§ (1) Where a loss is sustained in any trade, profession or vocation carried on by executors or trustees pursuant to the terms or provisions of a will of a deceased person, such loss, insofar as relief in respect thereof cannot be given to such executors or trustees under section thirty-four of the Income Tax Act, 1918, shall he apportioned amongst the persons to whom profits would have been properly payable if such had been made in the period in which the loss was sustained.
§ (2) Any such loss shall be apportioned among the said persons according to the rights and interests they would have had in any such profits.
§ (3) Any person to whom any part of such a loss has been apportioned as aforesaid shall be entitled to treat the amount thereof as a loss sustained by him in a trade, profession or vocation and to claim relief under section thirty-four of the Income Tax Act, 1918. accordingly.
§ Brought up, and read the First time.
§ Mr. Edward Heath (Bexley)
I beg to move, "That the Clause be read a Second time."
The purpose of the Clause is to remove an anomaly arising from Part III of the Finance Act, 1938—which deals with 92 taxation and the administration of estates—when executors have to carry on a business under the terms of a will and the business then makes a loss. As a result of the anomaly considerable hardship is inflicted upon those who are affected. Their numbers may be comparatively small, but it is nevertheless a hardship on those individuals who are the beneficiaries under the will.
A testator may very often decree under his will that a family business shall be carried on. It may be that it has to be carried on for a limited or an unlimited time. It very often has to be carried on until one of his children reaches a certain age. Sometimes the executors have to carry on the business by sheer force of circumstances. They are directed to sell but are empowered to allow the business to continue until they can sell to the best advantage.
I will quote an example of this which has come to my knowledge. It concerns a farm which the executors had to sell. The local authority then decided to develop a housing estate on a position embodying the farm. As a result, the executors found that it was impossible to sell the farm, and at the same time the local authority had no desire to purchase the land until they were ready to develop it as a housing estate. It meant that the executors had no alternative but to carry 93 on the business, and in the process the business made considerable losses over a number of years. That was a situation which could not have been foreseen by the testator; it was beyond the control of the executors and it was no fault of the beneficiaries.
What is the position when a business of that kind, which is being run by an executor, makes profits? It is quite clear that the income is passed on from that estate to the beneficiaries and that, when received by the beneficiaries, it is grossed up for purposes of Income Tax and Surtax. The Inland Revenue, quite rightly, take all the taxation they can from the income of the estate which is passed on to the beneficiaries.
What is the position when the business makes losses? If the executors have another source of income the loss can be set off against that income, but it must he income in the name of the executors. In the case of a family business into which everything has been sunk, it may be that there is no other source of income against which the loss can be set off. In the normal course of business one has the ability to set off losses against profits over a six-year period but if, as in this case, consecutive losses are made there is no means of relief. Under the 1938 legislation the beneficiary cannot off-set the loss against the rest of his income, although he is taxed upon any income he receives from profits and the Inland Revenue take that. In other words, the Inland Revenue gain on the swings but are not prepared, in equity, to allow the beneficiaries to off-set on the roundabouts.
Let us turn to the position of a business run by trustees under a settled estate. Here also the income of the beneficiary is grossed up for taxation purposes, but I am advised that it is clear that if a loss is made the beneficiary, where he has an absolute interest, is allowed to offset the loss against any other source of income. Moreover, if a trustee of a settled estate is also a beneficiary the Inland Revenue are accustomed to grant him earned income relief. That is equitable and is a principle which should be extended to cases where a business run by executors makes a loss, so that the beneficiary may off-set the loss against the rest of his income. I hope the Government will be prepared to accept the Clause and so remove the anomaly.
§ Mr. Hylton-Foster
My hon. Friend the Member for Bexley (Mr. Heath) has done the Committee a great service in raising this matter. In order to emphasise what we believe to be an injustice, I want to recall to the Committee the circumstances in which Part III of the Finance Act, 1938, came into being. The matter is necessarily technical, and I do not seek to recall that history because I think I am specially qualified to do so. Nevertheless, I ask for the indulgence of the Committee, because I feel sure that the Committee will hold the view that time spent in removing a grievance or in avoiding the sense of it is time well spent.
