§ Mr. Deputy-Speaker
We come now to Amendment No. 153, with which, I understand, we can take Amendment No. 308, Clause 38, in page 43, line 38, 1855 after "settlement", insert "made after the passing of this Act";
Amendment No. 322, Clause 38, in page 43, line 40 leave out "is" and insert "was domiciled and either";
Amendment No. 323, Clause 38, in page 43, line 41 leave out from "Kingdom" to "when" in line 42.
§ Mr. Diamond
I beg to move Amendment No. 153, Clause 38 in page 43, line 40 after "is", insert "domiciled and either".
The purpose of this and the other Amendments which you have kindly said, Mr. Deputy-Speaker, we might discuss at the same time, arise again from the Committee stage debate on Clause 38, during the course of which the Clause was criticised on five main grounds, and the Government promised to consider those matters before Report stage. In particular, my right hon. Friend the Chancellor, at columns 135 and 139 on the 1st June, made it clear that although he was determined to catch the tax avoider, he was not unsympathetic to the case of the genuine trust established before Budget day, and that it was a case he would try to meet.
There are five grounds of criticism, by and large, which the Government are meeting, and it might be convenient if I refer to them very shortly, and to the solution shortly. The solution is to be found at length in the words of the various Amendments we are now discussing.
The first criticism was that because it applied to all overseas trusts, including trusts in existence on Budget Day, the tax was retrospective in its effect. That point was made by the Leader of the Liberal Party. The solution to that is contained in our Amendment No. 306, Clause 38—the new subsection (4)—as a result of which a beneficiary under a pre-Budget trust is not to be charged unless and until he can lay his hands on capital—
§ Mr. Marcus Kimball (Gainsborough)
Mr. Deputy-Speaker, are we discussing Amendment No. 306 as well as Amendment No. 153 and the others?
§ Mr. Deputy-Speaker
I understand the right hon. Gentleman the Chief Secretary 1856 to be illustrating from this Amendment that he is answering criticisms made in Committee by some of the Amendments, in addition to those Amendments that we are now discussing.
§ Mr. Eric Lubbock (Orpington)
Further to that point of order, Mr. Deputy-Speaker, would it not be convenient for us to deal with Amendment No. 306 at the same time, so that we can have from the Chief Secretary a complete explanation in one speech?
§ Mr. Diamond
Perhaps I could put the following point to you, Mr. Deputy-Speaker, although I recognise the inconvenience of putting it to you in this way. I am so sorry that when you were describing which Amendments we could discuss, I had not got hold of all my papers. I put it to you that it might be for the convenience of the House if we were to discuss all these Amendments together; to wit, in addition to Amendment No. 153 which I have moved, and Amendments Nos. 308, 322 and 323, Government Amendments Nos. 154, 155, 156, 157, 267 and 306 in Clause 38. They all relate essentially to the same series of problems connected with the same Clause, and to the points put forward by the Opposition at that time.
§ Mr. John Hall (Wycombe)
Although we would like to meet the Chief Secretary in this respect, Mr. Deputy-Speaker, we prefer at this stage to stand by the original selection.
§ Mr. Deputy-Speaker
If there is disagreement about this between the two sides, we must stand by the original selection. We are therefore back to the Amendment that has been moved and the three Amendments that I said could be taken with it. However, I might add that there is no reason why the right hon. Gentleman the Chief Secretary should not continue the argument he was making.
§ Mr. Diamond
I am grateful to you, Mr. Deputy-Speaker.
The second objection in principle was that the tax imposed a charge on beneficiaries who might not be aware of their liability, and who might, in any case, have no cash with which to pay the tax. I think that the hon. Member for Gainsborough (Mr. Kimball) recognises 1857 his own point, which he made in Committee on 31st May. It is to be found in col. 1351 of the OFFICIAL REPORT. The solution is the new subsection (3), under which no charge on discretionary interest is to be paid unless a beneficiary has received payment from the trust.
The third criticism was that although the tax charges resident beneficiaries on their proportion of the gains accruing to a non-resident trust, it makes no allowance for losses accruing to the trust. The solution to that is that we now have the charge based on the amount on which trustees would have been chargeable if resident.
The next, and fourth, major criticism was that the tax might bear hardly on the perfectly genuine non-resident settlor who became resident in the country, but might be defective in catching the resident beneficiary who goes abroad and who knows the money will accrue to the trustees. The solution is the provision that the settlor must be domiciled as well as resident or ordinarily resident in the United Kingdom.
The fifth, and final, major criticism lay in the complaint that the formula in subsection (2) which governs the apportionment of trust gains between beneficiaries would be very difficult to interpret. The solution is that gains are now to be apportioned among the beneficiaries according to the value of their respective interests. Special rules will apply to discretionary trust interest in the new subsection (3) in Amendment No. 306, which we can discuss later in more detail.
