Clause 15.—(RELIEF FROM SURTAX FOR ESTATE DUTY ON ACCRUED INCOME.) (Hansard, 12 June 1956)

§ Mr. Houghton
This is the Clause which the Financial Secretary said was going to save him correspondence and save him from unpopularity. He had little to say about it in his speech on Second Reading but he did say this: Clause 15 will remove a clear injustice where the present law in certain cases renders the same income liable, rather surprisingly, to both Estate Duty and Surtax."—[OFFICIAL REPORT, 9th May, 1956; Vol. 552, c. 1242.] "Rather surprisingly", he said, but there is no real surprise about our system of taxation, and I am surprised that the right hon. Gentleman should have been surprised, even though both Estate Duty and Surtax were chargeable on the same income.
The Clause provides for relief from Surtax of a person having an absolute interest in the residue. Where an income accruing before death is taken into account in estimating the value of an estate the residuary income is to be treated as reduced in ascertaining Surtax liability of any person having an absolute interest in the residue of the estate. The amount of the reduction is set out in absolute gibberish in subsection (2), which, for the benefit of the Committee, I will read: The amount of the reduction shall be an amount which, after deduction of income tax at the standard rate for the said year of assessment, would equal the amount of estate duty payable in respect of so much of the income taken into account as mentioned in the foregoing subsection as exceeds any liabilities so taken into account. If any hon. Member can tell me what that means I shall be very pleased to sit down and let him do so. I propose to sit down in any case in a moment, because this is as far as I can get with this Clause. That is why I am asking the right hon. Gentleman if he will throw a little light on it.
There is another and even more serious question I want to ask him, and that is why the Chancellor proposes, as apparently is the case, to leave the injustices of the past unremedied. That is what the Clause seems to me to do. Subsection (9) says: This section shall have effect as respects tax for the year 1956-57 and subsequent years of assessment. 295 I think it is a bit hard that past injustices should be left unremedied when injustices which, apparently, caused the right hon. Gentleman so much correspondence and so much unpopularity that he is now most anxious to remedy them are to be remedied. Perhaps the Financial Secretary will spare a few moments to tell us a bit more about it. I notice that since the Government changed the bowling the hon. Member for Southampton, Test (Mr. J. Howard) has scored three runs. I hope for similarly favourable treatment from the right hon. Gentleman.

§ Mr. John Hall (Wycombe)
I find myself in complete agreement with what has been said by the hon. Member for Sowerby (Mr. Houghton) and particularly with what he has said about the injustices of the past. I was most interested in the speech made by my right hon. Friend on the Second Reading of the Bill, a speech to which reference has already been made, and in which he said that the Clause would remove a clear injustice. It is quite true that it does, but only for the future, and not for the past. My right hon. Friend went on to say that a number of hon. Members had written to him in justified indignation about cases which had affected their constituents. I want to talk to him in justified indignation about a case which affects one of my own constituents. It is a very good example of the kind of thing which the Clause is intended to remedy.
My constituent had an estate into which there fell an income to the value of £28,631. On that she paid Income Tax at £14,000-odd and Estate Duty of £9,000-odd and legacy duty of £1,400 leaving her with £3,866 out of the original income forming part of the estate. That, one would have thought, would have been bad enough. It did not leave very much of the original income in the estate of more than £28,000. But worse was still to come, because a Surtax demand for £11,000 was levied upon that income, which means that now she is called upon to pay £7,000 more than she actually received.
That, of course, is injustice, which is recognised and which has been described as injustice. Is it asking too much that we should do something for those people—there cannot be many of them—who have suffered this injustice, due, apparently, either to clumsy draftsmanship 296 or to a complete lack of forethought in drafting the previous legislation on this matter?
I know it is not easy to safeguard or compensate citizens against injustices which they might have suffered through bad, misleading or misguided legislation of the past. We have had a lot of examples of that between 1945 and 1951 from which some of us are suffering now, and so we cannot expect complete compensation in those cases. I should, however, like to know how many cases of this kind exist and what the cost would be of repaying them the sums they paid to the Treasury in excess of the sums which rightly should have been taken from them. I would not have thought it could be very much.
I hope my right hon. Friend will took at the Clause and see whether it is not Possible to introduce a retrospective provision to make it possible to remedy this injustice. Retrospective legislation is not unknown. It has been indulged in before and in this instance it could be indulged in again to the satisfaction and justice of all those concerned.

