HC Deb 22 June 1966 vol 730 cc759-71
The Solicitor-General (Sir Dingle Foot)

I beg to move Amendment No. 316, in page 43, line 19, at the end to insert: (2A) If immediately before the death of the deceased a number of persons were, as beneficiaries under a discretionary trust, together entitled to an interest in the property limited to cease on the death and the deceased was then one of those persons, or at some earlier time had been a beneficiary under that discretionary trust, then, in determining the questions in subsection (1) above as regards that interest, any other interest in the property which, whether as arising from the same trusts or otherwise, belongs to those who immediately before the death were the beneficiaries under the discretionary trust shall be treated as being held by persons other than those beneficiaries, and other than the deceased. I propose, with your permission, Sir Eric, and that of the Committee, to take with this Amendment, Amendment No. 317, as they go together.

I can propose this Amendment in a few words, but to make it in some degree more comprehensible may I refer to the reasons for the Clause to which it is an Amendment. This Clause was foreshadowed by the Chancellor in his Budget statement. He then made it clear that it was proposed to close a gap in the law of Estate Duty which had been revealed by the House of Lords' decision in the case of Ralli Brothers v. Commissioners of Inland Revenue. I do not think that the Chancellor's announcement or this Clause has come as a surprise to anyone familiar with Revenue legislation.

The House of Lords decision, which reversed the decision of the Court of Appeal in the previous October, was delivered on 15th December last. I will say a word about its effect?

Under Section 1 of the 1894 Act—the Act where Estate Duty began—a duty is imposed on all property, real or personal, settled or not settled, which passes on the death of any person. Under Section 2(1)(b), the property which passes includes property in which the deceased or any other person had an interest arising on the death of the deceased, to the extent to which the benefit accrues or arises by the cesser of such interest". Where property is settled on a tenant for life, Estate Duty becomes payable when the tenant dies because the property then passes to the reversioner. In the Ralli case, the reversioner assigned the income of the reversionary capital to the life tenant until a fixed date to be expected after her death, that is, some years ahead. In fact, she was certain to have died before that date was reached. Following her death, therefore, some years before the date fixed, the income continued to be paid to her estate.

The House of Lords held, in effect, that the interest did not cease on her death and that the beneficial ownership of the settled fund remained the same. In other words, the property had not changed hands and there was no liability to Estate Duty.

As the Committee will appreciate, this opens up an enormous prospect of tax avoidance, and it is for that reason that this Clause has been included in the Bill. As drafted, subsection (2) deals with ordinary trusts, but by the Amendment it is proposed to make the same provision for discretionary trusts. The Committee will note that a discretionary trust is defined in the new subsection (5) proposed in Amendment No. 320 as including a trust under which the disposition of any of the trust income is at the discretion of the trustees or of any other person". In order to avoid transgressing the rule against perpetuities, there has to be some provision in a discretionary trust for the ending of the trust. There is nothing at present in the law to prevent the employment of what I call the Ralli device, which I have described and which was held to be lawful by the House of Lords, in a discretionary trust: that is to say, the settlement may be expressed to continue until the last beneficiary dies or until a much later date. It is necessary, therefore, here to deal with the discretionary trust in the same way as the ordinary trust, and these Amendments are proposed for that purpose.

Mrs. Margaret Thatcher (Finchley)

The Solicitor-General has given us a detailed account of what is known as the grafting operation, and I understand that the purpose of this set of Amendments is to cure the law as it was shown to be in In re Holmden's Settlement Trusts, the judgment in which was published in The Times on 13th May last, against which the Clause as originally drafted would not have been sufficient to strike.

In view of the debate on the last occasion, I ask the Solicitor-General whether he is quite certain that the Amendment which he proposes strikes at that mischief and goes no wider. Having examined it reasonably carefully, I think that the words or at some earlier time take it very much wider than the Holmden case. I should be grateful if the hon. and learned Gentleman would look at that point, because there is no time limit at all. The expression "or at some earlier time" could cover a very long time ago.

Will the Solicitor-General give his considered opinion on Report if I put down an Amendment to delete those words? I recognise that it would be asking a lot to expect an expression of opinion now, but I am concerned that we should not unwittingly enact a provision which went much wider than the case at which it was intended to strike.

