§ 11.45 p.m.
§ Mr. Grimond
I beg to move Amendment No. 410, in page 43, line 11, after "settlement" to insert:made after the passing of this Act".I understand that with this Amendment we are taking Amendment No. 1348 308, in page 43, line 29, at the end to insert:(4) This section shall apply only in the case of settlements made after 6th April, 1965.Let me say at once that the object of both these Amendments is to limit this Clause to settlements made after these proposals were brought in, and that for my part I would be perfectly content to take 6th April instead of "after the passing of this Act".
This is a Clause which deals with nonresident trusts, and it has three features. First, the charge is to be levied not on a trustee, but the beneficiary. Secondly, as in the previous Clause, no losses are to be set off against gains. Thirdly, there is what seems to me the considerable difficulty in interpreting subsection (2), and I will come to that in due course.
I want to make two preliminary points. First, that this Committee should not authorise the Government to penalise the whole lot of perfectly legitimate transactions for the sake of catching some tax evaders. This seems to me a most important principle which we are in danger of losing sight of. Because there are some burglars, that is no reason for locking up everybody after a certain hour at night. Secondly, although it is justifiable to stop serious tax evasion, I do suggest we must act in such a way that, in changing the law, as we are doing, the people whose transactions we want to stop have some chance of so rearranging their affairs that they come within the new law. It seems to me that, as it stands, this Clause offends against both those principles.
Let me make it clear at once that I fully realise that from now onwards, of course, if the Government took no steps to levy some charge on non-resident trusts, this would leave a totally unacceptable loophole. Therefore, neither I, nor, I think, the sponsors of the other Amendment, are disputing that the Government have a right to legislate for the future against what could become a very easy method of tax evasion. What we are anxious about is trusts already in being. I do not know whether the Government can give us any idea—it would be interesting if they could—how much revenue might be lost if existing trusts were struck out altogether. I do not know whether they have any figures.
1349 I now come to try to explain to the Committee what may be the effect of this Clause if it is applied to existing trusts unamended. It imposes a charge to tax on capital gains of persons who may not receive capital gains and who may derive very little or no benefit from them if they are beneficiaries in this country of a trust wholly managed abroad. Capital gains realised by non-resident trustees are normally to be apportioned between those persons resident in the United Kingdom interested in the income of the trust and those interested in the capital.
As I said, it would seem that the latter part of subsection (2), which saysany such gain shall be apportioned in such manner as is just and reasonable",would be extremely difficult to interpret, especially as it goes on to say:as near as may be, in equal parts to those interested in income and to those interested in capital respectively.Persons resident in the United Kingdom who are entitled to income of a nonresident trust made by the settlor who was in residence in the United Kingdom when he made the settlement are to be treated as though they received half of any capital gain. That is the nomal procedure. No doubt, there may be an argument with the Inland Revenue, but that appears to be the normal procedure. As I say, no relief is to be given in respect of the settlement's capital losses.
Let us take a hypothetical case. Let us take a non-resident trust with a capital of £100,000. Let us suppose that the annual gross income is £4,000 a year and that in a hypothetical year it gains £11,000 on one transaction and loses £11,000 on another. For the purpose of this Clause it has made a gain of £11,000. A beneficiary of the settlement, entitled to the income of the trust, but having no interest in the capital, would be treated as though he had made a capital gain of £5,500, that is to say, half of £11,000. If he was a single person with no other income than the £4,000, he would pay about £1,800 in Income Tax and Surtax and he would pay tax on this notional long-term capital gain, which would come to £1,650 or thereabouts. In fact, his annual net income from the trust would be reduced to £547.
1350 If it was a short-term gain, as far as I can see, assuming those figures, he would lose money. He would have to find £1,784 in that year. I cannot believe that that would be considered fair. In fact a United Kingdom resident contingently interested in the capital of a non-resident settlement is to be treated as having made a gain of £5,500, even though he has received no benefit from that transaction. It seems to me that a nonresident trustee who is pursuing a successful investment policy, and certainly acting in the best interests of the remainder-men, might thereby have a highly deleterious effect on those with a life interest.
It may be asked, "Are there many such trusts? Would this often happen?" I am told that there are many such trusts. There are a lot of trusts in Ireland which will be affected by this, but one that I can quote particularly is an American trust which was set up by a British national in 1916. The assets of the trust are wholly American, and have been in America for generations. The object of the trust was to prevent the beneficiaries from frittering away the assets. In this case there was no question of transferring assets to America for the purpose of evading taxation. They were there. In fact, there was no question of evading British taxation at all. I am told that in America that type of trust is known as a spendthrift trust, and is set up simply to prevent beneficiaries from frittering away their inheritance or their assets.
