HC Deb 09 June 1964 vol 696 cc255-60

(1) Where by virtue of a contract for the sale of an estate or interest in land there falls to be apportioned between the parties a receipt or outgoing in respect of the estate or interest which becomes due after the making of the contract but before the time to which the apportionment falls to be made, and a part of the receipt is therefore receivable by the vendor in trust for the purchaser or, as the case may be, a part of the outgoing is paid by the vendor as trustee for the purchaser, the purchaser shall be treated for the purposes of tax under Case VIII of Schedule D as if that part had become receivable or payable on his behalf immediately after the time to which the apportionment falls to be made.

(2) Where by virtue of such a contract there falls to be apportioned between the parties a receipt or outgoing in respect of the estate or interest which became due before the making of the contract, the parties shall be treated for the purposes of tax under Case VIII of Schedule D as if the contract had been entered into before the receipt or outgoing became due, and subsection (1) above shall apply accordingly.

(3) Where on the sale of an estate or interest in land there is apportioned to the vendor a part of a receipt or outgoing in respect of the estate or interest which is to become receivable or be paid by the purchaser after the making of the apportionment, then for the purposes of tax under Case VIII of Schedule D—

  1. (a) when the receipt becomes due or, as the case may be, the outgoing is paid, the amount of it shall be treated as reduced by so much thereof as was apportioned to the vendor;
  2. (b) the part apportioned to the vendor shall be treated as if it were of the same nature as the receipt or outgoing and had become receivable, or had been paid, directly by him immediately before the time to which the apportionment is made and, where it is a part of an outgoing, had become due immediately before that time.

(4) Any reference in subsection (1) or (2) above to a party to a contract shall include a person to whom the rights and obligations of that party under the contract have passed by assignment or otherwise.

(5) This section shall apply as respects tax under Case VI of Schedule D in a case falling within section 15(4) (furnished lettings) of the Finance Act 1963 as it applies as respects tax under Case VIII of Schedule D in other cases.—[The Solicitor-General.]

Brought up, and read the First time.

4.11 p.m.

The Solicitor-General (Sir Peter Rawlinson)

I beg to move, That the Clause be read a Second time.

In the 1963 legislation, as the Committee will recollect, we introduced Case VIII of Schedule D, which is the new head of charge for rents and other income from land. Difficulties have arisen over the charge of tax where rents and outgoings are apportioned on a sale, and this new Clause is designed to deal with those difficulties. It was foreshadowed by my hon. Friend the Financial Secretary, in his speech on Second Reading, when he said that the Case VIII legislation did not take into account apportionments of rent payable for a period overlapping the date of sale of a property. Without the new Clause the present law would be that the rents for periods in which the apportionment date falls are taxable partly on the wrong person and outgoings are only partly allowed as deductions for tax purposes.

This new Clause, therefore, is designed to enable liability to Income Tax under Case VIII to be appropriately adjusted as between the vendor and the purchaser. The Clause applies only to sales of an interest in land where the interest carries income which is assessable under Case VIII of Schedule D and the sale requires income or outgoings for a period to be apportioned between the vendor and the purchaser. The present law is that, where there is a contract for sale, it creates a trustee relationship between the vendor and the purchaser which ends with the completion of the transaction, that is, with the sale. It applies in different circumstances according to whether the rent is in advance or in arrear.

I will now introduce the gentlemen to whom I referred the other day, Messrs. A and B, as perhaps that will explain the matter more clearly. If there has been a contract by A to sell to B with completion on 1st May, 1965, and that contract is made before 25th March, 1965, and provides for apportionment of rent, as is usual, the effect is that A would hold the appropriate part of the instalment of rent payable in advance on 25th March on trust for the purchaser, B, so that B is beneficially entitled to the part apportioned to him.

The tax liabilities of A and B in that case would take that apportionment into account. But if the contract is made and entered into after A has received the instalment due in advance on 25th March, 1965, that contract cannot alter the fact that A received the whole of the rent beneficially for himself and, as the law stands, A is taxable on it in full under Case VIII, which, as the Committee will appreciate, he should not be.

4.15 p.m.

Broadly, as the law stands at present, it goes wrong, first, where receipts or outgoings are payable in advance and received or paid by the vendor before the contract is entered into. The second case where it goes wrong is where receipts or outgoings are payable in arrear and received or paid by the purchaser after completion. The new Clause provides that the Case VIII charge to tax shall apply properly to the vendor and purchaser where there have been apportionments. The Clause appears complicated on the Notice Paper. It would correct a minor but important gap in the 1963 legislation. The principles have met with the agreement of the professional bodies which have been consulted.

Mr. Graham Page (Crosby)

This Clause seems to be calculated to confuse. It has certainly left me bewitched, something or the other, and bewildered. I should like, first, to refer to some words that I do not understand. The Clause speaks only of a sale, and my right hon. and learned Friend spoke only of a sale, but are apportionments of the lease excluded, and does the Clause apply only if there is a sale?