If we do not recall the circumstances in which that part of the Act came into being, my hon. Friend's argument might be countered with the suggestion, "Well, the position of these residuary beneficiaries is like that of anybody else whose business is carried on for them. For instance, they are like a shareholder in a company who has the business carried on for him by the directors and receives dividends on his shares. He could not be heard to say that when the company suffered any loss he should be allowed to off-set that loss against the income which he had received in the form of dividends." For that reason, I want to emphasise the distinction between the shareholder on the one hand and the residuary legatee under the will on the other.
The Committee will remember that a long time ago now, in 1921, there was a case about Dr. Barnardo's Homes. Someone made a will leaving the residue to the Homes and the administration was delayed for reasons that do not matter. The executors during the administration received income. It was from stocks and shares and tax was deducted at source. That income ultimately formed part of the amount paid over to the charity, whereupon the charity sought to get back the tax deducted from that income on payment to the executors.
The charity said they were entitled to do that under the relevant provision that yearly payments, applied solely to charitable purposes, were to be exempt. "Oh, no," said the Revenue, "You cannot have your money back because it was not your income until it was paid over to you. The 95 income is the income of the executors until the end of the administration for them to apply to the payment of debts and the purposes of the administration. It is certainly not the income of the residuary legatee until the residue has been ascertained."
The House of Lords thought the argument of the Revenue was right and the Revenue went away triumphant. After that there was another charity case where the decision went the same way and the Revenue triumphed again. Then in 1938 came the case of Corbett v. the Inland Revenue Commissioners, where the Revenue, brazen as usual—like Mr. Bloodsucker, the Inland Revenue official in the column of one of our more entertaining journalists—completely reversed their previous argument and tried to have it both ways. In that case the executors credited and paid over some of the income during the administration to a lady, a daughter of the testator. who had an interest in the residuary estate.
In due course, the Revenue contended that this income, having been paid over to her, should be part of the income of her husband liable to Surtax. That was considerable effrontery in view of their previous argument, and the Court of Appeal thought it was such and said, in more judicial terms, "Not on your life." So the Revenue came to the House and the House was induced to pass Part III of the 1938 Finance Act.
The position before that statute was that the income during the administration was the income of the executors only, and the executors only were subject to tax upon it. So the statute said that in future income to the beneficiaries should be deemed to be their income; in other words, if the executors are carrying on a business the profits of that business—although they are not in law and in fact, apart from the statute, the profits of the residuary legatees—shall now by virtue of that statute be deemed to be the profits of the residuary legatees.
Our case, which we ask the Government to consider sympathetically, is that it is real bloodsucker tactics to deem those profits which are not somebody's profits to be his profits and, at the same time, not to deem the losses arising from that business not to be his losses.
§ The Attorney-General
I do not think that reference to Part III of the Finance Act, 1938, advances this matter at all, because the whole object of that part of the Act was to avoid people escaping Surtax. What had been done before was that executors had prolonged administrations beyond the necessary period and had paid over the income to the beneficiary which, not being the income of the beneficiary, could not be grossed up for Surtax purposes. Part III of the Finance Act, 1938, made that income of the beneficiary income for Surtax purposes when it was paid over to them. Therefore, it did not advantage anybody to continue the administration beyond the necessary period to administer the estate with reasonable expedition.
So I do not think that has any analogy to the situation we are considering here. Equally, I would submit to the Committee that it does not carry the matter further to refer the fact that in the case of an executor beneficiary who earns income, the Inland Revenue do not refuse him earned income relief. It is somewhat in the nature of an extra-statutory concession which is allowed when in the same person there is an executor and a beneficiary who earns income. The hon. and learned Member for York (Mr. Hylton-Foster) referred to the case of a shareholder in a company. In doing so he has given the answer to his own argument and to the argument of the hon. Member for Bexley (Mr. Heath).
