§ (1) Where on or after the sixth day of April, nineteen hundred and fifty-four, an individual has purchased an annuity to be payable either for a stated number of years depending on the survival of the annuitant, or during the lifetime of the annuitant, then for purposes of assessment to income tax, each periodical annual payment shall be divided into two parts, as follows:—
- (a) a part representing the estimated capital content, which shall be exempt from income tax, and
- (b) the difference, which shall be subject to payment of income tax at the rates in force for the time being.
§ (2) The part representing the estimated capital content shall be calculated by dividing the actual sum paid as the purchase price of the annuity (whether paid in a single payment or as a series of premiums) by the expectation 1232 of life of the annuitant, as ascertained from a table to be prescribed from time to time by the Treasury.—[Mr. E. Fletcher.]
§ Brought up, and read the First time.
§ 9.45 p.m.
§ Mr. E. Fletcher
I beg to move, "That the Clause be read a Second time."
The object of the Clause is to change the present provision of the law with respect to the treatment for tax purposes of purchased annuities. As the Financial Secretary will be aware, the Clause is inspired by one of the recommendations in the Second Report of the Millard Tucker Committee published in February this year, which deals with the taxation of provisions for retirement.
1233 This will be the only opportunity that we shall have during discussion of the Bill to comment on this very important Report which one distinguished journal of the Left described recently as being… the most significant social document published in this country since the Beveridge Report.It went on to say that whether the Report reveals an equally desirable tendency towards social democracy might be more dubious. There is no doubt that at some time this Committee, or indeed the House of Commons, will have to give most serious consideration to the social implications of the second Millard Tucker Report, which points out the very serious cleavage in the social status of those who enjoy pension rights and those who do not.
Perhaps the most revealing feature of the Report is that, as a result of the popularity of superannuation schemes, the working population is rapidly being divided into two classes—those who are dependent in their retirement on National Insurance schemes, and those who enjoy the infinitely greater benefits that are obtained from the multiplicity of pension schemes provided by employers. If the main recommendations of the Committee are implemented, they will produce greater uniformity in the benefits obtained by the latter class, and to that extent one of the results will be to aggravate to an even greater degree the rift between the class of persons who enjoy superannuation benefits of one kind or another and those who do not.
In moving the Second Reading of the Clause, it would not be right for me to venture any further into a general discussion of the very important questions which, sooner or later, will have to be debated by the Committee. I can quite understand and sympathise with the statement which the Chancellor of the Exchequer made in his Budget speech, when he felt compelled to say that because the Report was published only in February of this year he had not yet had time to reach any conclusions on the main issue involved.
I feel very strongly that the specific and limited object which it is sought to be achieved by the new Clause, dealing with the tax treatment of purchased annuities, is a relatively simple matter which can be segregated from all the other recom 1234 mendations of the Report. But the subject matter of the Clause seems to me urgent, and I hope that we shall find that it is non-controversial and that the Clause will be accepted by the Government.
This recommendation arises because my right hon. Friend the Member for Leeds, South (Mr. Gaitskell), very shortly after assuming the office of Chancellor of the Exchequer, gave a direction which brought this subject within the terms of reference of the Millard Tucker Committee. The Committee will be aware that, as the law stands at present, the basic rule is that an annuity is subject to tax in the hands of the recipient. In view of that, it is perhaps not unnatural to find that the Millard Tucker Committee said, in paragraph 477, that this matter was the subject of more representations to it than any other subject.
The present position is highly anomalous. Basically, any annuity purchased by an annuitant is subject to Income Tax. It is perfectly true that there has been a variation in recent years of that basic provision because the Court of Appeal decided that if an annuity were purchased, not on the life of the annuitant but for a number of years, the annuity received was taxable only in so far as it represented an interest content and that the part of the annuity referable to the repayment of capital cost of the annuity escaped taxation. Some doubt was thrown on that decision by a subsequent decision of the Court of Appeal but, nevertheless, the result of the earlier decision was that there has grown up, as the Financial Secretary will be aware, a rather complicated system whereby those who desire to purchase an annuity purchase what are called "split" annuities.
