Schedule 9

HC Deb 20 June 1968 vol 766 cc1349-72

LIFE POLICIES, LIFE ANNUITY CONTRACTS AND CAPITAL REDEMPTION POLICIES

Mr. Patrick Jenkin (Wanstead and Woodford)

I beg to move Amendment No. 163, in page 64, line 8, after ' term ', to insert: 'or a series of capital sums payable on or after death and until the expiry of a specified term such specified term'.

The Chairman

With this Amendment we are taking Amendments No. 164, page 64, line 29, after ' term ' insert: 'or a series of capital sums payable on or after death and until the expiry of a specified term such specified term'. No. 165, page 64, line 36, after 'or' insert: 'the same or a different capital sum payable'. No. 166, page 66, line 11, at end insert: (iv) Reduction of premium policies. 5A. Where a policy issued under a scheme of participation in profits provides for the premium to be reduced after a fixed term of not less than seven years instead of bonuses added to the sum assured and the total premiums payable in any period of twelve months does not exceed twice the amount of the total premiums payable in any other such period during the fixed term it is a qualifying policy notwithstanding that it complies only in part with the conditions specified in paragraphs 1 and 2 above. No. 167, page 69, line 2, after ' gain' insert: 'or a loss as the case may be '. No. 169, page 72, line 7, at end insert: 17. The Commissioners shall approve a special policy notwithstanding that it does not fully satisfy all the conditions applicable to-a qualifying policy, provided that they are satisfied that such special policy would have been a qualifying policy but for certain provisions contained therein which though conflicting with the provisions of this Schedule only do so to an immaterial or trivial extent.

Mr. Jenkin

As I was fairly heavily involved in dealing with this Schedule and Clause 16 in Committee, it was suggested that it might save time if I were to move the Amendment on behalf of my hon. Friends. I understand that the rules of the House are such that one's name does not have to be to an Amendment in order to move it.

Schedule 9 seeks to implement the intention of the Chancellor of the Exchequer to bring to an end the enjoyment of life assurance relief and the exemption from Surtax on the proceeds of what are loosely called single premium policies. The Schedule contains a large number of new rules with which insurance policies must comply if they are to fall within the description of "a qualifying policy" referred to in Clause 16 and the Schedule. These rules are detailed, complex and, in many respects, as the Bill was originally drafted, highly restrictive.

It was difficult to reconcile the Schedule as it was presented to the House with the intention expressed by the Chancellor of the Exchequer when he introduced this part of his Budget. He said: I say at once that I have no desire to weaken the tax position of legitimate life assurance or endowment schemes."—[OFFICIAL REPORT, 19th March, 1968; Vol. 761, c. 290–1.] We debated the Schedule at some length in Committee, and I am happy to say that the Government were most forthcoming. They accepted some of our Amendments as drafted. They accepted the principle of others and undertook to table suitable Amendments on Report. They were sympathetic with others and said that they would consider them between the Committee and Report stages. On yet other Amendments, they said that they were fairly sure that the Bill was all right but that they would look at it again. The Committee was impressed with two things: the very fair and open-minded attitude adopted by the Financial Secretary and the Minister of State to the matters which we drew to their attention; and with the astonishing rigidity of the Schedule as it was drawn. The comment of my hon. Friend the Member for the Cities of London and Westminster (Mr. John Smith) as to what would have happened if the Schedule had been guillotined, not surprisingly, received no answer.

We are content to leave for the Report stage most of the matters which we raised and which the Government are considering again, but there were a few Amend- ments which we thought it would be appropriate to air for a few minutes on recommittal. These are Amendments which were not selected in Committee. I make absolutely no complaint about that. The Chairman was more than generous in his selection. However, he felt that enough Amendments had been selected already.

One Amendment was selected and debated, but the Minister of State was most unhopeful, although he had sympathy with the point, that a way would be found of drafting an Amendment to take account of our point. It was therefore rejected and we thought it right to return to the matter at this stage in order to demonstrate its importance. I express to you, Sir Eric, our thanks for having chosen these Amendments for discussion on recommittal.

I will deal, first, with Amendment No. 163, with which Amendment No. 164 goes. These two Amendments were not selected in Standing Committee A. They relate to what is described in the Schedule, and is often referred to in the insurance world, as "term assurance". They seek to amend paragraphs 1(3) and 1(4) of Schedule 9.

5.30 p.m.