The present beneficiaries of the trust are British, the trustee is an American corporation which regards it as its duty to increase and protect the capital. The point is that the Government are now to levy a Capital Gains Tax on the beneficiaries. But there is nothing to force the trustees to realise the assets and make the money available to enable the beneficiaries to pay the tax. Therefore, the beneficiaries may well be forced to pay this tax out of other assets which they hold, or they will be unable to pay it at all. I cannot believe that this is fair, equitable, or, indeed, practicable.
Section 412 of the Income Tax Act, 1952, has provisions against the remission of assets overseas for the purpose of tax avoidance, but it makes it clear that it is to be invoked only in cases in which the object is clearly tax avoidance. As a 1351 layman, I submit that that section, or something similar, could well have covered any cases which the Government wanted to cover.
I therefore recommend that the Government should either accept the Amendment to remove the retrospection from the Clause, and thereby prevent it from applying to existing trusts—as I have said the incidence on existing trusts would be almost impossible to enforce, and if it were enforced it would be extremely unfair on beneficiaries—or they should take the matter back and re-examine it, and let us know their proposals on Report. I do not deny that for the future something must be done to prevent people putting money into an overseas trust. The Government may be able to find a better way of dealing with this problem, but as it stands the Clause needs amendment.
§ Mr. Marcus Kimball (Gainsborough)
I sincerely trust that the Government will re-examine the Clause, because it has the most extraordinary effect of imposing liability for tax on people who have absolutely no control of the funds to which the gain may apply. In fact, they may not even know that the funds exist. They may be in the position of having no resources with which to pay the liability. The whole Clause brings about a drastic change in the whole principle of taxation of trusts, and particularly foreign-based trusts. It demands a radical change in the way in which these trusts are created. Powers will have to be given—and there are none in the Bill—to trustees to pay taxes which would normally be legally unenforceable in the jurisdiction of the country in which the foreign trust is based.
When these existing trusts were formed nobody could have had any idea that such an unfair and extraordinary tax could ever have been envisaged. The Clause represents the worst kind of imposition of retrospective legislation on people who will not be able to pay this tax.
As I understand, it goes against one of the great international principles, that one country cannot sue for taxation in another country. The Clause attempts to get round this difficulty by saying, "If we cannot enforce the capital gain in the country where the trust is resident we 1352 shall nail the beneficiary who is unfortunate enough to be resident in the United Kingdom". This is forcing Peter to pay Paul's taxes. Peter is the wretched beneficiary in this country, who is paying tax on capital gains which would be liable to be paid by Paul, the foreign trustee who is non-resident here.
Most of us regard the law as an ass in many respects, and this Clause and the Chancellor's action make the law even more contemptible. Many of us have received advice that the Clause as drafted is quite unenforceable. The right hon. Member for Orkney and Shetland (Mr. Grimond) pointed out that trustees—particularly those resident in another country—might be committing a breach of trust if they were to pay this tax on behalf of the trust. The Clause represents the worst kind of mediaeval torture, in that we torture A in order to get money out of B. That is what the Chancellor is trying to do.
It is administratively impossible. It will not be paid by any well-managed or well-advised trust. The Chancellor will be aware that in a discretionary trust the trustees have absolute power to whom they elect to pay out the money. The amazing thing is that they do not even have to inform a person that he is a beneficiary under a discretionary trust. A person could run into a liability for tax for which he did not even know he was liable. A beneficiary might not even know that he was liable to benefit under a trust, and would certainly not be in a position to find out whether a foreign-based trust had made any capital gains.
The fact that the Chancellor is worried about the Clause is proved by its drafting, and the use of the wordsshall be apportioned in such manner as is just and reasonable …This certainly lends itself to very long arguments about what is just and reasonable. I would give the Chancellor a simple example. There might be a discretionary trust with its first discretion towards the settlor's widow, aged 85, then three children aged 50, five grandchildren in their twenties, one great grandchild in its first year, and a non-resident foreign charity. Two of the children in their twenties are not even resident in this country. Who is to pay their share of the Capital Gains Tax? 1353 Will the widow have to pay it? She may have no resources, and probably cannot afford to pay it.