I am sure you will appreciate, Major Anstruther-Gray, that anyone who purchases an annuity does not want merely income for a limited period of years and then to be left without any income at the end of his days. The general object is to purchase an income for the rest of his life, the expectation of his life being a matter of such uncertainty. The whole object, in 99 cases out of 100, is to get security for the remainder of one's life. What happens at present is the very complex system whereby a great many annuities take the form of split annuities which, in essence, are two separate 1235 annuities, one, following the decision of the Court of Appeal, being an annuity certain and limited to a definite term of years, and the second a deferred life annuity to commence at the end of the term if the annuitant should have survived to that date.
Under that scheme on the annuity for the limited period of years tax is payable only on the income content but not on the capital content represented by the annuity during its certain term of years. If the annuitant survives and the deferred life annuity takes effect, Income Tax is wholly payable on the whole of the amount received. That is a highly complicated and very expensive system.
It was to deal with that situation and in the light of the many representations received by the Millard Tucker Committee that, after examining the history of the subject and noticing the ways in which it is treated in various other countries—notably the United States of America, Australia and Canada—that that Committee came to the conclusion that the present system in this country could not be defended and should be changed. The Committee take the view, which I accept, that it is really highly legalistic to say that when a person sinks his capital in the purchase of an annuity the source of his annuity is not his original capital but a contract with an insurance company. The Millard Tucker Committee, in Paragraph 497, say:…in our view the reality and substance of the matter are that the original capital sum paid to acquire the annuity still remains a part of the source of the annuity, the remaining part being the interest earned by that capital, or by so much of it as from time to time remains not repaid to the annuitant.They go on to say that they have examined the question whether any administrative difficulties arise in giving effect to what they think should be the solution, and they find that other countries, such as the United States of America, Australia and Canada, have all devised satisfactory methods, though differing in various details, for dealing with that situation.
I should, perhaps, here make it quite clear that in this proposed new Clause, we are dealing only with the cases of 1236 annuities purchased by individuals themselves, and we are not dealing with the case of annuities which derive from superannuation schemes or insurance schemes of one kind or another. The Committee's Report recommends that…in the taxation of purchased life annuities, the part of each periodical annual payment representing the estimated capital content should be exempted from tax, and only the difference should constitute taxable income.The Committee analysed the more complicated subject of the methods whereby the two parts, one subject to tax and the other escaping it, should tie calculated, and they decided that the method employed in Canada works very well, always has worked well, does not produce any administrative difficulties and is a sensible way of dealing with the matter.
Therefore, my hon. Friends and myself, in framing this new Clause, followed precisely the system adopted in Canada and also the system recommended by the Millard Tucker Committee. I very much hope that, while we are awaiting with considerable interest the Government's general observations and conclusions on the other recommendations of the Millard Tucker Committee, the Government will see fit to give immediate effect to the recommendations which are implemented in this new Clause.
As the new Clause is drafted, it proposes that the new proposal shall apply to annuities purchased on or after 6th April, 1954. I do not attach any particular significance to that date, and I should be quite happy if the Financial Secretary would say that, if the law is to be changed, the principle should apply equally to annuities purchased before that date. It may be said that otherwise there would be injustice between those who purchase annuities in the future and those who have already purchased them.
We all know the nostalgia with which the Financial Secretary used to regard anything which smacked of restrospective legislation, but in the debates on this Bill I have been pleased to notice how his education on this subject has developed. We had a fascinating exposition from him the other night in answer to an Amendment by the hon. Member for Wimbledon (Mr. Black). I am sure that the right hon. Gentleman now realises that the 1237 scope of retrospective legislation in its objectionable form is much more limited than he formerly thought it was. I for one would not think that there was any objection to making this provision retrospective if that should appeal to my hon. Friends and to the right hon. Gentleman.