§ Mr. Kimball
I do not want in any way to be churlish to the right hon. Gentleman, because I appreciate that even after the debate in Committee he and his right hon. Friends have been at some considerable trouble, and have engaged in some very long and complicated negotiations in order to try to meet our point. I am very sorry that we should have got to this impasse. Amendment No. 153 deals specifically with domicile, with which the Chief Secretary dealt as the fourth point in his remarks. I appreciate the reasons for his tabling this Amendment, but the result is to make the Clause extremely objectionable. My Amendments seek to remove this particularly objectionable facet. His domicile 1858 provision will cause great injustice, and even further administrative problems.
Let us suppose that someone was resident abroad for many years and, while abroad, made a non-resident settlement without any beneficial interest for himself. He continued to live abroad, but his children, who were the sole beneficiaries of the settlement, came back to live in England. Quite suddenly—and it happens in many cases, particularly in, say, Kenya—the person who made the settlement finds that country impossible to live in. He may suddenly find that, in his old age, his farm is taken from him. One of his children invites him to return to this country to live. By this Amendment, his coming back here will mean not only that the beneficiary under the trust with whom he has taken up residence will be liable to Capital Gains Tax, but another beneficiary under the trust, who may have no knowledge whatsoever that the original settlor has come back, is also liable to Capital Gains Tax.
The principle should not be where the settlor is now domiciled but where he was resident when he made the trust. That is the important principle. I am very worried, because the right hon. Gentleman's Amendment will have the very serious consequence that many people who are beneficiaries under a trust will find that they have to pay this tax. They will not know that the settlor has changed the liability, and will have no idea whatsoever that the tax liability has arisen.
The right hon. Gentleman will know from his own very unhappy experience with his Domicile Bill what a very tricky problem domicile is. It might never be agreed in a person's lifetime. The Inland Revenue never makes up its mind about it. It just says, "It will be agreed" or "We will negotiate at some future date, but will accept the position for this one year". I therefore hope that the right hon. Gentleman will feel that these objections are well founded; that in stopping up one loophole he has created another uncertainty. I hope that he will either look at the matter again, or withdraw the Amendment.
§ 5.30 p.m.
§ Mr. Lubbock
My right hon. Friend the Member for Orkney and Shetland (Mr. Grimond) raised a number of points in Committee. He is very sorry that he 1859 could not be here to continue the discussion this afternoon, but he had to attend a meeting of a Select Committee. He has asked me to raise one or two points on his behalf. He thinks that the Clause would be considerably improved by the Amendment tabled by the Government.
The Amendment we are discussing relates to the five points which the Chief Secretary has mentioned. It would have been more convenient, with great respect to you, Mr. Deputy-Speaker, to discuss all these Amendments together. I find it difficult to separate some of them in my mind when we are talking on the question of domicile.
§ Mr. Deputy-Speaker
May I explain? I am not prepared at a moment's notice to make a grouping of Amendments if one major part of the House is opposed to such a grouping. If I had been informed of the suggested grouping before I might have considered it, but I cannot now in view of that fact.
§ Mr. Lubbock
I perfectly understand Mr. Deputy-Speaker, that we are not entitled to discuss Amendment No. 306 with this group of Amendments, including Amendment No. 308, which would insert the words:made after the passing of this Act".The Chief Secretary said that this point raised by my right hon. Friend was dealt with by the addition of the new subsection (3), which we are not entitled to discuss with these other Amendments. I find it difficult to express myself on these points.
§ Mr. Deputy-Speaker
I would not prevent the hon. Member from straying a little at the moment but in any case he will not be deprived of his opportunity. My job is to preserve his rights.
§ Mr. Lubbock
Thank you very much, Mr. Deputy-Speaker. Perhaps all that I need ask the Chief Secretary on this occasion, while reserving my right to say something when we come to Amendment No. 306, is why he did not adopt the simple words suggested by my right hon. Friend—why they should not have been accepted by the Government. The Chief Secretary said that the Government have agreed that retrospection is not advisable and that they have taken steps to eliminate it.
1860 I wish to reinforce what was said by the hon. Member for Gainsborough (Mr. Kimball). I stand to be corrected, but it seems that if a person comes back to the United Kingdom after what may have been a very long absence abroad, the beneficiaries of the trust may be suddenly placed in a completely different and less favourable position and may not even know that the settlor has returned. I should like the Chief Secretary to go a little further and to say that if in those circumstances the settlor returns after a long absence abroad, which may not be through any fault of his but owing to circumstances in the country in which he has been domiciled for a long time, the beneficiaries of the trust will not suffer.
§ Mr. George Younger (Ayr)
I appreciate that the Chief Secretary and his colleagues have been doing their best since Committee to improve this Clause. I think the arguments put forward by my hon. Friend the Member for Gains-borough (Mr. Kimball) and on behalf of the right hon. Member for Orkney and Shetland (Mr. Grimond) are very good.