In the case of a company which makes losses the shareholder cannot seek to set the losses which the company makes as a loss against his other income. It is a loss which he has to bear in the sense that ultimately it reduces the capital value of his holding in the company, but nobody has ever suggested that a shareholder, in the event of a company making a loss at the end of its trading year, can seek to have some part of that loss apportioned to him in order that he can set it off against the balance of his income. That would be a wholly novel and untenable proposition, and it is really very much what is being suggested now. That is to say, when executors carry on an undertaking under the terms of a will and make a loss, the beneficiary is to be entitled to say, "Part of that loss I can use as a set-off against other income in order to obtain tax relief by so doing."
97 Each of those propositions I should have thought had only to be stated to carry its own refutation. There cannot be any logic in either. The shareholder is not liable to make good the loss of a company. Equally the beneficiary cannot be called on to make good the loss of the executors out of his other income. If he could, it would be an altogether different situation. Supposing the executor made a loss and he could say to the beneficiary, "You must recoup the amount of this loss out of other income of your own"; then it would be reasonable that the beneficiary could say, "Equally, if you make a loss, I shall treat that part of the loss which on some fair apportionment is to be attributed to me as a loss which I can set off against my other income."
If the beneficiary had to make good the loss, it would be another matter. He should be entitled to set off the loss against other sources of his income—equally in the case of a shareholder. But inasmuch as they do not, this proposal has little to commend it.
§ Mr. John Foster (Northwich)
Surely the fallacy of the Attorney-General's argument is that a beneficiary is not like a shareholder. The Attorney-General kept on saying "the beneficiary shareholder."
§ The Attorney-General
No. I said "beneficiary" in one case or "the shareholder" in the other. I certainly have sought to draw an analogy for the purpose of this argument between the positions of the two.
§ Mr. Foster
I think that that is what I was saying. The fallacy is to use the two words interchangeably. In the case of a company, the shareholder has voluntarily become a member of the company. He has either subscribed for a share or has bought a share, and becomes a member of the company. I quite agree with the Attorney-General that in that case the shareholder could not be expected to set off the loss of the company against his other income.
But the case of an executor is quite different. The beneficiary has not chosen to become a member of a company, nor is a business carried on by an executor in the least like a company. The executor does this under the will of the person 98 who is deceased, and in my view—and surely, I should have thought, the view of the Committee—it is like a partnership that the executors are carrying on for the benefit of the various beneficiaries. Just as one can set off the loss of a partnership against the other incomes of the individual partners, so, I should have thought, it was eminently just that in this case we should set off against the other income the loss which the executor bears for carrying on the business on behalf of the estate.
It must be remembered that the loss suffered by the executor can only be set off against the other income of the executor as executor. I think that the Attorney-General agrees with that. Therefore, it means that if there is, so to speak, a net loss—no loss against which to set it off—the executors will have to pay it out of the estate, thus diminishing the total amount inherited or acquired by the beneficiaries.
I do not agree with the Attorney-General that the fact that the executor cannot say to the beneficiaries "This loss ought to be borne by your other income; come and subscribe to it" makes any difference at all in the case of a partnership. When the partnership assets disappear because of a loss, the partnership may be wound up; and I should have thought that in this case it was an act of elementary justice to allow the loss to be set off against the income of the beneficiary, just as the profits, when they are in the hands of the beneficiaries, are assessable for Surtax.
§ Mr. Turner-Samuels (Gloucester)
I should not have intervened had it not been that not only is the Clause without merit, but that it is positively mischievous. Some attempt has been made to show that there is an analogy between the cases sought to be covered by the Clause and the cases of a shareholder in a company, and also of a partnership. I rather agree with the hon. and learned Member for Northwich (Mr. J. Foster) that there is not a very close connection between what the Clause aims at and that of the case of a shareholder in a company. That, however, does not take the case for the new Clause one wit further.
Imagine what could happen under the Clause. Supposing a testator were to leave in his will to trustees or 99 executors an utterly bankrupt business, which was in fact incurring a very serious loss. One of the beneficiaries under the will may very well be an individual who is concerned in a very good practice or business of his own. What we are being asked to do by those who are putting forward the Clause is this: They are saying that such a person who is carrying on a profession, a practice or a business, from which he is deriving a profit, should be able to set against that profit the loss that has been sustained in the bankrupt business that has been left by a testator and in which this person is simply a beneficiary. Can anyone imagine a more mischievous proposition?