§ Mr. H. Brooke
I am happy to seek to explain the intricacies of the Clause, if I can do so briefly. The difficulties arise under legislation passed originally in 1938 although that legislation is now embodied in the Income Tax Act, 1952, which, as hon. Members will remember, i; a consolidating Act.
The point is that income arising during the period when the estate of a deceased person is being administered is deemed to be the income of the beneficiary for purposes of Income Tax and Surtax. It may therefore be liable to Surtax in the hands of a residuary legatee if his income is big enough, but that part of the income which accrued before the death is also taken into account in computing Estate Duty on the estate. The same money may, therefore, be liable to both Estate Duty and Surtax, and with the present high rates it may in some cases total more than 20s. in the £, so that it would have been better from the legatee's point of view if the money had not been there at all.
This is an anomaly which had come to light. We studied it and it was examined also by the Royal Commission on the Taxation of Profits and Income. 297 What we are doing in the Clause is in accordance with the recommendation of the Royal Commission that the Estate Duty attributable to the inclusion in the estate of accrued income which also ranks for Surtax purposes as part of the income of the residuary legatee should be deducted in computing the income on which Surtax is charged.
Those words are perhaps the simplest in which I can explain the general effect of subsection (2), but perhaps I may use a few figures. Supposing there is a gross accrued dividend of £200 and the estate is liable for Estate Duty at the rate of 40 per cent., under subsection (2) the Estate Duty of £80 would be deducted from the gross amount of the dividend and the Surtax would be charged, not on £200, but on £120.
The hon. Member for Sowerby (Mr. Houghton) and my hon. Friend the Member for Wycombe (Mr. John Hall) raised the question of restrospection. I agree at once that hardship has been suffered—

§ Mr. Mitchison
Is the right hon. Gentleman quite sure that he has got his own Clause right? He spoke of an Estate Duty of £40. What it seems to me to be—I may be quite wrong—is an amount which, after deduction of Income Tax at the standard rate for the said year of assessment, would equal £40.

§ Mr. Brooke
I said 40 per cent.

§ Mr. Mitchison
I see.

§ Mr. Brooke
I admit at once that I was trying to simplify my explanation. Perhaps I oversimplified it. If I were to give it in great detail, I might make both the Committee and myself more confused than before.
On the question of retrospection, I quite agree that hardship has been suffered but I am bound to point out two things. First, when we make a tax change we do not normally make it retrospective. If we were always to do that we would open up a great many settlements and assessments which had been settled for many years past. In this case, as I said at the outset, the anomaly goes back to 1938. It would be physically impossible, even with the best will in the world, to clear up all the cases which have been examined by the Inland 298 Revenue and by the Estate Duty Office over the past seventeen years. We must, therefore, take a dividing line somewhere and I must advise the Committee that, despite the hardship which has been caused in individual cases, the only practical way of doing it is to make the change date from this tax year.

§ Mr. John Hall
Can my right hon. Friend give any idea how many cases have been involved since 1938? It cannot be very many.

§ Mr. Brooke
No. I could not make any conjecture of the number of cases over the past seventeen years.

§ Mr. Houghton
Why did this banditry not stop before? If more has been taken in tax than the taxpayer received in money, why jib at retrospection for the remedying of such an obvious injustice? I do not know what the right hon. Gentleman has been thinking about to have received these protests and to have suffered this unpopularity without doing something earlier. The Government should repair the damage of their delay.

§ Mr. Brooke
I am doing my best. I have been Financial Secretary for less than two years. I cannot say why all this occurred seventeen years ago. There is an element of ingratitude when one introduces a change that is generally welcome and then is merely criticised for not having done it before.

Major W. Hicks Beach (Cheltenham)
I should like to make one suggestion about the question of retrospection. I should certainly not contradict my right hon. Friend in saying that these cases have been going on since 1938, but my impression, from actual practice, is that most of these cases have arisen following a decision of the court since the war. Perhaps my right hon. Friend would have another look at this question. A great injustice has been done to a great number of people and I think he will find that most of the injustices have arisen since the war.

§ Mr. Brooke
This situation is not the result of the Stewarts Executors case, to which, I think, my hon. and gallant Friend is referring, but has existed ever since the 1938 Act. I do not, therefore, think it would be possible to find a later date and to make it the dividing line.

Major Hicks Reach
I think I am right in saying that it was only enforced by the Inland Revenue since that case was decided in 1946. I hope my right hon. Friend will look at this matter again.