I will summarise some of the problems of principle at which we would be grateful if the Chief Secretary would look again. There are three points in reference to the question of domicile. The first refers to the settlor. The settlor, by the act of making the settlement, has given up any interest in the trust from then on. He has gone off the stage altogether. Therefore, it is quite illogical to have any consideration about what he should do thereafter. His domicile thereafter must be irrelevant. His views and desires thereafter are totally irrelevant, and must be in logic, to the rest of the proceedings.
The second point concerns the trust itself. Inevitably it must be a foreign trust. It is situated in a foreign country. Nothing can alter that fact. In common with all matters affecting trusts in foreign countries, it is subject to the tax laws of a foreign country. I cannot see any justification for bringing in a new principle whereby a trust completely domiciled and resident and legally in existence in another country, should be subject to the laws of tax in this country. It is quite a simple point of logic that it should not be so.
The third point concerns the beneficiary. There is only one important point about 1861 the beneficiary. He is getting income from the trust and it is a perfectly simple fact that people who get income in this country pay Income Tax. So does the beneficiary. If he gets more income he pays more tax, and if he gets less income he pays less tax. His part in this proceeding is no more nor less than that. Therefore it seems quite illogical that there should be any question of any other tax affecting him in this matter.
I hope that that is helpful to the Chief Secretary, because I feel that perhaps in our anxiety to improve the Clause we may have gone a little wide of three very simple points with very simple solutions to them.
§ Mr. Diamond
I shall try to help the hon. Member for Orpington (Mr. Lubbock) if I can in relation to the point he raised about the retrospective effect of the Clause as previously claimed and why certain words should not be accepted. The simple reason is that the Clause was fully retrospective as alleged. If he would like me to go into that more fully, he will see if he looks at Clause 24 that we have the same position there in regard to gains accruing to trustees. One Clause is not in any sense more retrospective than another.
The only difference is that in the case of an overseas trust within Clause 38 the liability attaches to the beneficiary who may have to meet it himself if the trustees have no powers under the terms of the trust to meet it on his behalf. This has little to do with arguments about retrospection and may apply equally to trusts set up after Budget day. We have recognised the force of the arguments advanced in Committee and gone some way to meet them. The concessions we are proposing turn on the proposition that in the case of trusts set up before Budget day the United Kingdom beneficiary should be charged under Clause 38 only if he is in a position to secure that the assets of the trust apply to his benefit.
The new subsection (4) provides that in relation to a settlement made before Budget day the beneficiary would not be chargeable if his interest is solely an income and he cannot obtain for himself any part of the capital recognised by the settled property. In the case of a person with a reversionary interest, the tax 1862 chargeable may be postponed until he disposes of his interest unless he can obtain any of the benefit of the interest represented by the settled property. The question which the hon. Member asks me relates to the problem of avoidance by going to the Bahamas, which is a method not completely unknown. As it stands, if I may refer to Clause 38(1), he will see that that applies to non-resident trusts and uses the words:if the settlor, or one of the settlors, is resident or ordinarily resident in the United Kingdom, or was so resident or ordinarily resident when he made his settlement.The Clause is primarily aimed at the United Kingdom settlor who, being taxable on capital gains as a resident, cannot settle his gains on other residents. The primary test therefore is whether he was resident or ordinarily resident when he made the settlement. That is to say, was he removing chargeable assets from the scope of the tax? This primary test is not enough because he could avoid it by going to the Bahamas for a few years and just ceasing to be resident or ordinarily resident and making a settlement during that period. The Clause blocks up this exit by providing that even if he was not resident or ordinarily resident at the time of making the settlement, the resident's beneficiary shall be chargeable under trust gains for any particular year in which the settlor is resident, or ordinarily resident here.
If the settlor goes to the Bahamas and makes his overseas trust while he is there, the Clause will still bite when he comes back to this country, and that is what we all want to happen. I do not deny that these matters are complex, and I would be very happy indeed to look once more at what has been said. I cannot, at this stage give any undertakings at all. One is anxious that the tax should work smoothly and should not be avoided unduly. In applying a tax to such esoteric branches of the law as trusts of one kind or another, one has to walk carefully and listen to all that is said, and I would be glad to look again at what has been said.
§ Mr. John Hall
This is a very complicated Clause, as those of us who have had to study it during the Committee stage and now have discovered to our cost. Even the Financial Secretary, unlike his usual custom, had to stick rather 1863 closely to his brief in reading out the legal implications of this Clause and Amendment. It is clear, from what he says, that my hon. Friend the Member for Gainsborough (Mr. Kimball) is absolutely right when he said that a settlor who, for one reason or another, had to return to this country, would find that he had made his children liable to Capital Gains Tax.