The Solicitor-General

I should be very glad to give the hon. Lady my considered opinion on Report, but I think that I can probably set her mind at rest here and now as regards the words, or at some earlier time had been a beneficiary under that discretionary trust …". There may be a number of beneficiaries under a discretionary trust.

12.15 a.m.

Supposing we take the case of an old lady, let us say, who is one of the beneficiaries under the trust, and it may be that obviously she has not long to live. She can give up her interest under the trust and the result would be that the payment of Estate Duty would be avoided. It is to meet that kind of situation that these words are included.

That is the purpose, but I will, of course, look at it again as the hon. Lady asked and, if she wishes, give her further information on Report stage.

Mrs. Thatcher

The words to which I referred go much wider even than that explanation. The words are "at some earlier time." The old lady could have been a member of the trust from the time she was born, and if she ceases to be a member of the trust at 21 she would still have been a member at some earlier time, even if she did not die until she was 80. What the right hon. and learned Gentleman said encourages me in the view I expressed, and I would ask him to reconsider the point.

Amendment agreed to.

Further Amendments made: In page 43, line 20, after "purposes" insert "(a)",

In page 43, line 20, after "section", insert: and (b) so far as they relate to estate duty leviable on a death after 3rd May 1966, of section 43 of the Finance Act 1940 and section 28 of the Finance Act 1958 (disposition or determination of interest limited to cease on death, and purchase of interest in expectancy in property subject to an interest limited to cease on death)".—[The Solicitor-General.]

Mr. Hugh Fraser (Stafford and Stone)

I beg to move Amendment No. 105 in page 43, line 20, to leave out from "section" to end of subsection (3) and insert: the deceased shall be deemed to have had more than one interest in property including immediately before his death an interest in property limited to cease on his death if at that time he had any of the following interests:

  1. (a) an interest not limited to cease on his death but which was enjoyed under two or more titles one of which conferred an interest limited to cease on the death of the deceased;
  2. (b) an interest which could not terminate before the death of the deceased;
  3. (c) an interest which in contingencies not related to the death of the deceased could not terminate before his death."
At this late hour I do not intend to detain the Committee too long, but the hon. and learned Member for Manchester, Cheetham (Mr. Harold Lever) and my hon. Friend the Member for Wanstead and Woodford (Mr. Patrick Jenkin) drew the attention of the Committee when we were discussing Clause 37 to the general danger of vague legislation. I would like to call the attention of the Committee at this stage to the great danger of incomprehensible phraseology. This was drawn attention to by my hon. Friend the Member for Birmingham, Edgbaston (Mrs. Jill Knight) in a remarkable maiden speech when she referred to subsection (3) of this Clause.

If any hon. Member is at this time of night prepared to read subsection (3) and comprehend it, I would gladly pay him a very heavy reward. My only regret is that my Amendment No. 104 has not been called, because, taken with this Amendment, it does make the intention of this Clause infinitely clearer than it is at the moment to the average person and even to the average lawyer.

This Clause is quite rightly aimed at dealing with a form of avoidance quite apart from the question of the trust, to which the Solicitor-General referred a moment ago. It refers to the type of avoidance which I think is known more as the extension of the life interest scheme. The proposals which I put do, I believe, make this infinitely clearer than it has been made by the Parliamentary draftsmen and by Parliament. I am glad the Solicitor-General is here tonight because it must be the Solicitor-General's duty to make the thing as clear as possible to the Committee.

Of course, as the law stands, the technique has been, providing that an interest can be arranged to extend beyond death and not coincidental with it, that tax can be avoided. This is one of the weaknesses of the Act of 1894 of odious memory, when the economic relationships of the whole country were changed. To those blessed inside this type of scheme, death loses its financial sting, and although they cannot take it with them, neither can the Chancellor take it off them. This is rightly being corrected by the Government in the Clause.

But I believe that, as it stands, the Clause is scarcely comprehensible, not only to the ordinary layman but to the ordinary lawyer. Consequently, I have tabled two comparatively simple Amendments which I believe clarify the Clause enormously. Although my other Amendment was not called, I hope that the Chancellor or the Solicitor-General will adopt it on Report because it makes the Clause infinitely clearer. The Amendment to subsection (3), by breaking it up into paragraphs and giving it a new introduction, also makes the intention infinitely clearer. I hope that in the interests of better drafting and greater clarity my Amendments will be adopted by the Government.