Paragraph 1(3) deals with a term assurance which is intended to last longer than 10 years. It provides that, to be a qualifying policy, there must be regular payment of premiums over a reasonably even spread. The details are spelt out. I need not weary the Committee with them.

Paragraph 1(4) deals with term assurance where the term is less than 10 years. In that event, the only restriction imposed is that in the event of the surrender of the policy before it has run its period, the surrender payment should be no larger than the aggregate of the premiums which have been paid thereunder.

These two paragraphs refer to term assurance in these words: If the policy secures a capital sum payable on death occurring during a specified term … In our view, and the view of those in the insurance world, this is altogether too narrow. It does not take account of a generally employed form of insurance policy, the family income benefits policy, where a series of lump sums are payable over a period of time, perhaps up to the termination of the term for which the policy was originally expressed, or up to any other date written into the policy. This is a popular policy and meets the needs of insurers in a large number of cases. As the Bill stands, I understand that this form of policy could not be taken out so as to qualify for relief. Yet, in my view, it most assuredly ought to be provided for, and Amendments Nos. 163 and 164 deal with that matter.

Amendment No. 165 deals with endowment assurances in paragraph 2 of Schedule 9. Here again, the possible benefit has been too rigidly circumscribed. Endowment assurance is an assurance where the sum becomes payable not on death, but on some other event, or with an alternative of a payment on some other event. The kind of case that we have in mind, with which we feel that paragraph 2 ought to deal is special mortgage protection policies. Hon. Members who were on Standing Committee A will know that Clause 16 contains a broad general exclusion for mortgage protection policies, because they are a special animal which should not have to comply with all the requirements of the Schedule. They are narrowly defined to mortgage protection. We had an undertaking that this was probably too narrow, and we may find other words substituted on Report. But there could be mortgage protection policies which should not qualify for that blanket exclusion, but which would be qualifying policies provided they complied with the requirements of Schedule 9.

We are here talking about … a capital sum payable either on survival for a specified term or on earlier death… In some cases these policies provide not for the payment of a capital sum payable either on survival or on earlier death, but different sums. The sums may be paid by instalments. The normal building society mortgage provides that the sums should be payable half-yearly, or indeed more frequently.

The words which we suggest should be added to the Bill in Amendment No. 165 are: the same or a different capital sum payable on earlier death. This is a small Amendment. I do not believe that it strikes in any way at the roots of the main purpose of the Schedule. It is a necessary Amendment in order that the legislation should not frustrate perfectly genuine life assurance relief.

Amendment No. 166 is directed to a special kind of policy, to which we referred in Standing Committee A, the declining premium policy, where the bonuses earned by the policy during its life are applied not to add to the policy monies, but to reduce the premium in the latter years of its life. On 22nd May, in Standing Committee A, I quoted a passage from a letter from one of the life offices describing what the policy was about. It is probably simpler to refer to that letter again to put the matter before the Committee. The letter reads: We are especially concerned over the Reduction of Premium Policy which has been issued without any material change in the basic principle ever since the Association was founded in 1806. It is a unique contract unmatched by any other company and of such long standing that it can hardly be said to have been devised with tax avoidance in mind. Briefly, the policy is a with-profits contract which participates in profits by way of reduction of the premiums payable as opposed to the addition of a reversionary bonus. A level premium is payable during the first seven years. In the eighth and subsequent years the premium is reduced by the rate per cent. declared by the Directors for that year. The reductions continue until the rate of reduction reaches 100 per cent. when the premium is extinguished and no further premiums are payable. Thereafter, declared 'reductions' are added annually to the policy and accumulated as a cash benefit. Clearly, any policy on those lines is bound to come into conflict with the basic rules written into the Schedule about the reasonably even spread of premiums. The difficulty which the Minister of State saw about this was that it could lead to great loopholes if the general were so altered that it would comprise a special policy of this kind. The hon. Gentleman said: But there is the very great difficulty, which I hope hon. Members opposite will understand, of not altering the provisions of the paragraph in such a way that there is a very wide loophole that would be very widely explored."— [OFFICIAL REPORT, 22nd May, 1968, Standing Committee A; c. 1232.] I interpreted the Minister as saying that, though he was sympathetic, he did not think it possible to amend the Schedule so as to comprise this type of policy, of which tens of thousands must have been issued over the period since they have been in practice. Therefore, we thought it right to see whether it is not possible to deal with this as a special policy. Amendment No. 166 seeks to add to the Schedule new paragraph 5A relating to reduction of premium policies.