§ Mr. Boyd-Carpenter
I intervene to say a few words which might assist the course of the debate. As the hon. Member for Islington, East (Mr. E. Fletcher) knows not only is this matter one of the recommendations of the second Millard Tucker report, but it is also a subject which has been a matter of controversy for many years. I listened with great interest to what the hon. Gentleman said, especially with respect to the different treatment of purchased annuities for a term of years and for life. It is an important point. I agree that, together with the other Millard Tucker recommendations, it will have to be considered by the House of Commons at some time and in great detail.
The short point, however, is whether it is possible to deal with the matter separately and this year. I was glad to note that the hon. Member referred with some sympathy to what my right hon. Friend said on the point in his Budget speech. My right hon. Friend said:There has not been sufficient time, since the publication of the Report, for me to reach any conclusions on the complex issues involved. In any event, the cost of the proposals would make it impossible for me to implement them in present circumstances. I shall not, therefore, propose this year any change in this part of the Income Tax system."—[OFFICIAL REPORT, 6th April, 1954; Vol. 526, c. 224.]We look at this matter with some sympathy, therefore, but from the point of view that these recommendations will have to be considered during the course of the year. The hon. Member suggested that it might be possible to separate this one and to deal with it separately. I put to him two reasons why it would be difficult to do that.
This proposal has a very close relationship with certain of the other proposals of the Millard Tucker Committee with respect to tax-free lump sum payments. It has the obvious connection that these payments could, and in many circumstances would, properly be used to purchase an annuity. It is impossible to deal with lump sum payments separately from the treatment of purchased life 1238 annuities. One must consider them together.
Secondly, there is the question of cost. When these matters are reviewed by my right hon. Friend it may well be that the question of cost will make it impossible to do some of them. Therefore, there will be the question of weighing which is the most immediately desirable to be done. The hon. Member will appreciate that, if because a new Clause has been put down we arbitrarily select this proposal and put it into the law this year, that is not really a proper way to deal with these immensely important recommendations.
I do not need to add to what the hon. Member said. These matters are extremely important and stimulating to thought on what is, on the whole, one of the most difficult aspects of our tax law. I repeat, as my right hon. Friend said, that during the course of the year we shall give the closest consideration to these matters on their merits, their relative priorities, and their relative interactions on each other; but I do not think it is reasonable to ask us to pick this one out and deal with it now.
There is one further aspect which has some bearing. As the result of representations this proposal is, I understand, to be considered by the Royal Commission. We should not take a decision on this matter until we have the advantage of knowing also what the Royal Commission thinks about it.
§ Mr. G. R. Mitchison (Kettering)
For myself, I do not find that reply good enough. Chancellors of the Exchequer and Financial Secretaries seem to me too often at this time of the year to resemble that famous centipede, which, being unable to decide which leg to move first, never moves at all. I have had that feeling over quite a number of the matters which the Committee has been considering this evening, but quite definitely over this one.
I shall not repeat what my hon. Friend so ably urged on the lines of the Millard Tucker Report as to the merits of the matter beyond saying that it seems to me to be an absurd anomaly that a man should be able to do substantially the same thing for himself by way of provision of an annuity for the rest of his life and have totally different results according to whether it is done by the type of split annuity to which my hon. Friend 1239 referred or, as the plain man more often does, simply by buying an annuity.
I have in mind the case of a professional man who came to see me in Kettering. His happens to be a badly paid profession, and the Financial Secretary will allow me to follow the well known procedure of no names, no pack drill, and go no further into what it is. [Interruption.] My hon. Friend the Member for Stoke-on-Trent, South (Mr. Ellis Smith) provokes me, so I will chance my arm. The man was a teacher.
The teacher had saved up for many years and bought an annuity. Partly, I own, as a result of the rise in prices, but also because of the incidence of tax on his annuity, he was simply not able to live on it. He said to me, "Is it not most unfair that when I have put my money up in this way, I should have to pay tax on the money itself when it is paid back to me?"