Suppose the trustees decide not to exercise their discretion in favour of two other children resident in the United Kingdom because they have plenty of money from other resources. Are those children, with no benefit from the trust, to be responsible for the capital gains from the whole of the trust, although they get no provision from it? Or will the Chancellor wait for the great grandchild of one year to come of age and put the whole tax burden on him? I suspect so.
The Chancellor must know that there are some foxes which one cannot hunt: they do not smell strong enough. He will get no joy from hunting this one. He has no hope of catching it, and he would do far better to withdraw the Clause. Throughout the Bill we have suffered from the Chancellor's approach, and a complete misconception of all trusts and, in particular, of discretionary trusts. They have nothing to do with tax avoidance. They are merely a means of trying to foresee how money can best be used in the future. The settlor gives to his trustees the complete discretion to look after his fortune in the light of present circumstances to the best advantage of his widow and children. Who can possibly tell what the relationship in a family will be in the next generation? Who can possibly provide for it?
It is possible for the Chancellor himself to be named as a beneficiary under a discretionary trust. He would not know it. He cannot come to the Box and deny it, because he would not know it. It would be nobody's duty to tell him. Somebody might have thought, with this iniquitous tax in mind, of naming the Chancellor as beneficiary, but the trustees would not elect to pay him anything out of the trust, even if he made a charge for tax on them—[An HON. MEMBER: "Why not?"]. Because they would not agree that it was to his advantage. The Chancellor could become liable for tax under Clause 38 of the Bill, but he would have no assets from which to pay it.
1354 I hope that the right hon. Gentleman is aware that there is no provision in our law under which somebody who is fortunate or unfortunate enough to be the likely beneficiary under a discretionary trust can renounce his fortune. I hope that, in view of the remarks made on this highly unsatisfactory Clause, he will tell us that he will not go on with this, because it is not a starter.
§ Sir Eric Fletcher
I think that it is obvious from the speech of the hon. Member for Gainsborough (Mr. Kimball) that, unless something is done, there are obvious ways in which liability for Capital Gains Tax can be avoided by residents transferring their assets abroad and putting them in the hands of non-resident trustees. There is obviously a case for doing something.
I am impressed by what the right hon. Member for Orkney and Shetland (Mr. Grimond) said. He enunciated a principle with which, I think, we would all agree—that the Treasury, in taking legitimate steps to prevent tax avoidance, should, at the same time, try to avoid penalising legitimate transactions. Consistent with that principle, we must examine the Clause and see whether it can be modified to meet some of the criticisms made by the right hon. Gentleman.
In the first place, the right hon. Gentleman criticised the Clause on the ground, primarily, that, whereas it was right that it should apply to all future non-resident trusts, it was objectionable that it should apply to existing trusts, and that, in that sense, it smacked of retrospective legislation. We all have the same views about retrospective legislation; indeed, before now I have attacked it in the House. The principle to which we subscribe is that a case has to be made out to justify it.
The right hon. Member mentioned the trust created in America in 1916. My view is that it might be right to introduce a modification to the Clause to ensure that legitimate trusts created long before there was any thought of introducing a capital gains tax in this country are not caught by it. At the same time, it would not be right to accept his Amendment applying the tax only to trusts created after the passing of the Bill.
1355 Ever since my right hon. Friend the Chancellor made his Budget statement on 11th November, 1964, if not earlier, it was well known that a Capital Gains tax was to be introduced into our fiscal arrangements. From that date at least the opportunity, and, no doubt, the temptation, presented itself to those who were desirous of avoiding liability to Capital Gains Tax and who had the wealth and the means with which to do it. It was open to them to try to avoid liability to the tax by at once transfering their assets abroad to a nominally non-resident trust of which they or members of their family were beneficiary residents in this country and liable to the tax.
Therefore, although there may be a case for meeting the right hon. Gentleman in making the Clause not applicable to very old trusts, I would like to consider whether the date of the operation should be some appropriate date other than the one he has proposed. It may even be before 11th November, 1964, because in a sense it has been clear since the short-term Capital Gains Tax was introduced in April, 1962, that there were advantages to be gained by this type of device. There is a case for considering what would be the appropriate date in order not to penalise legitimate transactions, but to catch transactions designed to circumvent the law as it was or was expected to be.
The right hon. Gentleman also asked whether I could give any estimate of the cost involved in making a concession of the kind suggested. I am sorry to have to tell the Committee that it is quite impossible to forecast or to give an estimate of the cost involved.