Even if my proposals are accepted, as I trust they will be, there is another point in subsection (3) which needs clarification, and that is: Why is the final sentence of the subsection necessary? Surely what is contained in paragraph (c) is contained within my paragraph (a)? It is not clear to me why it is necessary to have this apparently redundant and tortuous phrase.

To sum up my arguments, I believe that there is an important obligation on any Government to ensure that complicated and complex legislation—I agree that the question of preventing avoidance, with which we are all in accord, is complicated—is in language of such clarity that it can be understood by the average Member of Parliament and at least by the average lawyer. If this is not done, all the dangers which the hon. Member for Cheetham and other hon. Members have pointed to will accrue—simply because the language is not clear.

The hon. Member for Manchester. Cheetham quoted from Dr. Johnson. I should like to end by quoting Confucius. He was told that he was to be the military governor of a new province, and he was asked what his first reform would be, and he replied that his first intention would be to reform the language so that men understood what he was about. In spite of their great talk of new tax structures, this is what right hon. and hon. Gentlemen opposite have singularly failed to do. They are prepared to bring before the House of Commons such a meaningless piece of mumbo-jumbo as subsection (3).

Mrs. Jill Knight (Birmingham, Edgbaston)

It may be thought that I rise because so many hon. Members in the last hour or two have made speeches which coincide precisely with my own view, but this is not so. I rise because some days ago I tabled Amendment No. 323, which I understand is being taken with this Amendment.

My Amendment seeks to delete subsection (3), not because I have any strong feelings against it or for it, but simply because I do not understand one word of it. It really is pure gibberish from beginning to end, and so far it has defied the intelligence of every person to whom I have shown it. My hon. Friend the Member for Yeovil (Mr. Peyton) a little while ago quoted another subsection. That subsection is a model of clarity and light compared with this particular subsection.

The Government stretch the loyalty of their supporters in many ways, but I should think that the limit has been reached when they expect them to troop dutifully through the Division Lobby in support of a great chunk of legislation which is couched in terms of ritualistic mumbo-jumbo which would do credit to the Flower Pot Men, and hardly reflects any credit upon the Chancellor.

Early in the Second Reading debate I quoted this subsection in full and, in doing so, I begged the Chancellor to make it clearer. It is perhaps presumptuous of me to expect that the Chancellor will take the smallest piece of notice of me, but I feel that there might be some slight hope that he will take some notice of his right hon. Friend the Chief Secretary. I was delighted when during the Second Reading the Chief Secretary said: The administration which we propose must be based on simplicity. …"—[OFFICIAL REPORT, 25th May, 1966; Vol. 728, c. 484.] "Hear, hear" I said from my seat. How splendid. Now everything is going to be all right. But not a bit of it. What we find when we see the Amendments put down is that the Chancellor, far from making things simpler in response to the plea by the Chief Secretary, if not in response to my plea, seeks to make it more complicated by adding another four or:5ve lines to the nine lines, which are all one sentence. There are no full stops. What a contribution to clarity !

Anyone who goes through the Lobby in support of this subsection as it stands will deserve, and will probably receive, the ridicule of every political commentator in the land. We are not all lawyers here and, even if we were, this subsection would still baffle 99 out of a 100 Members. My right hon. Friend the Member for Stafford and Stone (Mr. Hugh Fraser) has valiantly attempted to bring order out of chaos in this subsection, but I must say that it seems almost to have defeated even him. This subsection is better out altogether, but if it must remain then Amendment No. 105 is infinitely preferable.

No one expects Finance Bills to be easy to understand, but at least reasonably intelligent Members should have a fair chance of doing so before they vote, otherwise Parliament is a farce and we might as well all go home and let the Government rubber-stamp the lot.

Sir L. Heald

I would like to point out that we have been usefully discussing, in an entirely non-party spirit, apart from the Government Front Bench, a matter of very great importance. This demonstrates that this new House of Commons at last is going to insist on some sensible action being taken in relation to the wording of tax matters. It is also very important to note that the hon. Lady the Member for Birmingham, Edgbaston (Mrs. Knight) has been expressing a point of view held by a large number of women who are interested in these matters.