I agree at once that that is not the strictly legal view of the matter. The legal view is that one puts one's money up, one purchases an annuity and one's only rights depend on the annuity, and the common sense of the transaction, on that legal point of view, completely disappears. But it is a very real hardship on badly off and comparatively badly off people who are in some kind of employment or making a small amount of money in some way that they get an annuity for their old age and then have to pay tax on it. It is even more of a hardship if one is perfectly frank and says to them, "The trouble in your case is that you did not buy the right kind of annuity." That is a monstrous result.
I cannot see why the very moderate concession that is asked for in the new Clause could not have been made at once. If any concession at all is to be made, this surely represents the very minimum. It represents it on a point upon which the Millard Tucker Committee had more representations than on any other point. It represents it on a matter which for more than 100 years has been the subject of representations before one Royal Commission, Select Committee and the rest of it after another. It deals with a point which any ordinary plain man would say was a manifest piece of injustice; and why this cannot be put right at once and this Clause—for the very short distance 1240 that it goes—accepted here and now, I completely fail to understand.
§ Mr. A. Fenner Brockway (Eton and Slough)
I wish to support the plea made that the Minister should reconsider the judgment he has given to the Committee that this matter ought to be held up still further. There are undoubtedly thousands of old folk in this country who are living on their superannuation allowance and who are now finding it difficult, because of the rise in the cost of living. Though the amount of this tax may, as a monetary figure, seem comparatively small, for those old people it is sometimes a matter of bread and butter and other essentials of life.
My own interest in this matter was aroused by a particular case brought to my notice as long ago as 1950. Then the need was urgent, and since that time, because the cost of living has been steadily rising, the need has become increasingly acute. The hon. and learned Member for Wellingborough—[HON. MEMBERS: "Kettering."] The hon. and learned Member for Kettering, of which Wellingborough is an important part—
§ Mr. Mitchison
Will my hon. Friend allow me to deny at once that monstrous suggestion, both on my own behalf and on behalf of my hon. Friend the Member for Wellingborough (Mr. Lindgren)?
§ Mr. Brockway
I accept the correction at once. I would only say that if the hon. and learned Gentleman had suggested that Eton and Slough should not be combined, I should have resisted it as strongly as he has resisted my suggestion.
Seriously, the point I was making was that back in 1950 this was a severe burden to many old people in this country. In the particular case to which I am referring, the burden has become more and more severe, so that today it is literally a question of the first essentials of life and of decent living.
The hon. and learned Member for Kettering remarked that this matter had been under consideration for 100 years. I shall go no further back than the appointment of the Committee on the Taxation Treatment of Provisions for Retirement, which was appointed in 1950 by the late Sir Stafford Cripps. It has undertaken a very detailed survey of this whole issue and its Second Report was 1241 published earlier this year. If one could only understand that this is a matter of immediate need, week by week, then to have delayed for these four years is sufficient in itself.
I have communicated with the right hon. Gentleman on this subject more than once, and I wish to acknowledge that I had encouraging letters from him, and that the case put in those letters was forwarded to the Committee. I wish also to acknowledge that, as the time for the Budget approached and I wrote on this matter once again, I was again assured that the matter was under consideration. I listened to the speech of the right hon. Gentleman when he outlined his Budget. It had passages of sympathy with the older people and they aroused my hopes, which were dashed when the Chancellor said that the recommendations of the Report on this point could not be implemented in the Budget or in the Finance Bill.
There is not a case for saying that this recommendation should not be dealt with separately from the other recommendations. The point is only whether the savings of the old folk or the interest on those savings should be taxed. Hon. Members on the Government benches strongly denounce Members on this side who suggest a capital levy, but this is in effect a capital levy on those who can least afford to bear it, namely, the old folk who live upon superannuation allowances. This is a very simple proposition that tax should be levied not upon the actual savings but upon the interest on those savings. The justice of that is so clear and the proposition is so simple that I decline to believe the right hon. Gentleman when he said that this proposal could not be embodied in the Finance Bill.