We understand that this Clause is designed to prevent tax evasion, and we all know examples of the kind which the Chief Secretary hinted at, where there are attempts to evade tax. But there are many examples where, quite genuinely, without any desire to evade tax, persons resident abroad make settlements. Later, their children have come back to live in this country, and under normal circumstances, provided those settlors still remained abroad, their children living here would not be liable to Capital Gains Tax.
One could have a case where there were two settlors who made settlements for the benefit of their issue, neither settlor retaining any interest in the settlement and, if the child of each settlor came to live in this country, there would arise the extraordinary situation in which, if the first settlor remained abroad to the date of his death, no liability for Capital Gains Tax would subsequently arise in respect of the interest of his child living in England.
However, in the case of the second settlor, if for reasons mentioned earlier, he found he could no longer continue living abroad, and was perhaps forced out of the country by the conditions there but with no desire to come back here, he finds that by doing so he makes his child liable to Capital Gains Tax. The child has to have strong paternal affection to invite his parent back under those circumstances. No doubt he would, but it seems very hard that because of a Clause designed to catch tax evaders, a number of innocent parties are penalised.
I beg the Chief Secretary to look at this point. I know the problems of trying to amend the Bill further at this stage, but it could be done, and the Bill may well be recommitted because of other things which have occurred earlier this week. Under those circumstances, I am sure that it would be possible for the 1864 Chief Secretary, if he is seized of and sympathetic to the case deployed, to put this right. I beg of the Government not to try to prevent tax evasion by a few by penalising the many, sometimes extremely harshly.
I hope that the Chief Secretary will look at this again and when, and if, the Bill is recommitted, perhaps he will find some other form of wording which will deal with the fears expressed. We do appreciate the efforts made to meet the fears voiced during the Committee stage, but unfortunately they have given rise to another anomaly which could be disastrous.
§ Amendment agreed to.
§ 5.45 p.m.
Further Amendments made: Clause 38, in page 43, line 41, leave out
so resident or ordinarily resident" and insert "domiciled and either resident or ordinarily resident in the United Kingdom".
§ In page 44, line 1, after "is", insert "domiciled and either".
§ In page 44, line 2, leave out from "Kingdom" to "shall" in line 3 and insert "during any year of assessment".
In page 44, line 5, leave out from first "the" to "shall" in line 6 and insert:
amount, if any, on which the trustees would have been chargeable to capital gains tax under section 19(4) of this Act, if domiciled and either resident or ordinarily resident in the United Kingdom in that year of assessment, had been chargeable gains accruing to the beneficiary in that year of assessment; and for the purposes of this section any such amount".
§ In page 44, line 9, leave out from "reversion" to "and" in line 10.—[Mr. Diamond.]
§ Mr. Diamond
I beg to move Amendment No. 306, Clause 38, in page 44, line 11, leave out from "be" to end of line 12 and insert:according to the respective values of those interests, disregarding in the case of a defeasible interest the possibility of defeasance.(3) For the purposes of this section—
- (a) if in any of the three years ending with that in which the chargeable gain accrues a person has received a payment or payments out of the income of the settled property made in exercise of a discretion he shall be regarded, in relation to that chargeable gain, as having an interest in the settled property of a value equal to that of an annuity of a yearly amount equal to one-third of the total of the payments so received by him in the said three years, and
- (b) if a person receives at any time after the chargeable gain accrues a capital payment made out of the settled property in exercise of a discretion, being a payment which represents the chargeable gain in whole or part then, except so far as any part of the gain has been attributed under this section to some other person who is domiciled and resident or ordinarily resident in the United Kingdom, that person shall, if domiciled and resident or ordinarily resident in the United Kingdom, be treated as if the chargeable gain or as the case may be the part of the chargeable gain represented by the capital payment, had accrued to him at the time when he received the capital payment.(4) In the case of a settlement made before 6th April 1965—
and for the purposes of this subsection, property added to a settlement after the settlement is made shall be regarded as property under a separate settlement made at the time when the property is so added".
- (a) subsection (2) of this section shall not apply to a beneficiary whose interest is solely in the income of the settled property, and who cannot, by means of the exercise of any power of appointment or power of revocation or otherwise, obtain for himself, whether with or without the consent of any other person, any part of the capital represented by the settled property, and
- (b) payment of capital gains tax chargeable on a gain apportioned to a beneficiary in respect of an interest in reversion in any part of the capital represented by the settled property may be postponed until that person becomes absolutely entitled to that part of the settled property, or disposes of the whole or any part of his interest, unless he can, by any means described in paragraph (a) above, obtain for himself any of it at any earlier time,
§ Mr. Deputy-Speaker
We are taking with this Amendment the Opposition's Amendments to the Amendment in line 2, leave out "disregarding" and insert "taking into account".
In line 2 at end insert:Provided that the amount of capital gains tax payable by a beneficiary in respect of any year of assessment shall not exceed the amount of any payments received by him under the settlement in respect of that year of assessment.In line 21, leave out from "beneficiary" to "who" in line 22.