The right hon. Gentleman and the hon. Member for Gainsborough both made a point which I would like to look into between now and Report—to see whether, in view of the illustrations which they gave—which I do not accept as typical, but which, nevertheless, may be genuine—there may be a case for allowing losses to be set off against capital gains.
The right hon. Member for Orkney and Shetland stressed the importance of the interpretation of the second part of subsection (2). Admittedly, it is expressed in language which is necessarily somewhat 1356 vague. In a Clause of this kind we are working on the assumption that the Clause will operate in respect of future trusts, whether straightforward trusts with a life interest, with a series of life interests, discretionary, or whatever it may be in the infinite variety of trusts. There will be circumstances in which apportionment of tax liability will be necessary. It may be apportionment between the owner of a life interest and the remainder, or between persons to whom discretion to apply the income can operate in the hands of the trustees.
Therefore, the only way in which one can attempt to secure justice for all concerned is to provide that the apportionment shall be in such a manner as is just and reasonable between persons having an interest in the settled property. It is impossible in a Clause of this kind to go further than that. That ensures equity and justice between all concerned. As the Committee will realise, in the event of any dispute, it would ultimately be for the Commissioners of Inland Revenue to decide what was just and reasonable in the circumstances.
I hope that with that undertaking to consider what modifications are required, the right hon. Gentleman will be prepared to withdraw his Amendment.
§ Sir Hugh Lucas-Tooth (Hendon, South)
On a point of order. The Minister has replied in terms somewhat wider than the Amendment. I have some issues which I intended to raise on the Question, "That the Clause stand part of the Bill". I do not know, Mr. Steele, whether you would prefer the debate to be widened, or for me to wait until that Motion.
§ The Temporary Chairman (Mr. Thomas Steele)
I think that we would be better to leave the issue until we get to it. Mr. Heath.
§ The Temporary Chairman
Order. I thought that the right hon. Gentleman was rising to a point of order. I called the right hon. Member for Bexley (Mr. Heath).
§ Mr. Heath
I am sure that the Minister without Portfolio is right to say 1357 that he will take back the Clause and look at it again. I hope that he will consider the whole Clause. He has referred to a number of points which arise on the next Amendment, as my hon. Friend the Member for Hendon, South (Sir H. Lucas-Tooth) said, dealing with allowing for losses, and so on. I am very glad that the Chancellor of the Exchequer has heard this short but important debate, because it must have brought home to him in a way which nothing else could have done the extraordinary lengths to which, knowingly or unknowingly, he has gone in the Bill, the extraordinary viciousness of the consequences of the lengths to which he has gone in the Bill, to try to block a possible loophole even against a few people, while, at the same time, being prepared to damage other people through no fault of their own.
We have heard from the Leader of the Liberal Party that the Chancellor has been prepared to go to the lengths of pursuing a course which is completely unenforceable in international law, as I believe, and certainly not enforceable in practice. If he tried to enforce it, it could cause hardship in many ways to people who are in no way blameworthy.
The Government's willingness to force an issue to extraordinary lengths in order to try to deal with a few people who might get through the net, regardless of the damage to other people in the process, has been characteristic of a good deal of this legislation and that is what has made the Committee angrier and angrier. I do not know what the explanation is. I do not believe that the Chancellor himself is the sort of person who wants to do this, or that the Minister without Portfolio is. I do not know where the momentum comes from for pursuing this course throughout this legislation, and I do not presume to suggest where, but it constantly strikes many of us that behind the Bill there is this force which is prepared to abandon any normal sense of justice in the attempt to catch a few people.
It is not enough for the Minister without Portfolio to say that we are all agreed about retrospection and then to say that he will consider the date because it strikes him that some people from 1962 onwards may have been trying to evade what the 1358 Government now intend—a Labour Government, elected in 1964, in a Finance Bill in 1965. It is not good enough to say that we are all against retrospection and in the next breath to say that we might have to do it from 1962 just because people with a genuine case might have got mixed up with a few who are trying to avoid tax. It is not a good enough attitude to take.
Hon. Members on the Government side say, "Of course, we are against retrospection and we are in favour of savings." But their actions belie their words. I feel deeply about the attitude, which has been demonstrated during the passage of this legislation. Therefore, I hope that the Minister without Portfolio will take back the whole of the Clause and not try to carry the issue to an unenforceable point or to a point only enforceable by causing immense hardship to individuals.
§ 12.15 a.m.
