ESTATE DUTY. (Hansard, 1 May 1940)

§ The Solicitor-General
It may be convenient—especially as I notice certain anticipatory movements on the benches opposite—to say a few words at this stage about this formidable Resolution and what it is devised to do. It is devised to check certain forms of avoidance of Estate Duty. Paragraph (a) deals with cases where an interest in property is limited to cease on death. In such cases, where that interest has been surrendered or disposed of during the lifetime of the owner, there is a chance at present of methods being devised whereby it can avoid Estate Duty. An attempt was made to deal with the situation in the Finance Act, 1900. At that time it did not seem necessary to provide for the case in which the surrender of the life interest was made to a person other than the remainder man. In such a case, no merger resulted of the life interest and the residuary interest. But with the steepening of taxation and the increased ingenuity of those who advise people how to avoid taxation schemes grew up which had to be dealt with by legislation in 1940.
776 The kind of scheme then aimed at was that in which the life tenant and the remainderman surrendered their interests to a company for shares, the remainderman taking the shares and the life tenant taking for the remainder of his life, income from the company in the form of directors' fees. The result was that although the life tenant derived from the company an income which was for his life, equivalent to what he had got from the estate, the property did not pass on his death, because the two interests were merged in the company. Section 35 of the 1930 Act was aimed at dealing with that situation. But we have found that that Section is not as effective as we had hoped, and paragraph (a) of the Resolution is devised to enable us to introduce legislation to tighten up the provisions of that Section. The way we propose to do it is to take power that where there is a life tenancy, the property is to be deemed to pass on the life tenant's death, notwithstanding the fact that he has surrendered his interest, and without regard to whom the surrender may have been made. The only surrender we shall recognise is one made more than three years before death, and thereafter the life tenant had no interest whatsoever in the property transferred. By that method we hope to check these cases.
Paragraph (b) dealswith a different kind of avoidance. It is a sort of case where a man during his life transfers the whole of his property, or a substantial part of it, to a near relative in return for an annuity. Supposing a man is fortunate enough to have £500,000and in his life transfers that amount to his son in return for an annuity of, say £25,000 or £30,000 a year. On his death on a transaction of that kind the property does not pass because it has passed in his lifetime. It is perfectly true that if he sold his estate to a company for an annuity—a proper insurance company—the property would have passed out of his control, but the whole essence of buying an annuity is that you have the confidence and the backing of a substantial company carrying out that kind of business and to whom you can look to for security. But transactions between a man and a relative must rightly be the object of the closest possible scrutiny to see whether they are not for the purpose of the avoidance of Death Duty. We do not look on transactions of that kind as being fair-sale purchases of 777 annuities, and the remedy we are proposing is that where property is transferred by an individual to certain specified persons in consideration of an annuity payable to him, the property so transferred shall be treated as liable to Estate Duty on the transferor's death. The specified persons will be near relations and private companies.
Paragraph (c) deals with a different matter, which is again a scheme for tax evasion consisting of evading the full effect of Death Duties by creating artificial debts, and the object is to impose the charge of duty where a gift is made by the deceased during his life in the form of the creation of a debt. The simple sort of case is where a man makes a loan charged on his property as a consideration for whatever it is which he is buying from a company or relative instead of making an actual transfer of property to them. As again, having made a loan, he could extinguish it, even though it is extinguished within three years of his death, and the extinguishment was in substance a gift within that period. Under the existing law, there would be no liability of duty. I can give the House instances, and perhaps the simplest is that of "A" lending £100,000 to a relative and then releasing the debt in consideration of an annuity. The relief is not a "disposition of property," and the existing law does not catch that transaction, but when we have passed the legislation here contemplated, it will.
Lastly, paragraph (d) is designed to give an extended meaning to the expression "an estate limited to cease on death." A good many references are creeping into settlements of provisions for an interest to terminate on death or on prior happenings of some other contingency, and we propose that references to an interest limited to cease on death shall include references to its being subject to cessation on death or on the prior occurrence of some other event.
Question, "That this House doth agree with the Committee in the said Resolution," put, and agreed to.
Twenty-seventh Resolution read a Second time.
Motion made, and Question proposed, "That this House doth agree with the Committee in the said Resolution."