We have adopted the solution of taking the term of the policy and, where one has a minimum term of seven years, as was described in the passage from the letter I read, writing that into the Clause as one of the conditions enabling the policy to be a qualifying policy. I am happy to say that the case which the Minister put as a possible loophole if the matter were dealt with generally was recognised by the company concerned which wrote to my hon. Friend the Member for Worthing (Mr. Higgins) and said: I think there must be a minimum term for the full premiums otherwise the way would be open for large first premiums. Some of the Bill's restrictions must apply to the full premium period otherwise there will be innumerable loopholes. I quote that to demonstrate again, if it needs demonstrating, that those who deal with these matters in the world outside— the life offices, the various constituent companies, and other organisations—are anxious that they should not be thought to be trying to leave loopholes for tax evaders. They take a very responsible attitude to these matters, and I hope that this Amendment, too, will attract the support and sympathy of the Financial Secretary.

I come, now, to an Amendment which is regarded by the life offices as very important, and again one which was not selected in Committee. I am referring to Amendment No. 167, and with this we come to the paragraph which deals with the charge to Surtax where the policy is a non-qualifying one. The general rule is that if a policy does not qualify the excess of the policy moneys over the total premiums paid comes into charge for Surtax. The rationale is simple to understand, namely, that the income which has accrued in tie life company's hands has been subject to Income Tax, and there has also been Capital Gains Tax on the investment, but there has been no Surtax, and therefore if the policy holder is a high Surtax payer this is a way of getting an accretion to his wealth without a charge to Surtax.

That being so there must be a case for the allowance where there has been a loss on a policy, and the case comprehended by the Amendment is where, for instance, two policies are surrendered at the same time. Qualifying policies do not give rise to any difficulty, because there we are not concerned with Surtax, but if two policies which do not qualify are surrendered simultaneously, the one which shows a gain will be Surtaxable, while the other, as the Bill stands, will receive no relief if there is a loss. Surtax is paid on the gain, but to the loss is carried by the policy holder. I cannot believe that that is the right way to approach the matter.

The normal rules relating to losses for Income Tax and everything else are that a balance is struck between gains and losses, and the result is the figure which represents the sum on which taxation is charged. I cannot believe that it is right to tax the gains and to leave the losses unrelieved.

Finally, I come to the last of the group of Amendments, Amendment No. 169, and in some ways this is perhaps the most important of the lot. Here we are introducing new and admittedly complex provisions which, whether the Government like it or not, are bound to have a material influence on the general shape and development of life assurance over the years ahead.

The tax reliefs given to those who pay premiums on genuine life insurance— Income Tax relief, and freedom from Surtax on the proceeds—are extremely valuable. Although many policies do not qualify for those reliefs, even as the law stands, nevertheless the great attraction of life assurance as a vehicle for saving is that for many years these tax reliefs have been enjoyed. The Government's intention is that for genuine life assurance they should continue to be enjoyed, but the new restrictions included in the 9th Schedule are of a complex nature indeed. The debates in Committee upstairs—and indeed what I have been saying today— showed that there must be many matters which, with the best will in the world, the Government's advisers have not thought of, and are therefore likely to cause grave difficulties until they are put right in subsequent legislation.

In Committee we discussed two Amendments related to the point at issue here. Both Amendments aimed at giv- ing the Government room for manoeuvre where a policy broadly complied with the restrictions but where there might be some small extent to which it conflicted with the letter of the law as it will when Schedule 9 becomes law. We moved an Amendment about variations on policies, the purpose of which was to exempt insignificant variations. The Financial Secretary accepted it and undertook to introduce an Amendment on Report. He said: I shall undertake to amend so as to define variations in a way that will restrict the variations to those of substance and not to trifling variations of no real materiality."— [OFFICIAL REPORT, Standing Committee A, 22nd May, 1968; c. 1288.] The second Amendment included a paragraph aimed at giving the Government some power of dispensation where there were insubstantial variations from what would otherwise have qualified under the Schedule, but there the Minister of State took a different view. He misconstrued what his hon. Friend the Financial Secretary had said earlier. He told us that an undertaking had been given "to look at" the earlier Amendment. In fact, as I have said, the Financial Secretary undertook to table an Amendment. The Minister of State refused even to consider the suggestion that there should be some sort of locus penitentiae, some room for dispensation in the case of minor infractions of what would otherwise be a qualifying policy under Schedule 9. He said: … there would be considerable danger that if this discretion were granted all sorts of schemes would be launched as a try-on to see whether the Revenue would treat them as special policies."—[OFFICIAL REPORT, Standing Committee A, 22nd May, 1968; c. 1308.] He went on to argue that this would lead to an immense amount of extra work for the Revenue, and give rise to great uncertainty.