§ The Chancellor of the Exchequer (Mr. James Callaghan)
Whatever the view one may take about any form of taxation, whether capital gains or any other, a balance has to be struck between a genuine case, such as that raised by the hon. Member for Gainsborough (Mr. Kimball), and the tax avoider. The tax avoider is thriving in Britain and has done so for many years. The practice is growing and it must be known to every hon. Member on the Opposition side who has been a member of a Government that the growth of systematic tax avoidance has reached scandalous proportions.
I would invite the help of right hon. and hon. Gentlemen opposite in fixing a balance between catching the tax avoider, who is arranging his affairs in such a way that he is avoiding what other people are genuinely paying, and the ordinary taxpayers. I hope that the right hon. Member for Bexley (Mr. Heath) will give some consideration to that. I think my hon. Friend showed clearly that he wants to draw the line between the two cases. He wanted to ensure that the genuine trust—the 1916 trust—set up in this way, would not be caught by this kind of legislation.
But I warn the Committee that it is not merely on capital gains but on all our tax arrangements that we shall make a mockery, or allow the avoiders to make 1359 a mockery, of the ordinary taxpayers unless we act. When ordinary taxpayers feel that action is not being taken against those who take this way out, we shall be on the way down in this country.
Our attitude is to draw a distinct balance between the two cases, That is why, during our consideration of the Bill, we have been reasonable and flexible in the answers that have been given.
I assure the Committee that we shall go on examining the Bill in this way. I heard the case that was made here and I thought that there was a point here which I would try to meet. I hope that the right hon. Member for Bexley will remember that there is a genuine problem of the tax avoider who is escaping his liabilities and that this is a deeply felt grievance amongst those who know what is going on. However, we shall consider seriously the points that have been raised and see what Amendments ought to be introduced.
§ Sir D. Glover
I am sure that the Chancellor of the Exchequer is sincere in his desire to catch tax avoiders. I think I can say that there is no one on this side who does not want to support him on this. But the Chancellor, because he has got this bee in his bonnet, is going far beyond the bounds of reasonableness.
As I said at an early hour the other morning—and I think that this sums up the Budget—it is the same as in the case of the Christian Church, which for 2,000 years has been trying to stop adultery. Every Chancellor since the war has tried to stop tax avoidance. In the same context, the Chancellor is saying, "I have tried to overcome the difficulty. Now I have a brilliant idea. I will do away with marriage". He is saying, in effect, that while 90 per cent. of this is legitimate, because 10 per cent. of it is not he will do away with the whole lot. He has done exactly the same thing with expenses and the rest.
The right hon. Gentleman knows me well enough to know that when I say that I am with him in his desire to do away with tax avoidance, I mean that I support that genuine desire. However, he is going so far now that, in an effort to stop up a loophole for a mouse, he will kill all the remaining animals in the zoo.
§ Mr. Callaghan
The hon. Gentleman has got his percentages the wrong way round. Ten per cent. are genuine and 90 per cent. are not.
§ Sir D. Glover
It is obvious that the Chancellor is not being advised by the officials of the Treasury, but by the "importations". I am not prepared to accept, and the right hon. Gentleman cannot prove, that the great mass of the people are dishonest.
§ Sir D. Glover
That is what the right hon. Gentleman is saying. Let it go out from the Committee that the Chancellor is saying that 90 per cent. of the people are dishonest.
§ The Temporary Chairman
Order. Hon. Members would be well advised to keep to the Amendment under discussion.
§ Mr. Callaghan
I do not know whether the hon. Gentleman is trying to misrepresent me. I am referring to the Clause. That is all. We are discussing the Clause. If the hon. Gentleman is discussing something else, he will know whether or not he is in order. I am referring to this type of trust. I thought that that was clear.
§ Sir D. Glover
Even so, when the right hon. Gentleman talks about 90 per cent. of the people trying to avoid tax he is completely off the beam and he knows it perfectly well.
§ Mr. Grimond
I do not wish to delay the Committee, but I must comment on the speech of the Minister Without Portfolio. According to the hon. Gentleman, the Government do not know how big the mischief with which we are here concerned may be. Therefore, we may be hitting a whole range of legitimate transactions for a mischief which does not even exist. I cannot accept the view that, because the Government gave a general warning in November that tax avoidance would be legislated against, they should now introduce retrospective legislation on specific points.