I ask anyone who supports the Clause to say whether that proposition is accurate, that a bankrupt or insolvent business may be left by an individual to someone who has had absolutely no part in its management or ownership; has put no money in it and has no responsibility whatever in connection with it, and yet, because he is a beneficiary in it under the will and the business has sustained a loss, he can set that against the profits of his own business. The proposition is too ludicrous to continue the debate upon it.
§ Mr. Maudling (Barnet)
Neither of the arguments we have heard from the other side have really disposed of the basic point made by my hon. Friends that there is here an undoubted injustice. One other reason why the analogy of the shareholder, which the Attorney-General introduced, is quite misleading that the income in this case is not the income of the beneficiary. It is deemed to be his income, as I understand it, by the Statute. If the Government take the action of deeming income to belong to someone, they should also deem losses to belong to someone. I have not yet heard any argument from the other side to dispose of what seems to me to be this simple basic principle.
Surely the more reasonable case to take is not that of a shareholder, but the example of a farm, to which one of my hon. Friends has referred in moving the Clause. If the beneficiary were carrying on the operation of farming in his own right, he would be entitled to set off his farming losses under the normal loss provisions 100 of the Income Tax statutes. If the income under the administration is deemed to be his income and the profit, if a profit were made on the farm, were aggregated with his income, then surely any loss made on the farm should be deducted from his profit on the farm in accordance with the normal principles.
There are very great complexities about this matter. Equally, a very strong case on the grounds of justice has been advanced from this side, but it has not been answered by the reply of the Attorney-General.
§ Mr. Marlowe (Hove)
I intervene only because the argument of the hon. and learned Member for Gloucester (Mr. Turner-Samuels) was founded on a complete misunderstanding of the present law in relation to taxes. He put forward the opinion that it would be a monstrous proposition that anybody should be allowed to set off the losses of a bankrupted business against the profits of a prosperous business.
§ Mr. Turner-Samuels
I can understand the hon. and learned Member putting words into my mouth to try to justify his case. What I was referring to, and referring to exclusively and advisedly, was a bankrupt business which had been left by a testator wholly or partly to a person who had no previous interest or responsibility in it whatever; and that, that business incurring a loss, the person was able to set that loss against the profit of his own business.
§ Mr. Marlowe
That is exactly the case. The accepted principle of taxation is that one may set off the loss of a bankrupted business against the profits of the prosperous one. All we are endeavouring to do in the Clause is to carry that principle logically to its conclusion where the businesses are carried on by an executor; it is only carrying on the old principle of taxation which already exists.
§ Mr. Marlowe
That is the accepted principle at present. We want it carried on when the businesses are conducted by the executors. The proposal would only carry on the same principle after the death of the operator of the business. 101 The argument of the Attorney-General was, I think, founded on a completely fallacious premise. It was a quite ingenious argument to found it on some imaginary analogy with a company which had nothing whatever to do with the argument we are discussing.
I should like to put to the Attorney-General an entirely different case. Putting companies aside for a moment, suppose that the estate consists of two shops, one of which makes a profit of £100 and the other a loss of £100. The present position is that the tax has to be paid on the one which makes a profit, but there is no counter-balance in respect of the loss which is made on the other. The case I am putting forward is that the estate should be aggregated for that purpose and that the loss should be allowed to be set off.
That is a far straighter case than the one put forward by the right hon. and learned Gentleman. His proposition, founded on the analogy of the company, was misleading because this has really nothing to do with the company or the analogy of the shareholder to which he referred. One entirely accepts his contention that it would be unreasonable for a shareholder to set off against his ordinary income the losses of the company in which he is a shareholder; but that has nothing to do with the case at all. I ask the right hon. and learned Gentleman to apply his mind to the question of whether these two should not be set off against each other.
§ Mr. Heath
I naturally regret that the right hon. and learned Gentleman finds himself unable to accept the Clause. However, I hope that he will give attention to the rather weighty arguments put by my hon. and learned Friends and will appreciate the fallacy of the argument he has advanced. I beg to ask leave to withdraw the Motion.
§ Motion and Clause, by leave, withdrawn.