The fourth Amendment to the Amendment, in line 34, at end add:(5) In any case in which the amount of any capital gains tax payable by a beneficiary under a settlement in accordance with the provisions of this section is paid by the trustees of the settlement such amount shall not for 1866 the purposes of taxation be regarded as a payment to such beneficiary—is down for separate discussion and will be put to the House at the appropriate time, if the hon. Member for Gains-borough (Mr. Kimball) so wishes.
§ Mr. Kimball
I am obliged to you, Mr. Deputy-Speaker, for preserving the form as listed. This is a highly complicated subject and my three Amendments raise specific points which the right hon. Gentleman has moved formally.
§ Mr. Deputy-Speaker
The hon. Gentleman can speak to all four Amendments and, if necessary, at the end of the debate can put formally the last one.
§ Mr. Kimball
Only on Tuesday The Times, in its leading article, accused many politicians of always talking "gobbledygook". The more one looks at the Clause one has to face the fact that the right hon. Gentleman the Chief Secretary is now writing what is nothing more than "gobbledygook" into a very important Statute.
I appreciate that this is a rehash of the liability on foreign discretionary trusts to pay Capital Gains Tax. It is marginally better than the first draft, but I must honestly tell the Chief Secretary that it is only marginally better. We have heard from the right hon. Gentleman, who, despite his great expertise, seems to be a little bit at sea on this Clause, that he will look at the first part of the domicile question again. I hope that he will, because his reply was based entirely on residence and not domicile. Perhaps he will proceed in the same spirit and will look at the objections which are made to his Amendment as they are set out in my four Amendments to the Amendment.
The minimum requirement for any tax is that it should be justly spread among those who pay it and that the taxpayer must be able to understand what his liability is. It is grossly unfair to disregard the possibility, which the Government's Amendment does, that a beneficiary may be cut out at any possible moment. According to the Government's Amendment, Capital Gains Tax will be apportioned and people will have to pay it according to the respective values of their interest. How do we decide the respective values of people's interest? This is an 1867 actuarial task which it is not possible to perform. Suppose that a child aged 10 years is the beneficiary of a trust. We may well say that his interest in the trust will last 60 years and that it will be very considerable but the trustees may have power of appointment and may decide to cut the child out of the trust. The child will pay Capital Gains Tax, to start with, on a 60-year interest in the trust. He may then marry someone of whom the trustees do not approve and they may cut him out from benefit. What would be the position in those circumstances?
I know what the Chief Secretary's answer will be. He will say, "This will not be written in the Statute. All this will be administered by discussion and negotiation with the Inland Revenue". This is not a suitable answer. Neither in reply to the debate on this Clause in Committee nor during the negotiations on the Clause has the right hon. Gentleman answered concrete examples. He never told us how a taxpayer could be assessed on the example which I gave in Committee. How will the liability to Capital Gains Tax be assessed in the case of a person who makes a foreign discretionary settlement on his children? Suppose that in the first 15 years the property is worth £10,000, that after 10 years he sells for £15,000 and reinvests, and that after 15 years the total worth of the trust is £20,000. For the first 14 years while these negotiations are going on the income is paid to a non-resident beneficiary, but in the fifteenth year a grandchild domiciled in this country is sent to school in this country and the trustees decide to pay the school fees. They do not even pay the child: they pay the headmaster of the school out of the trust.
What will be the liability to Capital Gains Tax on the share of the trust which has been paid on the grandchild's behalf by the trustees? Will the Inland Revenue go to the headmaster and say, "You have had these school fees. Capital Gains Tax is due on them"? All the difficulties which we originally envisaged over the Clause are inherent in the Government's Amendment, and the rehash only seems to make them worse.
I accept that the Chief Secretary has made a concession on certain trusts 1868 created before 5th April, 1965. I am grateful to him for sticking to 5th April, 1965, and not taking any other bogus or unsatisfactory dates suggested in Committee. I admit that he has made a concession that Capital Gains Tax will not be charged if a person is solely an income beneficiary of a foreign-based trust. But this is not a true concession. How many trusts are there which do not give power to the trustee to advance capital for school fees, operations and various other forms of crises?
The more one looks at the Government's Amendment, the more one realises that it is not an improvement. Quite simply it merely makes the whole tax on foreign trusts a whim tax. It is a tax at the whim of the inspector of taxes. The Government cannot decide how they will legislate for the tax. They cannot lay down a formula which will make it perfectly clear what people's liability will be. They merely say that the burden of deciding how much tax a person shall pay will be negotiated between the person whom they think has incurred a liability and the Inland Revenue. This is not satisfactory.