I understood from the remarks of the Minister and the Chancellor that they do not deny that there are a number of genuine cases which it would be wholly unfair to catch by the process of the 1361 Clause. I also understand that the Committee was given a specific undertaking that on Report the Government will introduce an Amendment designed to put the obvious anomalies of the Clause right. On that understanding, I beg to ask leave to withdraw the Amendment.
§ Amendment, by leave, withdrawn.
§ Mr. John Hall
I beg to move Amendment No. 247, in page 43, line 20. to leave out from "him" to the end of line 27 and to insert:if and to the extent that a beneficiary under such a settlement has the immediate right to call on the trustees to transfer to him the gain which had accrued and any such gain shall be apportioned in such manner as is just and reasonable between the beneficiaries under the settlement".
§ The Temporary Chairman
I suggest that it would be convenient for the Committee to discuss, at the same time, Amendment No. 307, in page 43, leave out lines 23 to 27 and insert:in the capital of the settled property; provided that except where a person has the immediate right to call on the trustees of the settlement for the transfer of the chargeable gain which has accrued the payment of the tax assessed under this subsection shall be deferred until such time as the right to the assets representing the chargeable gain or the proportionate part thereof shall have vested in possession in the person or persons assessed hereunder".and Amendment No. 248, in line 28, leave out subsection (3) and insert:(3) An apportioned part of any capital loss (apportioned in like as a chargeable gain hereunder) may. if such a capital loss would have been taken into account if it had accrued to trustees of a settlement resident and ordinarily resident in the United Kingdom be set off against an apportioned part of the chargeable gain treated as accruing to a beneficiary hereunder.
§ Mr. Hall
In this Amendment we have asked that a beneficiary resident in the United Kingdom who benefits under the terms of the non-resident trust shall only be liable to pay Capital Gains Tax if such beneficiary has the immediate right to request the trustees to transfer to him any capital gains which have accrued. In the other Amendment we have tried to ensure that it is possible to offset losses. It is extraordinary that I should have to move Amendments designed to prevent a person paying tax on something they have not received and may 1362 never receive, but this is an extraordinary Clause.
I cannot help but comment on the interesting possibility mentioned by my hon. Friend the Member for Gains-borough (Mr. Kimball), who said, in describing discretionary trusts, that it might well be that the Chancellor himself might be a beneficiary under a trust without knowing about it. It is nice to think that on a 10-year valuation the Chancellor might be presented with an assessment for his proportion of the capital gains accruing on that particular trust. One might perhaps commend the idea to those trustees who have the power to add beneficiaries under existing trusts. It might produce quite a sizeable bill for the Chancellor if this Clause remains unaltered.
One problem is how to value these trusts. In many cases non-resident settlements will hold foreign assets and it is difficult and sometimes very costly to value those assets. It will be a cost to the beneficiary because in many cases the trustees will not have the power to pay expenses of that kind. Examples have been given if losses are not allowed. A beneficiary may benefit under two trusts. In one there may be a capital gain and in the other a capital loss. In one case he would have to pay his share of the tax on the capital gains and in the other he would have to offset that loss and, therefore, suffer very considerable hardship in consequence.
My hon. Friend the Member for Gains-borough suggested this was a form of torture, torturing A to make B pay. It is certainly producing a sort of fiscal thumbscrew in the hope that the anguished screams of the person to whom the thumbscrews are to be applied will force the trustees of a settlement to ante-pay. What happens if the trustees are prevented by the conditions of their trust from ante-ing up I do not know. Presumably, the anguished screams will go unanswered.
I cannot believe that whoever drafted this Clause had it in mind to impose the kind of injustice and hardship about which we have spoken. I have a feeling that because of the haste and speed with which the Bill was drafted a lot of Clauses have been ill-drafted and a number of things have got into the Bill which should never have got in at all. I suggest 1363 that this Clause should be taken back in its entirety and drafted again so as to prevent the kind of injustice to which attention has been drawn.
I am sure that the Minister is thoroughly seized of this problem. He showed this in the sympathetic answer he gave to the previous Amendment. He understands the problems involved and I confidently anticipate that for the Report stage he will be drafting Amendments which will give effect to the various Amendments tabled by the right hon. Gentleman the Member for Orkney and Shetland (Mr. Grimond).
§ 12.30 a.m.
§ Sir Eric Fletcher
I shall not attempt to reply to the more provocative parts of the speech of the hon. Member for Wycombe (Mr. John Hall), nor will I attempt to repeat what was said earlier, when a good many of the points canvassed by these Amendments were fully discussed and disposed of, but there are two matters that should be made clear.