For those reasons, I urge the Minister to reconsider the decision which he has announced. I make my appeal to the Chancellor of the Exchequer, who is now upon the Government Front Bench. We have heard a plea for the old people frequently from the Government benches recently. The proposed new Clause gives the Government an opportunity to prove their sincerity in this matter, and we ask them to say that there should be priority for the old. We ask them to 1242 support the plea made from these benches by accepting the proposed new Clause.
Mr. Glenvil Hall
The Financial Secretary will now be well aware of the very deep disappointment on this side of the Committee at the reply he saw fit to give to the proposal in this new Clause. Not only are we disappointed, but many thousands of people will be equally disappointed when they read in their newspapers tomorrow of the decision of the Government.
I, for one—and I take it that this is true of many Members on both sides of the Committee—have received letters from those who desire to take out annuities of this kind. They are by no means well-to-do people and are a section which we should seek to help at the earliest opportunity. I cannot help contrasting the way this Clause has been treated by the Government with the way that the same Government, not many hours ago, treated proposals from their own side of the Committee relating to Estate Duty on family businesses, and to the avoidance of duty by individuals who took out several life assurance policies.
The people with whom we are now dealing are unable, owing to their financial circumstance, to take advantage of the provisions which are to be written into the Bill as the result of pressure on the Government from their own back benches last night. We think it extremely hard that there should be this differentiation, and we must voice our protest at the attitude of the Government towards the proposal.
I do not desire this evening to make a long speech—in fact everything which is worth saying has already been said by my hon. Friends behind me—but I wish to say how pleased I was when my hon. Friend the Member for Islington, East (Mr. E. Fletcher) paid a well-deserved tribute to Mr. Millard Tucker and the members of his Committee for their very valuable Report.
I know that the Chancellor intends next year, if he then still occupies his present office, to implement many of the recommendations contained in it, but it is only right and proper for us to take this early opportunity to pay our tribute to those who have worked so hard 'to produce such a magnificent Report.
1243 All that we are trying to do in this Clause is to help certain people to provide for their old age. There is nothing wrong about that. Hon. Members opposite find nothing wrong in individuals trying to avoid paying more tax than they need. We on this side of the Committee are not objecting to that, but we did hope that hon. Members opposite, equally with us, would not object to the proposal to help certain and mostly poorer sections of the community who want to provide for their old age. It is in the interest of the State and of the community at large that they should be assisted so to do.
In our opinion, this is a non-party proposal. Many proposals that are from time to time made from both sides are quite definitely political in their intention, but this is something of which, I believe, the whole Committee approves and wants to see implemented. I find it difficult to accept the reasons for refusal put forward by the Financial Secretary tonight. He argued that the Chancellor had not had sufficient time during which to study this Report. It was, I believe, issued last December, and I imagine the Chancellor had it fairly early in January. The Finance Bill was not produced until April, and we did not debate it until May.
It appears to be argued that that was not sufficient time for the Chancellor, with all he has to do, to study such complicated recommendations as these. But, as my hon. and learned Friend the Member for Kettering (Mr. Mitchison) pointed out, this particular proposal is almost as old as the hills. It has been discussed in and out of season for years by everybody interested in this kind of thing, and it was obvious from all that we knew, and from all that I am sure the Chancellor knew, that he could have made up his mind, and should have done so, whether, in fact, the Report came into his hands in January or only in February or March.
Canada, Australia, the United States, and other civilised nations have considered this matter, and have come to a decision upon it. The facts are well known and have been so known for many years. Therefore, we find it difficult to accept the excuse made by the Financial Secretary that the Chancellor 1244 has not had time to consider the matter. At the same time we do realise that there are other recommendations in the Report, some of which do connect in some ways with this one, but this is nevertheless one of the utmost priority. It can be singled out, and we suggest that it should be.
Strongly as we feel on the matter, we do not intend to divide the Committee on this new Clause. At the same time, I would warn the Government with all the strength at my command that we shall seek to return to this matter on Report in order to test whether the House as a House shares with us the desire not to wait another year.
§ Mr. Austen Albu (Edmonton)
Is the Chancellor of the Exchequer saving up all these concessions for the Budget which will take place before the next General Election?
§ Question put, and negatived.