In the spirit that I see behind this whim tax, I tabled the fourth Amendment to the proposed Amendment. If the Government are successful in persuading the trustees that they have to pay Capital Gains Tax on behalf of a beneficiary resident in this country, and if there is a series of transactions in the trust so that the liability arises nearly every year, what will happen? The trustees will pay Capital Gains Tax on behalf of a resident beneficiary and the Chief Secretary will then say, "This is also the person's income". May we have an assurance that Capital Gains Tax paid on behalf of trustees for resident beneficiaries will not also be taken into account in their liability for Income Tax and Surtax?
I am a little worried because the Chief Secretary mentioned the Bahamas earlier. I hope that I have not committed an impropriety. I should make it perfectly clear that certain members of my family have various kinds of trusts—I think that there was even one in my name—resident in the Bahamas and Bermuda. I am not to know whether I am a beneficiary. I may be cut out from the trust as a result of the failure of my efforts on this Clause.
§ Mr. Younger
I should like to ask the Chief Secretary three fairly simple questions. The first concerns the point referred to by my hon. Friend the Member for Gainsborough (Mr. Kimball) which arises from the words in the first line of the Government's Amendmentdisregarding in the case of a defeasible interest the possibility of defeasance".It could be most unfortunate to have clearly stated in the Bill the fact that this should be disregarded. I admit that it will be very difficult to make an exact assessment of how much an interest of this kind should be regarded. But it would be very wrong to state specifically that it should be disregarded for this reason. If there were an instruction in the Bill that it should be disregarded, supposing that the beneficiary was subject to defeasance after having paid a considerable amount in Capital Gains Tax and supposing that defeasance took place, it would preclude an adjustment being made.
It is, I think, common ground between both sides of the House that if this were to happen it would be entirely just that an adjustment should be made to put right what would be an injustice. Would the right hon. Gentleman think about this point again? I should have thought that there was nothing to lose in allowing the possibility of defeasance to be taken into account. That would not commit any particular form of action, but it would allow it to be taken into account, which would be fair.
The second point is this. It would not be fair for a beneficiary to have to pay Capital Gains Tax if he did not get any income from the trust in the given year. I think that the right hon. Gentleman agreed with that. He said that the tax would apply only if the beneficiary received some income from the trust. That is fair. Does it mean that if the beneficiary gets any income, however small, from the trust, he will be liable on any capital gains incurred, or that he is liable provided the amount gained in income by the beneficiary is equivalent to what he might have to pay in Capital Gains Tax? In other words, I hope that he is not going to lose on the transaction.
My third point concerns what the Chief Secretary called a reversionary 1870 interest. I appreciate that if a beneficiary has a reversionary interest—that is, a specific written-in right in the trust to some form of capital at a definite date—he has more than a purely income interest in the trust. What, however, would be the position if, as is often the case, the beneficiary has a contingent interest: in other words, if the trustees were to be enabled in certain circumstances to provide capital in an emergency to a beneficiary? As I see it, this could immediately make the beneficiary liable to Capital Gains Tax. There would be a possibility that he could get capital and interest from the trust. The emergency, however, in which the trustees might be enabled to help him by giving him capital from the trust might never occur. The fact that it could happen might render him liable for reasons of capital gains. I am sure that this is not what the Chief Secretary intends and I should like him to clarify the position of a beneficiary with a contingent interest.
§ Mr. J. Grimond (Orkney and Shetland)
I should like, first, to apologise to the Chief Secretary for not being present; I was in the Committee of Privileges. Secondly, I thank either the Financial Secretary or the Minister Without Portfolio for writing to me about this matter and meeting some of the points which I made in Committee. I know that some of these points have been gone over today, and I will not return to them, but I should like to follow the point which has been made on subsection (4) of the Government Amendment concerning settlements made before 6th April.
There might be what in this country would be called a discretionary trust. I understand that to avoid the charges arising under the Clause, a beneficiary would have to establish both that he had solely an interest in the settled property—
§ Mr. Grimond
—yes, an income interest in the property, and also that there was no means of the exercise of any power of appointment or revocation. I am advised that there are a great many trusts in which beneficiaries cannot be quite certain that in the case of a contingent interest they could establish that fact. There might be circumstances, possibly remote, in which trustees would 1871 be entitled to advance beneficiaries capital for a particular purpose. Some of these purposes have already been mentioned. The Clause might act unfairly in these circumstances. The beneficiaries could exercise little influence on the trustees, and the trust might have been made a long time ago. I do not, however, want to pursue that point further. I am grateful that capital losses as well as capital gains are to be taken into account and that the position of income beneficiaries is much more closely safeguarded.
I recognise all the arguments against tax evasion. I still think that the Government might have risked a little by excluding trusts set up before a certain date, perhaps going back to the time of the 1962 short-term Capital Gains Tax, but they have chosen not to do this. I am grateful for the concessions that they are making, but under the Amendment there are dangers that beneficiaries under existing trusts which were set up with no thought of tax evasion in mind might be caught in a way which I do not believe the Government intend.