§ The Solicitor-General
This also deals with preventing the avoidance of duty by transfers, and I gather that a little explanation would be welcome. The evil aimed at is the avoidance of duty by a person about to die transferring to a company property of which he is competent to dispose; and the valuation of shares in a private company passing on the death of a deceased owner. These matters have been dealt with by the Finance Act, 1930, but the provisions of that Act are not very satisfactory. I could give the House instances. The best way of illustrating the case with which we are trying to deal is by giving an example of an individual who has during his lifetime made a transfer of property to a company, which is a company falling within Section 21 of the Finance Act, 1922, relating to one-man companies, and has power to enjoy or dispose of either income or capital at his death. We feel that a charge of duty should be made upon his death. Sometimes it is found that a deceased person made during his life a transfer of property to such a company and could enjoy or dispose of the income or capital or receive benefits out of the company that had been created.
Suppose a man transfers property which is worth £100,000 to a company with a capital of £100,000 in £1 shares. Suppose 90,000 of the shares are ordinary shares and 10,000 are extraordinary shares, carrying all the voting rights, and the man gives the 90,000 shares to the children and retains the 10,000 shares, retaining all the voting rights, in his own possession during his lifetime. Each class of shareholders is now entitled to whatever dividend the person in possession of the voting rights cares to give them. So long as he lives he, in other words, can allot the whole of the income if he likes to the 10,000 shares in respect of which he has the voting right. What we say in this case is that you must examine over the last three years of the deceased person's life to see what real benefits he has had from the company and how these benefits are represented in proportion to the income of the company. Supposing the income he enjoyed was £6,200, £8,000 and £7,700, you would take the proportion that these figures bear to the total income of the company, in each of the last accounting three years, and relate 779 that proportion to the total assets of the company.
Paragraph (b) is to deal with a Section of the Finance Act, 1930, which badly needs redrafting. That Section was drafted to prevent the avoidance of Estate Duty in connection with the valuation of shares of a private company. The basis in such cases was to be the market value of the shares. Suppose the owner of shares in a private company, instead of taking the income by way of dividend on his shares, takes the whole income of the company by way of a salary to himself. Then the valuation of the shares is a very artificial one and does not represent the real value of the property that passes on death. In order to deal with that situation, we propose that the Act should be so amended as to enable us to value the shares of the company by reference to the total assets of the company and not by mere reference to the market value. That is one of the provisions that will be enacted by virtue of paragraph (b), which will have certain correlative effects.
Paragraph (c) is to deal with a different matter. It is necessary for the inclusion of a Clause to limit the operation of Section 3 of the Finance Act, 1894, which exempts from Estate Duty, wholly or partially, transactions for full or partial considerations in relation to transactions with certain private companies. Unless we can exclude the operation of Section 3, the transfer of property to a company in exchange for shares can itself be said to be a transaction for full consideration. The Clause in the Bill aims at the prevention of the avoidance of Estate Duty by these transfers, often to a large extent nullified by the existing provision of Section 3 which we now want to alter. If we excluded it entirely, we should do a good many injustices which we do not want to do, but it is necessary that it should be modified. The type of case we are trying to deal with is where property is transferred to a company where there are other shareholders beside the transferor. In such cases, supposing the transferor buys an annuity from the company, then to the extent of his own interest in the company he is really only buying for himself, but to the extent that there are other shareholders in its assets, as well as himself, of course these other 780 shareholders are contributing to the provision of the annuity. The solution proposed will be that in such cases the transaction with such a company will be one for consideration to the extent to which the Commissioners of Inland Revenue are satisfied that it would have been so treated if the company's assets had been held upon trust for giving effect to the rights of the various shareholders. This is not the ordinary, simple case of a man transferring his assets to a company and paying himself by way of dividends out of the company. We must, in order to be fair, apportion the incidence of the duty in cases where there has been a burden upon the other shareholders in the company who have themselves contributed. To that extent it can be said that the company has been giving real consideration for the transaction.

§ Mr. Benson
I hope the hon. and learned Gentleman will not think I am reflecting on his lucidity when I say that I shall know more about the Resolution when I read his speech in the Official Report. If I gathered it correctly, there are two types of evasion of which he gave examples. One was the company in which 10,000 shares are retained, the voting rights concentrated in them and the major portion of the dividends given to them. He also instanced the case of the method of depressing the valuation of shares by paying a high salary to the managing director so that the valuation placed on the dividends is very low. There is also the case, which I am not sure is covered, of the company in which the shares are transferreden bloc, with the possible exception of one share, to the children, and then by arrangement the disponer is appointed managing director. He receives, not dividend, on his one share, but a salary which absorbs all or most of the revenue of the company. Is that point covered in the Resolution?

§ The Solicitor-General
I will do the same as the hon. Gentleman is going to do with me; I will read his observations to-morrow morning. He will appreciate that we are dealing only with the Resolution and that when we see the Clauses will be the time to decide whether they fit the case he mentioned or not. The examples I have given have been only instances of 781 the kind of case which will be covered by the general principle which we are asking the Committee to accept. I cannot say more at the moment.
Question, "That this House doth agree with the Committee in the said Resolution," put, and agreed to.
Twenty-eighth Resolution agreed to.
Bill ordered to be brought in upon the said Resolutions by the Chairman of Ways and Means, the Chancellor of the Exchequer and Captain Crookshank.