First, Amendment No. 247 is in its terms completely unacceptable, because it is, in effect, a wrecking Amendment. It proposes that the Clause should not operate unless a beneficiary… has the immediate right to call on the trustees to transfer to him the gain which has accrued…The remaining words are unnecessary.
The Committee will realise that in the case of an ordinary settlement—and, I should have thought, in the case of most settlements—a beneficiary does not have an immediate right to call on the trustees for a transfer. In the case of a discretionary trust no beneficiary has any such right—certainly not an immediate right. If, on the other hand, there is a trust in which a beneficiary has an immediate right to call for the whole of the assets, and if that beneficiary is resident in the United Kingdom and has set up a trust which technically is non-resident, it is not unreasonable that the Clause should operate to prevent what would be an obvious case of tax avoidance.
I do not think that even if the right hon. Gentleman the Member for Bexley (Mr. Heath) now thinks that there is anything particularly vicious in trying to prevent tax avoidance of that kind—
§ Sir Eric Fletcher
I was saying that, in so far as this Clause is aimed at preventing tax avoidance, acceptance of this Amendment would make nonsense of the Clause. It would make it nugatory. It is a wrecking Amendment. It would prevent the legitimate object, to which the right hon. Gentleman now subscribes, of trying to prevent tax avoidance.
The hon. Gentleman's second point was in substance, the effect of Amendment No. 248, which seeks to provide that an apportioned part of a capital loss should be brought into account. I have earlier, in answer to the right hon. Member for Orkney and Shetland (Mr. Grimond) and the hon. Member for Gainsborough (Mr. Kimball), given an undertaking that we will consider how far losses should be brought into account, but I think that, for the record, I should add a word about the effect, as we understand it, of subsection (3).
It has been suggested that subsection (3) could be interpreted so as to have the effect that in any year gains accruing to the trustees are to be apportioned to the United Kingdom beneficiaries, but that any losses accruing in the same year are not to be so apportioned. This is not the intent of the Clause, and if there is doubt about it we will certainly see what changes are required. The intention of the Clause, and the effect which it is interpreted by the Government as having, is that only the net gains of the year would be apportioned to beneficiaries; that is to say, gains of the year after deducting losses of the same year. If there is any doubt about the question whether the words of the Clause give effect to that intention, I will certainly confirm the undertaking and table an appropriate Amendment on Report.
§ Mr. John Hall
The Minister without Portfolio said that Amendment No. 247 made nonsense of the Clause. I cannot see how it could. The Clause is nonsense to start with, and I cannot see how one could make a greater nonsense of it than it is already.
The Minister was forthcoming about references to the losses, and has given 1365 an interpretation of subsection (3) which I do not think would be understood by most people reading the subsection. If his present interpretation of the Clause is that it should only be the net gains which are to be chargeable, I think we welcome his intention to make this much clearer, clear beyond all doubt, in which case, presumably, we shall have the appropriate Amendment on Report.
I do not think that we want to press the Amendment. I am sure that the Minister realises that there is a great deal of feeling about it and that a great deal of injustice is created by the Clause. We would all be at one with him in trying to catch the tax avoider. But it is no good treating him as if he were a motorist in the following circumstances. If one knows that on a certain stretch of road motorists habitually exceed the speed limit, one does not automatically fine all motorists using the road on the ground that one day they will exceed the speed limit. But that is what is being done here. Because someone may avoid the tax, the Government are penalising all who set up trusts for legitimate purposes.
§ Mr. Cole
May I put a question to my hon. Friend before he seeks to withdraw the Amendment? Since normally Capital Gains Tax will be paid by the beneficiary of the capital gain, why is it said to be tax avoidance if the beneficiary paying the Capital Gains Tax seeks to have past of the capital gain made by the trust?
§ Mr. Hall
I find it a little difficult to follow that, I must confess. Perhaps the Minister without Portfolio may be able to answer that point put so cogently by my hon. Friend.
In view of the reply given by the Minister and the assurance that the whole Clause will be looked at again, and that it will be amended in such a way as to do justice where justice is needed, I beg to ask leave to withdraw the Amendment.
§ Amendment, by leave, withdrawn.
§ Question proposed, That the Clause stand part of the Bill.
§ Sir H. Lucas-Tooth
I wish to say something about provisions of the Clause which have not yet been referred to. The 1366 Clause applies, and applies only, while the settlor—that is, the person who makes the trust—is resident in the United Kingdom or if he was resident at the time that he made the trust.