§ Mr. Diamond
I gather from the various speeches that the Government's new Clause is generally welcome. I am bound to have regard to the Notice Paper in my interpretation of the feelings of right hon. and hon. Members about these matters, in the sense that had grave disquiet been felt about the methods by which the Government were proposing to deal with previous requests which have been made, Amendments would have been put down. I recognise that the time has not been long, but I hope that that is a reasonable way of looking at the matter.
I then go on to say that a number of questions have been addressed to me which, had I been counsel, would, no doubt, have been generously marked on the brief with regard to the amount of fee which was appropriate for considering questions of such abstruseness and with a complete lack of the relevant papers. It is quite correct, as has been said, that it is the duty of a Minister replying at the Box to stick closely to his brief on a matter of this kind; and when an hon. Member puts questions and does so clearly, but, perhaps, not using precisely the words which he would use if he had the opportunity to put them in writing 1872 and in full detail, it might be easy to mislead although one's intention is to help.
I am, therefore, sure that the House will agree with me that the best way of helping hon. Members who have detailed points of that kind is to ask them to be good enough to address to me in writing the questions which they have in mind, in as much detail as they care to do, and I will do my best to answer them fully and to say what the impact of the new provisions is. We have gone as far as we can in meeting all the points. We have fully understood all the representations which have been made. They have been considered carefully and the Amendments which my right hon. Friend the Chancellor has put down have met them to a large extent.
I now come to the Amendments in the name of the hon. Member for Gains-borough (Mr. Kimball), who said that we were discussing his fourth Amendment, in line 34 of my right hon. Friend's proposed Amendment, with his first three Amendments but that they would be subject to separate discussion if necessary. I do not know whether the hon. Member would like me, as I am in a position to do, to explain in full detail why the first three of his Amendments are not acceptable, when I tell him that I will be glad to accept the fourth. I see the hon. Member brightening considerably. That will make a considerable impact upon his thinking. I am not doing a deal with the hon. Member; I am considering the Amendments on merit.
The hon. Member's fourth Amendment is acceptable to the Government and we are grateful to him for having put it forward, even at this late stage. If this last Amendment is accepted, as I hope it will be, it may well have the result that trustees of overseas settlements look more sympathetically at the prospect of paying Capital Gains Tax assessed on beneficiaries, thus reducing the number of cases in which the tax is difficult or impossible to collect from the beneficiary. That is a sound reason and I very much welcome it.
I am sorry that I cannot recommend the House to accept the other three Amendments of the hon. Member. The first, in line 2, in effect proposes that in the case of an interest which is de-feasible, the possibility of defeasance 1873 should be taken into account in valuing that interest for the purpose of apportioning to the beneficiary a proportion of the gains made by the trust. The reason why this is not acceptable is that valuation implies market value, and no one would buy an interest if, either by reason of a contingency or by reason of a power of appointment in the hands of someone other than the beneficiary, that interest might be terminated at any point of time. The only possible basis on which to proceed is that the interest is to be valued without any regard to contingencies. The hon. Member was on this point, and I thought that he would offer me a simple and satisfactory solution, but he drew attention sympathetically to the difficulties without going as far as offering an alternative solution. I refer the hon. Member for Gainsborough to Section 33(3) of the Finance Act, 1954, which applies this same rule in relation to Estate Duty on certain life assurance policies.
The second Amendment to the Amendment is equally unacceptable. It would really do no more than provide an incentive to trustees to realise the maximum amount of gain in the year when the income or capital payments to the beneficiaries were at their lowest. We could have a wonderful switching arrangement as between beneficiaries and trustees under which they might have the money and not be liable to pay, or be liable to pay and not have the money. The net result of that would be that the beneficiary would be delighted and the Treasury extremely impecunious.
The third Amendment proposes that no beneficiary should be charged under Clause 38(2) unless he has access to the capital of the trust; but when one thinks about it one realises that such a beneficiary might well be interested in the capital of the trust and the gains on the property of the trust might be accumulating for his ultimate benefit. In other words, he might be in the position of the reversioner under the new subsection (4,b) who, if he cannot gain access immediately, is allowed to defer the tax on his proportion of the gains till his reversion vests or he disposes of it. He clearly ought not to be excluded from the scope of the charge. So I am afraid that that Amendment cannot be accepted.
1874 I can say that I am grateful to the hon. Gentleman for the thought that he has given to these matters. I am sorry that we cannot accept the first three of his Amendments to the proposed Amendment, but when the time comes I shall be happy to recommend the House to accept the fourth of his Amendments to the proposed Amendment.
§ Mr. John Hall
We are very grateful that the Government are accepting the fourth Amendment to the proposed Amendment. That is certainly a small step forward and a slight improvement. As I understand, the Chief Secretary found it difficult to reply to specific points put to him by my hon. Friend the Member for Gainsborough (Mr. Kimball). I would agree with him that if this case, with all its ramifications, had been put on the brief of learned counsel it would have commanded very high fees indeed. I should think it likely that in the days to come there will be many briefs for learned counsel trying to interpret this Clause.