I believe that the Minister of State took an unduly pessimistic view of the prospects if the Amendment were accepted. However, we have taken his point and redrafted the paragraph to make it apply to a lesser category of cases. The paragraph now contains the phrase: … though conflicting with the provisions of this Schedule only do so to an immaterial or trivial extent. We have had experience of legislation which has been drawn in an exact form and which the Revenue has felt bound to interpret strictly in accordance with the language employed by Parliament in the Statute. Indeed, that is the duty of the Revenue, and I make no complaint about it, but it imposes on us an important duty to make sure that if we want to give room for manoeuvre our legislation is not drawn in too tight and circumscribed a form.

One objection raised to the earlier Amendment was that it would give the Revenue a discretion. We said that the Revenue may grant a dispensation. We have dealt with that, and now we say that where there is a case of a trivial or insignificant variation the Commissioners shall approve the special policy. I believe that that is right. If the exemption comes within the paragraph as drawn, it should be mandatory on the Commissioners to allow the policy to qualify. The life offices give great weight to this Amendment, because the Revenue cannot be sure of having taken every possible variation into account. It is of the highest importance that Parliament does not put life assurance into a straitjacket which will affect the immensely valuable rôle which the movement performs in attracting savings and channelling them into investment.

I repeat what I said in Committee about the enormous importance of life assurance to the economy. In 1967, £750 million of new savings were generated through the life assurance movement—the biggest single form of savings in the country. This is why we insist, and, mostly, the Government accept, that it is desperately important that nothing done in this Bill should affect these savings. The economy depends, as we have been told so often, on an increased flow of savings. The more we save, the less the Government have to raise in taxation. I beg the hon. Gentleman to look sympathetically at all the Amendments, but particularly at the last.

The Financial Secretary to the Treasury (Mr. Harold Lever)

I am happy to follow the hon. Member for Wanstead and Woodford (Mr. Patrick Jenkin), because this has been the least acrimonious, if the most complex, aspect of the Bill. I have been filled with admiration at his complete mastery of the complex details and Amendments with which we have dealt, and it has been a source of great assistance to me in discharging my duty, as I have seen it, on this part of the Bill. The hon. Gentleman has not the team of skilled assistants practised in this matter that I have, so I unstintingly compliment him on presenting his arguments in a way as knowledgeable as it was sympathetic, and which has enabled me to meet him wherever possible.

If there be any friend of life assurance companies and similar institutions in their lawful avocations, I would say to him that my affection, regard and respect for these great institutions is no less than his. If, then, that friend demand why I am arguing the case for these restrictions, my answer must be that I believe that it puts life assurance on a firmer and sounder footing if we have, instead of a number of gentlemen's agreements to which not every life assurance company is a party, certain sound and clear rules acceptable to the Revenue and, basically, to the companies, which remove any uncertainty about which policies can be regarded as normal and reasonable and not tainted in the smallest degree with any charge of tax avoidance.

The provisions are not intended to be, and are not, in the least penal. In seeking to eliminate the area of unacceptable tax advantages gained by some taxpayers, we have not removed the immense advantages which accrue to taxpayers by insuring themselves in this way, including many significant tax advantages not merely in terms of tax concessions on premiums but in other ways.

I hope that the Committee will be aware that no hon. Member is more anxious than I to preserve intact the flourishing, growing, socially desirable— more than that: socially necessary— work of these great institutions. I would not knowingly support any measure which would damage their work and I have tried to take that approach up to now. If, between now and Report, anyone can press upon me any example of a failure by us to take into account the reasonable needs of the life assurance companies, I will consider it, even to the last moment.

These Amendments do not all present much difficulty. Amendments Nos. 163 and 164 are, in effect, drafting Amendments. The hon. Gentleman, despite my tributes to his mastery of this matter, seems to believe that clarification of what we all intended and for which he argued should be made. I accept his case. Our view is simply that the words would already achieve his purpose, while he thinks that we should make assurance doubly sure by clarifying them. If he and his hon. Friends would withdraw the Amendment, I am prepared, because I see no reason why we should not, to table an official Amendment on Report to remove any doubt as to the purport.

