clause will be to prevent evasion?

§ The Attorney-General
The object of the Clause is to see that the same amount of Estate Duty is collected as would have been collected if this transaction had been made by the normal method without the interposition of this company.

§ Colonel Burton
Will this Clause form one of those which will be made retrospective?

§ The Attorney-General
It applies to the estates of persons dying after the passing of this Resolution. It does not apply to deaths before the date of the Resolution.

§ Mr. Annesley Somerville
This Resolution provides for the increases of Estate Duty. Am I right in supposing that the increases do not apply to landed property?

§ Sir J. Simon
They do not.

§ Mr. Pethick-Lawrence
I should like to put to the Chancellor of the Exchequer the same question which I put with regard to Surtax, but relate it to Death Duties. Having had the opportunity of looking into the two illustrations of avoidance which I gave last week, can he tell the House whether they are either covered by the existing law or will be covered by these new proposals? I made another suggestion last week that primarily affected the Surtax, but also did affect to some extent Estate Duty, and that is that a further question should be asked of the taxpayer who makes up his Income Tax returns which would elicit from him certain transactions which would be of value for the Inland Revenue to know in both these respects. Has the right hon. Gentleman had time to have that point examined, and, if so, what conclusion has been reached?
I was interested in the illustration that the Attorney-General gave, because I thought he was going to deal with another matter which has also been represented to me as a means of evading a part of Estate Duty, but after I had listened very carefully to what he said, 1917 it does not seem to me to be a case that is precisely on all fours. The method which has been represented to me as being one of those which are used is to take advantage of the Married Women's Property Act of 1882, and I understand that this is the procedure. A man insures for the benefit of his wife and children under that Act, and on his death the insurance moneys belong to the wife and children and form no part of his own estate. The policy moneys, of course, are liable to Estate Duty, but are treated as a separate estate and are not aggregated with the rest of the man's estate for the purpose of determining the rate of duty applicable. If it is correct that a man can succeed in this way in partitioning his estate into two parts, he does avoid paying a particularly high rate of duty. I do not know whether that point can be answered straight away, but, if not, perhaps that also will be looked into and, if necessary, dealt with in the detailed Clauses of the Finance Bill.

§ Mr. Tinker
Will the right hon. Gentleman tell us, first, what it is expected to save by this kind of Clause, and, secondly, what steps are being taken in regard to the transference of moneys before death—in the case, I mean, of a rich man passing over some of his money to members of his family. What steps are taken to avoid that happening? Some 12 months ago it was stated quite openly that one very rich person had transferred a huge sum of money to his children, but one child had died before the father, and the Chancellor came in for a larger revenue than he would otherwise have got. I am given to understand that that method is largely practised by rich people. Can the Chancellor tell the House the length of time before a man dies that money has got to be transferred in order to avoid Estate Duty? If that sort of thing is happening on a large scale, I think steps should be taken to prevent it. I may be wrong in my assumption. It is only a kind of talk that is going on, and I have no ground for putting it forward as a definite fact, but I shall be pleased if the Chancellor can help me in the matter.

§ Sir J. Simon
The hon. Member will understand that these questions are necessarily rather complicated in detail. Death 1918 duties are duties which are charged at varying rates, according to the size of the estate or property, at death, on property that passes at death, as their name implies. If, however, you made no provision in the law for giving away property shortly before death, evidently the scheme of the tax would be liable to be defeated, say, on the death bed of a person, whether rich or poor. This duty is not limited, of course, to people of great wealth, and many a man, or woman, feeling that the last day had come might find that he had presents to give to his relations. Therefore, it has always been necessary, in the death duties scheme, to include in the property treated as passing at the moment of death property which did belong to the deceased in his lifetime, but which the deceased made a gift of a short time before his death. Originally, the period was a much shorter period than it is now—I think it was 12 months, or it may have been shorter—but anyhow it was felt, after some experience, that that was not long enough, and the present period is three years. There is, therefore, included in the amount which has to be vouched for by the executor when the death duty is calculated, worked out, and charged, not only the property which in fact belonged to the deceased at the moment when he died, but also any property which belonged to him within three years of his death, and which he had given away in the interval. If he sold property, say, in the last year of his life for full value, then the property sold would not be included in his estate, because he would only have exchanged one thing for another, but this provision I have referred to applies to gifts between living people which are treated as though they were in fact something which still continued to belong to the deceased at the moment of his death.
It is true that the period is a period of three years and no more. It would, I think, destroy the character of the tax if you did not have some limit of time, because it is a tax which is charged when property passes at death. The right hon. Member for East Edinburgh (Mr. Pethick-Lawrence) made a very interesting suggestion the other day which would have meant some annual contribution, but that is a different kind of tax. A death duty is a tax collected 1919 at death on all the property which passes, but you have to go back three years and account for everything that has occurred in that time. It has a very good indirect effect from the revenue point of view since, if a person does bestow some of his property away, let us say, to his son, because the son is younger and is therefore likely to survive him, and it does not in any particular case work out in that way, then, of course, death duty is paid by the son instead of by the older person.