As regards the alternative, the position is clear and no difficulty arises. Where a person resident here makes a trust, he is obviously the sort of person who would have to be dealt with by a Clause such as this, if there has to be a Clause of this kind at all. But as regards the settlor who is caught only while he is in the United Kingdom, it seems that difficulties are bound to arise. A great many trusts are made by people overseas. The Government obviously have it in mind to avoid the case of what I might describe as the genuine foreigner making a trust on people who may be resident here. An obvious case is the American who makes a trust in favour of his daughter who is married to an Englishman. I imagine that the Government would not for a moment seek to catch that sort of trust. It would create absolutely impossible difficulties.
But many trusts are made by British subjects when they are overseas. Many British subjects go overseas to earn their livelihood and have to deal with their affairs while they are there. One gets, for example, the case of a serving soldier who may spend considerable periods overseas and considerable periods in this country. As I understand subsection (1), the position will be that where such a person makes a settlement the charge will fall or not fall according to whether the individual is overseas or in this country.
This seems to me to give rise to quite impossible difficulties. In many cases, the beneficiary will not even know if he is to be chargeable and he will meet with more difficulty in trying to find out. Under the second subsection of this Clause, a beneficiary is chargeable if he is resident at the time when the charge accrues to the trustees.
I consider that those words are quite intelligent, but it occurs to me that they will allow any beneficiary the widest of loopholes merely by going overseas if he knows that the charge is about to fall. He need only go overseas for a few months in the case of a substantial charge and, while I do not at this time wish to point out loopholes for the Government 1367 to close, this Clause is so full of loopholes and anomalies that I do not think it will even work.
I hope that the Minister without Portfolio will look at the whole of the provisions of this Clause, and not only the specific point which I have raised, to discover whether it cannot be simplified. If in so doing, there is a simplification of this charge, so much the better.
§ Sir Eric Fletcher
There was an inherent contradiction in the hon. Baronet's speech which was unusual for him. In so far as he suggests that the provisions of the Clause are not watertight and that an ingenious person might circumvent them, I agree with him; but then he says that we should tighten them up to make that impossible. That, I thought, was a contradiction of the first part of his argument. However much we try to improve the language of this Clause there may still be cases where, by devious ingenuity or unintentionally, it will not operate satisfactorily.
The simple object of the Clause is to deal with those individuals who, because of their ordinary residence in the United Kingdom, would be subject to capital gains tax if they did not make a trust to try to circumvent the law by settling property on themselves or on a relative. Since the trust would be ordinarily resident in this country, that must be the test so far as settlement is concerned. Admittedly, there may be difficult cases of, for example, a British subject resident overseas who makes a settlement which he is perfectly entitled to do.
There may be cases where the beneficiary is resident in the United Kingdom and if they are subject to tax in respect of property held in their own right without the intervention of a trust, then it is not unreasonable that they should accept the same liability to capital gains tax. Broadly speaking, there is justice in the way in which the Clause places liability to capital gainst tax on the beneficiaries as if they were ordinary persons of property making a capital gain without the intervention of a trust.
However, in view of what the hon. Baronet has said, I will undertake to look at this matter again to see if we can make improvements designed to tighten up the legitimate aim of trying to stop 1368 tax avoidance and also to meet the objections which have been put to the Committee by the right hon. Member for Orkney and Shetland (Mr. Grimond).
§ 12.45 a.m.
Mr. Geoffrey Wilson
It had not been my intention to speak on the Clause, but I shall make one observation in view of remarks made about some Amendments. I gather that it is the view of right hon. and hon. Gentlemen opposite that they had to reject various Amendments on the ground that they would increase tax avoidance. The Chancellor of the Exchequer observed that tax avoidance was increasing and had been increasing for some years. It seems to be taken for granted by right hon. and hon. Gentlemen opposite, and particularly those on the Front Bench, that this is due to some increasing defect in human nature.
If tax avoidance is increasing, is it not possible that the reason is that respectable and honest citizens are dissatisfied with the form of taxation to which they are subjected and that, suffering from a sense of injustice, they seek to avoid it? If I am right in the proposition, it means that we must look thoroughly at some of these proposals for taxation, because evasion of taxation which people feel to be unjustified taxation is a serious matter which ought to be seriously considered.
§ Question put and agreed to.
§ Clause ordered to stand part of the Bill.