We find in the second line the words a receipt or outgoing…". My right hon. and learned Friend spoke only of rent, but on the occasion of a sale there are other receipts and outgoings that are apportioned. One normally apportions the general rate, the water rate and the insurance premium as well as the rent, and it seems to me that when referring to receipts and outgoings the Clause includes the other normal apportionments of a completion of sale or purchase.

Turning to the fourth line, we have the phrase …the time to which the apportionment falls to be made…'". It is that little word "to" that puzzles me. Does it mean the time at which the apportionment is made—that is, the time of completion of the sale—or does it mean the time to which a payment has been made? For example, if the rates in my right hon. and learned Friend's case were paid for the half year from March to September, is the time to which the apportionment falls to be made September, or the date of completion in May? The phrase confuses me, and I hope that my right hon. and learned Friend will be good enough to explain what it means.

The Clause seems to divide a simple process into a number of subsections, each of which becomes a little more confusing as one reads it. I have made an effort to reduce the Clause to two lines, and perhaps my right hon. and learned Friend will tell me whether, briefly, it really means, "For the purpose of Case VIII of Schedule D the net result of apportionment of receipts and outgoings on the sale of land shall be treated as income or as an allowance against income of the payee and payer respectively." I believe that this whole page of print could be reduced to those few words.

Mr. Douglas Houghton (Sowerby)

Until I heard the hon. Member for Crosby (Mr. Graham Page), the Solicitor-General had held me captivated and fully convinced, but now my first question is whether this provision is appropriate to Scottish law or only to English law. I have no knowledge of any difference that might apply, and I am directed to ask the question by my hon. and learned Friend the Member for Kettering (Mr. Mitchison).

I can see the point of this Clause. It was quite clearly explained by the Solicitor-General that there is a gap in the earlier legislation, and it is really a question whether this wording does, and does completely and satisfactorily, what the Solicitor-General explained to the Committee it is intended to do.

I was a little puzzled by the word "to", but thought that it was a word that covered a period of time rather than one that defined the time at which the contract would be completed. Not being a lawyer, I cannot say whether "to" or "at" is the right word. I am sure that the Government want to get it right this time, as there was an omission in the earlier legislation. If all the adequate consultations have taken place with those who advise on these matters, the Committee will, as far as one can judge, have to take the version of the Solicitor-General on trust.

The Solicitor-General

I am advised that this new Clause fits into the framework of Scots law, and that no Scottish adaptations are needed. I am also advised that the Law Society of Scotland has approved the Clause in principle.

My hon. Friend the Member for Crosby (Mr. Graham Page) has, in the language he used, expressed perfectly competently the principle of the Clause in general terms, but in all such matters it is very difficult to reduce to one or two sentences the effect of a complicated provision of Revenue law. While, therefore, I would say that my hon. Friend is quite right in his general assessment of the effect of the Clause, I can assure him that it is necessary, unfortunately, to have as much matter as appears in the Notice Paper.

My hon. Friend referred to the word "to". The date to which the apportionment is made is the date dividing the period in respect of which the payment is due, that is to say, the date that divides the part of the period for which the vendor is entitled to the rent from the part for which the purchaser is entitled to the rent. Subsection (1) expresses in statutory form what has previously been case law in regard to the trustee relationship between vendor and purchaser.

Perhaps an example might assist my hon. Friend. If, on 1st January, 1964, A contracted to sell to B, with completion on 1st May, land which was let with payment of rent in advance on each quarter day, and if on 25th March, A received that rent in advance, he holds it in trust for B so far as it is apportioned to the appropriate period, which is 1st or 2nd May, 1964, to 24th June, 1964—up to the quarter day.

Subsection (2) refers to rents or outgoings—my hon. Friend is quite right to mention outgoings—rent received and outgoings payable, when they are received or paid in advance, before the contract. Subsection (2) provides for the parties to be treated as if the contract were entered into before the rent or outgoings fell due, and, therefore, they can be treated in the same way as under subsection (1).

Subsection (3) applies where receipts and outgoings are receivable or paid after completion. It provides, as the Committee can see, uniform rules, first, for the amount of the receipt or outgoing to be reduced by so much as is apportioned to the vendor and, secondly, for the amount to be treated as a revenue receipt or payment by the vendor at the time of the apportionment. I can, therefore, assure my hon. Friend and the Committee that the new Clause does as in sets out to do, which is to close the gap that has been referred to.

Mr. Graham Page

Before my right hon. and learned Friend sits down, can he say whether this includes a letting as well as a sale?

The Solicitor-General

Yes, it includes a sale of a leasehold interest.

Question put and agreed to.

Clause read a Second time and added to the Bill.