§ Mr. Turner-Samuels
Can the right hon. Gentleman say whether, in view of the appalling circumstances about which we have heard, he has considered this matter from the point of view of making restoration? As the hon. Gentleman the Member for Wycombe (Mr. John Hall) has said, there cannot be a large number of cases, it is clear that in each one there has been a profound injustice committed, and, indeed, in many cases there must have been great hardship caused. To put it in plain words, all these people have paid money which they ought never have been asked to pay. It seems to me that as a moral consideration—if it is possible for the Treasury to consider anything of a moral nature—and not a question of whether this payment was made as a matter of law or as a mistake of fact, the Treasury ought to have considered the matter as to whether restoration should be made.
From what the right hon. Gentleman has already said, it looks as though no consideration has been given to this particular matter. That is an appalling thing. If the Financial Secretary had been able to say to the Committee, "We have scrutinised this matter most carefully, we have been able to scan the various cases, but the complications are so great that it is impossible to do anything", that would have been one thing. But the right hon. Gentleman in effect tells the Committee in the face of this appalling injustice, "I do not know how many cases there are. I have not looked into this matter. The Treasury does not care two straws about it."
Why then is the Treasury doing this now? Because they have had to recognise that a deep injustice has been done to citizens who have been made to pay money which they did not receive and have been left with deficits to meet out of their own pockets. One cannot imagine a more egregious case of business immorality than this. Yet the Financial Secretary has just boasted about the wonderful things the Government are now doing to amend this injustice. He told us plainly, nevertheless, that although this is so unjust that it has been essential to 300 put the matter right, he had not given a moment's thought and does not apparently intend to give a moment's thought to the injustices that have so far been done.
That will not do. It is incumbent upon the right hon. Gentleman and upon the Government to look at this matter again. It does not help if the right hon. Gentleman says, "I am sorry but I cannot now look at this matter." The stigma will still remain. The fact is that this serious injustice has been allowed to happen and it ought to be remedied. It should be remedied for the past just as it is being remedied for the future. It is being remedied for the future because it is immoral, and it should be remedied for the past equally because it was immoral.
I say, therefore, to the Financial Secretary that it is incumbent upon him to do something. We are not asking him to do something—not wonderful, or beneficient, or charitable. We are merely asking him to make restoration in cases where money has been wrongfully taken. It is in a sense almost a case of cheating. One has to be precise about these matters—to take money in this way and then, after it has been so taken, to turn round and say, "We ought never to have taken this money. We have dipped into the pockets of these people but we ought not to have done so," and yet do nothing about it.
For the Financial Secretary to say in effect that because it was wrong it is to be put right now, but on the other hand that what has been done already is done, we have the swag and we intend to stick to it, is really not good enough. That is not the sort of thing that an honourable Treasury ought to do. Because it is not an honourable thing, because it is a wrong thing, because it is such a profound injustice, and because it is on the record now, by reason of this very Clause in the Bill, that it was and is an injustice, I ask the Financial Secretary to do the right thing now and to be as fair to the people who have suffered in the past as he is going to be fair to people in similar circumstances in the future.

§ Mr. Gordon Walker (Smethwick)
May I add my plea? We are partly to blame because this happened when we were in office. We admit that it is an injustice which should have been noticed 301 earlier than it was noticed. However, it has now been discovered, and it should be put right, at least as far back as 1946. Certainly it would be fairer to go back to 1946 than not to make the change retrospecive at all, and if we have to draw a line somewhere much less injustice will be done if it is drawn at 1946, though it would be better still to go back to 1938. However, the argument of drawing a line somewhere is in favour of 1946 rather than 1956, so I hope the Government will look at this matter again, since there is a strong case for restrospection in this matter.

§ Mr. Brooke
I think I explained the reasons why on practical grounds retrospection to 1938 is impossible. We could not open up all those cases now long since settled. The hon. and learned Gentleman the Member for Gloucester (Mr. Turner-Samuels) was most unfair to me when he insinuated that I had taken no trouble about this matter, that I had not looked into it, and that I did not care. If all those allegations were true, how could I possibly have replied, as I did at once, to my hon. and gallant Friend the Member for Cheltenham (Major Hicks Beach), and show knowledge of the case which was clearly in his mind?

§ Mr. Turner-Samuels
The right hon. Gentleman says that, but I will give him the reason why I said it, and with every justification. I am the last person in the world to want to make an allegation against the Financial Secretary, who usually is very fair and very thorough about these matters. The reason why I said that, and why I felt justified in saying it, was that in answer to the question as to whether the right hon. Gentleman knew how many cases there were of this kind, he indicated that he had no idea whatever, and the implication from that was that he had not looked into them.

§ Mr. Brooke
I was asked how many cases there had been since 1938 and I replied, with truth, that I had no idea, because we do not keep classifications of these cases all the way back. It is happening in a not very large number of cases. It is not true that the Exchequer has taken this money immorally. It has been taken under the law, and we all know that the law operates in tax matters from time to time in an inequitable 302 manner because the law is not perfect in its detailed application to particular cases.
I do not want to seem hard-hearted about this matter. Certainly I will draw the attention of my right hon. Friend the Chancellor of the Exchequer to what has been said. I hope I have proved that I have given consideration to it. From my knowledge of the matter, however, I must say that at the moment it appears to me to be impracticable to do otherwise than what is proposed in the Bill.

§ Mr. Turner-Samuels
I want to say at once that if there was any implication in my words that the right hon. Gentleman had not given consideration to the matter, that was not an allegation which I wished to make. What I intended to convey was that it came to me as a surprise that he was unable to state how many cases, or in the region of how many cases, there were.