Time and again women have said to me, "Why cannot Members of Parliament, including many lawyers, express a thing in decent English which people can understand?" Let me read this English which we are asked to enact as the Parliament of 1966. For the purposes of this section"— that is always the introduction to something which will cause the courts to say that for the purposes of this Act Monday means Tuesday— an interest … shall be treated as two separate interests one of which is the interest limited to cease on death, and an interest shall be regarded as one including an interest limited to cease on death if it is an interest under more than one title and one title is to an interest limited to cease on death, or if it is an interest which cannot terminate before the death, or which in certain contingencies not related to the death cannot terminate before the death". 12.30 a.m.

We ought seriously to pause for a moment, irrespective of where we sit in the Committee. Is it necessary for us to put that jargon in an Act of Parliament? In about three years time we shall be told that the House of Lords has made a decision under this Clause which has an effect which is the exact opposite to that which many people thought it would have. The great advantage is that practically nobody here knows what our intention is so that the decision cannot be contrary to it when the time comes.

My hon. Friend the Member for Edgbaston referred to one comment on this subject and I should like to refer to another by, I believe, the greatest expert on Parliamentary nonsense in our history, even perhaps including Sir Alan Herbert. It is in a book by Lewis Carroll —Chapter 12 of "Alice in Wonderland": 'Write that down', said the king to the jury. And the jury eagerly wrote down all the dates on their slates. Then they added them up, then they reduced the answer to shillings and pence. Then the jury all wrote down on their slates, 'She doesn't believe there's an atom of meaning in it'".

The Financial Secretary to the Treasury (Mr. Niall MacDermot)

May I seek to respond to the spirit of the debate and the comments made in the previous debate. We all feel very frustrated when we see language like this. But this is highly technical language in a very specialised branch of the law and plainly no layman will understand it either in the form in the Bill or in the form in the Amendment proposed by the right hon. Member for Stafford and Stone (Mr. Hugh Fraser). Those of us who are lawyers but are not specialists in this field of law frankly admit that we are extremely unlikely to understand it, it being a specialised branch of law of which we have no specialised knowledge. It contains, and must contain, many terms of art. To ask that it should be put in ordinary layman's language is to ask the impossible.

May I remind the Committee that there was a famous Statute which quite deliberately was couched in layman's language, and the lawyers have been living off it ever since. It was the original Rent Act of 1923. It was put in ordinary layman's language. The result was that it was riddled with ambiguities and the cases seeking to construe it have never ceased since then. On the other hand, I suggest that no one who is not a Chancery lawyer would understand the Settled Land Act, 1925, but it was so drafted that there have not been more than a handful of cases seeking to construe it since the Act was passed. Probably the hon. Lady the Member for Finchley (Mrs. Thatcher) is one of the few people to whom subsection (3) is crystal clear because she has great expert knowledge in this field.

The right hon. Member for Stafford and Stone has made a valid point about the lay-out of the subsection. By breaking it into paragraphs his Amendment helps the reading of it by anyone, layman or expert. I will gladly consult the Parliamentary draftsmen to see whether there is a way of doing this, because it seems more easily digestible than the form in the Bill.

We cannot accept the Amendment, because the Amendments which we have already passed already alter the shape of the subsection, so that it would need redrafting anyway.

Secondly, I am advised that, although on the face of it the Amendment looks clear, it contains some latent ambiguities. If we put our heads together about it, we can produce something which at least appears more presentable.

Amendment negatived.

Amendments made: In page 43, line 28, at end insert: Provided that where an interest belongs to persons as beneficiaries under a discretionary trust which throughout the subsistence of that trust was such that it could not terminate before the death of the survivor of two or more persons, estate duty shall only be payable by virtue of this section in respect of the cesser of the interest on the death of that survivor.

In page 43, line 29, leave out from "that" to end of line 33 and insert: this section has effect for the purposes of estate duty not only as respects the question whether property is deemed to pass on a death but also as respects the questions—

  1. (a) whether, in any circumstances specified in section 43 of the Finance Act 1940, property would have passed on a death or would have been deemed to be included to a particular extent in property passing on a death, and
  2. (b) whether (as under section 28(12) of the Finance Act 1958 which relates to the purchases of interests in expectancy) in specified circumstances estate duty would have been chargeable by reason of the coming to an end of an interest in property.

(5) In this section 'discretionary trust' includes a trust under which the disposition of any of the trust income is at the discretion of the trustees or of any other person".—[The Solicitor-General.]

