TAX-FREE PAYMENTS (Hansard, 31 October 1945)

§ Captain Crookshank
May we have a brief explanation of this Resolution?

§ The Solicitor-General (Major Sir Frank Soskice)
The House will be aware that under the Finance Act, 1941, it was enacted that when a fund had to pay a beneficiary an annual or other payment free of Income Tax or free of Income Tax and Surtax, it should be proportionately reduced according to a specific ratio in order to avoid the burden upon the trust fund being made too heavy because of the increase in Income Tax and Surtax above prewar rates. Suppose that a fund of, say, £400 had to pay a tax-free payment or a payment tree of Income Tax and Surtax, the result might well come about, owing to the great increase in the rate of Income Tax and Surtax which took place when the war began, that the fund could virtually not stand the amount necessary to pay the tax-free annuity or other payment; that is to say, to pay the same amount free of tax as you had to pay before the tax rates were increased, you would have to pay such a large sum that the fund itself might not be adequate to pay that increased annuity or other periodic payment. In order to prevent that coming about, Section 25 of the Finance Act, 1941, was put into effect.
Briefly, that Section provided that the trustee of the fund should be entitled to reduce by a certain proportion, which in point of fact was worked out at 20–29ths, the amount of the annuity or other periodic payment which he had to make out of that fund. The result was that, in effect, the annuitant or beneficiary had himself to bear the increased incidence of tax upon his annuity. In terms that Section applies only when tax is at 10s. in the £. The Resolution proposes to enable the Finance Bill to include a Clause which will provide a sort of sliding scale so that the reduction in the annuity can be altered according as the tax is reduced. By that I mean that when the tax is at 10s. in the £ the trustee can reduce the amount that he has to pay by way of annuity or periodic payment to 20–29ths of the amount which he had to pay before. When the tax goes down to 9s. in the £, it is obviously fair that he should pay rather more in respect of that annuity than he had to pay when the tax was at the higher rate of 10s. in the £.
It is proposed to introduce into the Finance Bill a sliding scale which will operate in this way. With the tax at 10s. in the £, the trustee has to pay only 484 20–29ths of the amount that he had to pay before the tax was increased above prewar rates. With the tax at 9s. in the £, each pound of the trust fund will be available to a larger extent to pay the same annuity. Therefore, the annuity should be proportionately increased. When tax is at 9s. in the £, the sliding scale will operate with the result that instead of the trustee paying 20–29ths of the prewar annuity, he will pay 22–29ths. Roughly speaking, the fraction is worked out in this way. You increase the amount of the annuity which the trustee has to pay according as he has more of each pound of the trust fund available to pay that annuity. With the tax at 10s. in the £ he has only 10s. available; with the tax at 9s. in the £ he has 11s. in each pound available to pay the annuity. The Finance Bill will include a sliding scale which will be necessary to provide that as the tax decreases trustees shall have to pay a gradually increasing amount of the prewar annuity or other periodic payment which has to come out of the fund.

§ Sir P. Hannon
Where does the Solicitor-General get the denominator of 29?

§ The Solicitor-General
Let me put it in this way. Suppose that a trustee has x pounds in hand and as a trustee his obligation is to pay a periodic payment which I will call y pounds a year. When the tax was at 5s. 6d. in the £, the trustee had available on each pound of the trust fund £1 less 5s. 6d., in other words, each pound could provide 14s. 6d. of the annuity. When the tax went up eventually to 10s., the result was that instead of having 14s. 6d. of each pound to pay the annuity, he had only 10s. of each pound available to pay it. The object of Section 25 of the 1941 Act was to enable the trustee, instead of paying the whole of the annuity that he had to pay before, to pay only 20–29ths of it; in other words to pay a proportion which was equivalent to the proportion of each pound that he had of the trust fund after deduction of tax. The Clause which it is proposed to introduce in the Finance Bill this year simply introduces a sliding scale.

§ Sir P. Hannon
In thanking the hon. and learned Gentleman, may I say that his explanation is equal to that which might have been given by a mathematical master at a public school.

§ Colonel Stanley
Could we have as clear an explanation of how this affects the question of Surtax? Here we have the case where the Income Tax goes down and Surtax goes up. Have the Government a formula for that as well?

§ The Solicitor-General
Yes, practically the same formula applies. The Act of 1941 provided that where the trustee had to pay the annuity free not only of tax, but also of Surtax he would have to pay 20.29ths of the amount necessary to pay the annuity free of tax. In addition to that, he had to pay 20.29ths of the amount which had to be paid or which would have had to be paid in order to discharge the amount necessary to pay Surtax at prewar rates. The burden again was transferred from the trust fund to the beneficiary. There again, as tax gets lower, the trustee has pro tanto more of each pound in the trust fund to pay not only Income Tax but Surtax. After paying the Income Tax he has to find a further amount in order to pay Surtax. Before he had to pay 20.29ths and as tax goes down the fraction will go up. [An HON. MEMBER: "Surtax is going up."] The tax will vary either up or down. As Income Tax goes down the payment will necessarily go up because there is an increased amount of each pound after deduction of Income Tax to pay the Surtax whatever it is.

§ Mr. Pickthorn (Cambridge University)
I expect that I am missing a point which 486 ought to be obvious to me. If so, I apologise to you, Mr. Deputy-Speaker, and to the House, but I wonder if the learned Solicitor-General can enlighten me. Is the arithmetical problem at all affected, leaving out the Surtax business, by the amount of income either of the trust, or of the beneficiary? It would seem that there may be beneficiaries, and that there might even be trusts, which would come below the level at which tax is paid at the normal level of 10s. or 9s. in the £ as the case might be. Unless there is an inference, which escaped me, the point was not made clear by the explanation.

§ The Solicitor-General
I am sorry that I did not make myself clear. Suppose you have a trust fund which has to pay annually, a small annuity which would involve a return of tax, you have to ask what the annuitant was entitled to receive before the war, so as to give him his annuity free of any deduction of taxation. You have to find out what the fund had to pay him, in order to make sure that he got that amount of money without any deduction of tax. Let that amount be x. You find in the hands of the trustee certain money. If the trustee had to pay x at prewar rates and if the rate of tax has gone up, you have again in that case, and in the same way, to apply the same fraction. You apply the fraction which represents the amount of money that he has out of each pound available to pay the annuity reduced by the increase in Income Tax.