CLAUSE 18. —(Tax free annuities, etc.) (Hansard, 28 November 1945)

§ Captain Crookshank
We were indebted, on an earlier stage, for a description of the kind of cases covered here, and I am sure that anybody who heard the Solicitor-General was grateful for what he said. The only question I would ask is whether he can advise us whether there is any change in this Clause from the situation described before. If it is exactly the same, there is nothing more to be said.

§ The Solicitor-General (Major Sir Frank Soskice)
In answer to the right hon. and gallant Gentleman, I can assure him that the Clause, as drafted, simply bears out the proposal put forward on the Financial Resolution.

§ Mr. Diamond (Manchester, Blackley)
This is a small point, but perhaps the Solicitor-General could give me an answer. It does not refer to an increase or diminution of revenue, so far as the Chancellor is concerned. This is an important Clause, because it is an example of the State interfering with a contract made between two subjects. It interferes with that contract to this extent. It says that, whereas it was the intention of the person entering into the contract that he should bear 1411 the whole of the increase that might arise as the result of increased rates of tax, the State now intervenes and says that that shall not happen after a certain point. It says that the recipient shall bear that increase in tax. Quite obviously, there are many cases where it was not considered possible that an increase of tax from 5s. 6d. to 10s. in the £ would arise, and, quite clearly, there is a good deal of justification for the Clause as it existed previously, namely, that, so long as the tax is 10s. in the £, this arrangement would apply and the State was justified in interfering with a contract between two subjects so long as the tax was 10s. in the £. This Clause seems to go a good deal further, and states that, for all time in future, so long as the tax is higher than 5s. 6d. in the £, the recipients of the benefit under the contract shall bear part of the increase, and it seems to me clear that, although it is very difficult to say at what point the division should arise, there seems very good reason for saying that it should not arise at the particular point at 5s. 6d.
May I take the case of a man who entered into a deed of covenant in 1938, when the rate of tax was 5s. 6d. in the £, and who specifically entered into a covenant in a form whereby the grantee should receive a sum after deduction of tax? He has specifically decided, instead of entering into a form of contract in the normal way, that the recipient should not be prejudiced by any increase in the rate of Income Tax. In other words, whatever that man had in mind as to the possible rate of Income Tax, he was quite clear that, if the rate should go up from 5s. 6d., the grantee should not be prejudiced, at all events, to that extent. We realise that, when the rates of tax went up to 7s. and then to 8s. 6d. in the £, the State did not, at that point of time, attempt to interfere in a contract between two subjects. It is only now, when the tax is on the way down, that a Clause is being inserted in the Bill which is going to cover, for all time, the position between two parties for this type of contract where the rate of tax is not specified at 5s. 6d. in the £. I would ask the Financial Secretary whether he is satisfied that 5s. 6d. is the right figure, or whether this matter should not be further reviewed, bearing in mind that it cannot affect the revenue to the extent of one penny, and the fact that, 1412 whatever this person making the covenant in 1938 had in mind, of one thing he was certain, and that was that, if the rate of tax went up, he should bear some part of it.

§ The Solicitor-General
If I understand the argument of my hon. Friend it really involves a challenge to the whole system which was incorporated in the Act of 1941. Once you have accepted that it is justifiable for the State to interfere and to shift the incidence of burden on to the annuitant from the trustee, as we did in the Act of 1941,all that is being done now is simply an extension of that; it is filling in the gaps which were left. If one accepts, as we did in 1941, that it is justifiable that the annuitant should suffer and not the trustee —and I submit that it is undoubtedly so because the trustee might frequently find himself under an obligation to pay much more than he had to pay with —what we are doing here is to provide a convenient sliding scale to prevent fresh Amendments each year. That is entirely in accordance with the principle of the 1941 Act. Therefore, I ask the Committee to say that this Clause should stand, because it is no more than the bare minimum to achieve what I have just said.