§ Mr. Tomlinson
What happens if the prospective deceased realises his property within the three years period?

§ Sir J. Simon
Does the hon. Member mean when he sells all that he has?

§ Mr. Tomlinson
No, but if he gives it away, and within the period the son dies, and the man himself dies within the three years period?

§ Sir J. Simon
Let us call A the father and B the son, and say that A has given away a large part of his property to B in advance of his death, and B dies before A. The first thing that happens is that B has got to pay death duty.

§ Mr. Pethick-Lawrence
The right hon. Gentleman means, of course, that a payment has to be made out of B's estate.

§ Sir J. Simon
Yes. It is the estate that suffers. He did not bring anything into the world and he cannot take anything out. He has to leave something behind and it is his estate which pays the tax. Suppose A also died within three years of making his gift; I am not aware of anything to prevent the amount which he had handed over to B being regarded as passing when he dies.

§ Colonel Burton
The estate does not necessarily revert to A. It might go to C—a son of B.

§ Sir J. Simon
I did not say it does. My proposition is that if the son dies his estate will pay Death Duties and suppose A dies within three years of having given his property to B, I am not aware that there is anything to prevent the property 1920 of B being regarded as passing on A's death. There is an hon. and learned Friend behind me who is more instructed in these matters than I am, and he assures me that I am right. I am interested to have noted the state of astonishment on the benches opposite at the severity of these duties.
With regard to the matters raised by the right hon. Gentleman opposite I think that the cases he mentioned are, in part, covered by recent legislation though it may be that they are not wholly covered. I am glad that he mentioned them because apart altogether from what we are able to do this year in the Finance Bill I am making arrangements to have a definite and careful survey made of what is the real result of the recent legislation.

§ The Financial Secretary to the Treasury (Captain Crookshank)
I beg to move, "That this House doth agree with the Committee in the said Resolution."
This Resolution is the basis for a Clause in the Finance Bill authorising the payment of £1,500,000 to the Exchequer from the Unclaimed Dividends Account of the National Debt Commissioners. Under the National Debt Act, 1870, dividends on Government stocks which are not claimed within a period, which is generally speaking five years, are transferred to the National Debt Commissioners, who have a liability if at any future time they are called upon to repay the dividends. They invest the money and it earns interest. In actual fact, in no year have the claims in respect of unclaimed dividends made upon the National Debt Commissioners been great enough to require them to draw on their investments. Therefore, the fund goes on accumulating. At the present time there is sufficient in the fund for £1,500,000 of that accumulation to be taken out and passed to the Exchequer. This form of transaction is not being done for the first time. The first occasion of this kind was in 1866 by Mr. Gladstone, when £3,000,000 nominal of stock was cancelled. It was done again in 1904 1921 by Sir Austen Chamberlain, when £1,000,000 in cash was paid into the Exchequer. I am sure that it will not surprise the House to be told that such a transaction again took place in 1928 under the right hon. Gentleman the Member for Epping (Mr. Churchill), when £1,000,000 in cash was transferred to the Exchequer. The necessary Clause will be drafted, and I hope it will have the assent of the House.

§ Mr. A. V. Alexander
Does this proposal apply in any way to unclaimed repayment of National Savings. Certificates? They run for a certain period, and how long must elapse before they can be regarded as unclaimed?

§ Captain Crookshank
This Resolution applies only to dividends on Government stocks. The Savings Certificates are another question.