However, I would have thought, this proposed Amendment and the Amendments down to it having been before the House for some time, the Chief Secretary would have been able to tell the House how it would work in specific cases if they were given to him with sufficient information. If this hypothetical case advanced by my hon. Friend the Member for Gainsborough was not in sufficient detail I would be very happy to detail it much more closely so that the Chief Secretary could have all the facts on which he could express an opinion, and if he would like to do so, I will give way to him now so that he can say whether he would like me to do so.
§ Mr. Diamond
By your leave, Mr. Deputy-Speaker, and that of the House, I was trying to make it quite clear to the hon. Gentleman that it would be a gross discourtesy to him and to the other hon. Members if I attempted to deal off the cuff with their questions on the Clause, questions to which they have given much thought, and that it would be more appropriate to give them careful consideration, and for me to seek advice on specific matters so as to give the right answers and give them in writing so that they might know exactly where they were.
§ Mr. John Hall
I accept that from the hon. Gentleman, and if, when he has got that information, and has given careful attention to these questions, having sought the advice of his advisers, he in consequence comes to the decision that there should, perhaps, be further amendment of the Clause, to cover the points which have been raised, that would be highly satisfactory; but the hon. Gentleman does not need to refer to his advisers to reply to the question I now wish to put to him.
Is it not a fact that the Clause, even as amended by the Government Amendment that we are now considering, means that there would be many cases where a beneficiary could be well liable for more tax than the amount he receives from the trust? Does it not also mean that if trustees are skilled in investment and invest the trust funds wisely, they can, by so doing, heavily penalise the life tenant of the trust by adding to his tax burden? Is that not the effect of this Clause, even as it is proposed by the Government to amend it? So does it not, in fact, provide a considerable injustice?
I am sure that the Chief Secretary is as well aware as anyone on this side of the House of the problems which are presented by the complications of the Clause. I feel confident that, when he has had time to consider again some of the representations made to him from this side of the House, and when he has gained further information, which will, no doubt, be given to him by my hon. Friend the Member for Gainsborough and others, and if he finds that, despite the Amendments which have so far been tabled, and which are designed to undo some of the harm which the Clause in its original form would certainly have done, and the harm it could still do, he will find ways and means of amending it still further, even if that requires recommittal of the Bill, which might have to be recommitted for other reasons.
I do not want to go into all the legal complexities of these Amendments or of the Clause because we deployed many of the arguments in Committee and they have been deployed again this afternoon, but I would hope that the hon. Gentleman, aware of the problems and of the complexities, will think the matter over again and find a way of making provision to lessen the burdens which may fall 1876 on quite innocent people because of the way the Clause may be implemented.
§ Mr. Diamond
By leave of the House, may I say that I have listened very carefully to what the hon. Gentleman has had to say. I do not think that the burden he is concerned with is a real problem at all. It is a burden which relates to a capital gain being realised. No gain, no burden. However, I will look very carefully—as the hon. Gentleman has asked me to do—at what he has said; I will consider the matter very carefully; but I am bound to repeat that we had a very full discussion in Committee, and all the points were made and they were fully considered, and the Amendments which we have put down go as far as the Government feel it right to go to meet the problem; I do not want to mislead hon. Members into believing that the researches and investigations I intend to make are likely to lead to any immediate alteration in the Bill. But I shall be very happy to look at the points which have been raised.
§ Mr. John Hall
The hon. Gentleman pointed out quite rightly that no burden arises till a capital gain arises. That is absolutely true, but is it not also true that if a capital gain does arise the tax to which the beneficiary could become liable as a result could fall on the beneficiary in a form which might exceed the total income he received from the trust? Would it not be so? Would it not mean that the beneficiary could be required to pay more in tax than he gets in income from the trust, and be penalised by the skilful investment policy carried out by the trustees?
§ Mr. Diamond
I repeat that I do not think that would happen. I do not think that that is a practical problem. The difficulty of having to meet tax in excess of the income available to the beneficiary has been fully taken care of. The hon. Gentleman was speaking of English trusts? I repeat that I think the problem has been taken care of. I shall be very glad to look into the matter fully and write to the hon. Gentleman.
§ Question, That the words proposed to be left out stand part of the Bill, put and negatived.
§ Question proposed, That the proposed words be there inserted in the Bill.1877
Amendment proposed to the proposed Amendment: At end add:
(5) In any case in which the amount of any capital gains tax payable by a beneficiary under a settlement in accordance with the provisions of this section is paid by the trustees of the settlement such amount shall not for the purposes of taxation be regarded as a payment to such beneficiary.—[Mr. Kimball.]
§ Question, That those words be there added to the proposed Amendment, put and agreed to.
§ Proposed words, as amended, inserted in the Bill.