Mrs. Thatcher

I beg to move Amendment No. 107, page 43, line 33, at the end to add: (5)(a) This section shall not apply where prior to 3rd May 1966 an interest which at some time belonged to the deceased but which apart from this section was not limited to cease on his death has been bona fide sold for full consideration in money or money's worth; and, (b) in the case of any mortgage of such an interest so made, any duty payable by reason of an application of this section shall rank as a charge subsequent to that of the mortgagee. This is a short point, and I shall put it briefly. The Financial Secretary will be aware that when there is a change in Estate Duty provision it operates in one sense retrospectively. I am particularly concerned with the case where, before the change was announced, the interest affected by the change had been purchased by a bona fide purchaser for full consideration.

Where there is a change of this kind, protection for such a purchaser is often put in the Statute. There is a precedent in Section 17 of the Finance (No. 2) Act, 1940. When a change was made in the rate of Estate Duty, that Section gave protection to those who purchased the interest before the change in the rate. We ask for similar protection here, as otherwise the purchaser may be very adversely affected by the change.

The Solicitor-General

Everyone in the Committee can understand and sympathise with the principle for which the hon. Lady has contended. She says that where someone has bona fide purchased an interest, or advanced money on mortgage in reliance upon the existing law, that person should not be penalised by a change in the law which he could not have foreseen.

When the law has been changed in the past, provision has sometimes, but not always, been made to protect such bona fide purchasers or mortgagees. There was such a case in 1962. By Section 28 of the Finance Act, 1962, foreign land was for the first time brought into charge for Estate Duty purposes. At no time since 1894 had such land been chargeable. It was therefore thought right to except transactions of that kind which were entered into before Budget Day, 1962.

The hon. Lady referred to Section 17 of the Finance (No. 2) Act, 1940, which provides permanent protection against increases in rates of Estate Duty for such bona fide purchasers and mortgagees. The situation with which we are confronted is quite different. Any purchaser or mortgagee of one of these extended life interests will only have made his purchase or executed his mortgage deed at some time since 15th December last. That was the date of the judgment in the Ralli case. It must have been abundantly clear to everyone concerned in transactions of this kind that a new loophole, and a very large loophole, in the revenue law had been opened up by the decision of the House of Lords, and it must have been also abundantly clear that this was a loophole which would be closed at the first opportunity. That would have been done quite certainly whichever party had been in power and whoever had been the Chancellor of the Exchequer. That is what we are doing in this Clause. Therefore, it is extremely difficult to imagine anyone entering into a transaction of this kind since 15th December last without knowing the risk that he was running.

But, moreover, if we were to accept the Amendment, we should be creating a very dangerous precedent for the future, because it will almost certainly happen again, as has happened on this occasion, that the ingenuity of tax consultants will discover some fresh gap in the revenue law, and then again, whichever party is in power, it will only be a matter of time before the gap is filled by fresh legislation. During the interval until the fresh legislation, however, the beneficiaries have an easy way out. All that they will need to do will be to sell their interest in advance of the legislation and so protect themselves against the charge which will arise.

That is a situation which is bound to happen if we accept the principle in such a case as this. But a very clear distinction is to be drawn between this sort of case, when everyone during this short time since the House of Lords decision must have foreseen that in this Finance Bill or, at latest, the next Finance Bill this loophole would be closed, and the sort of case to which the hon. Lady has invited the attention of the Committee.

Mrs. Thatcher

The Solicitor-General is assuming that the language of this Clause strikes only at the Ralli case. I do not believe that it does. I believe that it goes wider, and for that reason I ask him to look at the language of the Clause again to ensure that it strikes only at the mischief which he has described. I can foresee one or two cases in which it will go wider. If that is so, his explanation falls to the ground. Again, I ask him to look at the matter. I agree with him in so far as it applies only to the Ralli case.

The Solicitor-General

I certainly agree to look at this point again in conjunction with the other point which the hon. Lady has raised. We are concerned with drafting. We do not want the language to go too wide. We want it to be as comprehensible as the subject-matter permits. But we still draw a distinction between the sort of case with which we are dealing here and the sort of case to which the hon. Lady alluded in her speech.

Mrs. Thatcher

On the basis of that undertaking, I beg to ask leave to withdraw the Amendment.

Amendment, by leave, withdrawn.

Clause, as amended, ordered to stand part of the Bill.