On Amendment No. 165, also, we think that the words proposed are not required, but I understand that there is some feeling that this is not absolutely sure. Again, rather than leave anyone in uncertainty or doubt about our intentions, I will meet the hon. Gentleman and put that down. There is no reason why people should carry unnecessary anxieties; it is bad enough when one has to inflict necessary ones upon them.

A more troublesome matter is Amendment No. 166, which deals with the case of a particular life policy which has been going for over 160 years, since 1806, and with which I am very reluctant to interfere. The difficulty is this. We have set the rules as simply and reasonably as we could, and one of them is that, within the qualifying ten years, no premium should be more than twice any other. Unfortunately, in this policy, after the seventh year, the premium begins to decline, and could conceivably be less than half the premium in previous years. Unhappily, with the best will in the world and starting from the principle that I must put the Revenue to a good deal of trouble rather than the citizen to a little trouble, I find that here we should have to make a significant breach of this basic principle to accommodate this ancient policy.

The policy could be brought within the rule by a variation so slight that I hardly imagine that it would affect its commercial impact, although it might affect its aesthetic appeal to the company which has had it for so long—and I sympathise with it. Unhappily, therefore, I must ask the Committee to reject the Amendment, not because I dissent from what my hon. Friend said previously—there is no question of avoidance here; this is a perfectly reputable policy—but because we have to rule by general principles and the principle must be preserved that no premium can be less than half a previous premium.

Therefore, the Amendment cannot be accepted, but I assure the Committee that it is open to the company concerned, by deferring the initial decrease in its premiums until the eighth or ninth years instead of the seventh, as hitherto, to bring about conformity to our rules and bring the policy within them. It is a very small matter for the company, and, although I have started from the sympathetic wish to accommodate it even at the expense of our rules, I have not been able to find any way without a fundamental departure from the rules.

Therefore, despite my genuine sympathy, I must ask the company to make the trifling variation which I understand that it would accept, and which would have no commercial effect on its dealings in this policy.

6.0 p.m.

The hon. Member for Wanstead and Woodford rightly regards the principle of Amendment 169 as important. This proposal is intended to give discretion to the Inland Revenue, but in fact it would impose a mandatory obligation on it and it would, in effect, have to make up its mind whether or not to fight a case should anyone challenge its supposed mandatory obligation. This is not acceptable, first because I do not in principle like legislation the effect of which is to set out rules for qualifying policies and then to say, "Something not far from that will do." That is a blurred form of definition. We should not, on the one hand, say, these are the rules to be observed for a policy to qualify and go on to say, "If, however, there is a minor variation, it will still qualify." To pass legislation of this kind would place an impossible burden on the Revenue, since it would have to look at every scheme submitted to it and then, on a writ of mandamus, decide whether or not there was a trivial variation. That should not be invoked as a style of legislation, except when absolutely necessary.

Mr. Patrick Jenkin

Perhaps I did not explain this fully enough. The hon. Gentleman should remember that Section 379 of the Income Tax Act, 1952, relating to superannuation benefit schemes, sets out the exact considerations with which a scheme must comply if it is to get relief, but goes on in subsection (3) to say, in effect, that any scheme which does not comply may nevertheless be approved, providing it complies with a number of other considerations. There are many other matters in which the Revenue has discretion. The Amendment is, therefore, not a novelty.

Mr. Lever

As I explained, I would accept this sort of discretionary variation only where the circumstances of the case were absolutely compelling. In principle, one must be against it because one wants hard and fast definitions. Where possible, we should define these matters accurately and clearly. There are exceptions, and from his vast knowledge of these matters the hon. Gentleman has selected one concerning the approval of superannuation schemes.

The point to remember here is that we are not dealing with a mass of unskilled people preparing policies but with a relatively small number of skilled insurance companies. There is, therefore, no danger of an accidental variation in a policy occurring; one would not, by accident, be saddled with a policy in which there is a trivial variation. The insurance companies, which have maintained excellent relations with the Inland Revenue on these matters—we are happy to cooperate and help them whenever possible —will, before issuing these policies, satisfy themselves that they are qualifying policies.

The hon. Gentleman pointed out that there might be a danger of a variation occurring. I have explained that we are dealing with insurance companies which are skilled in preparing these policies and which are checking them with the Inland Revenue to see if there is the smallest doubt. This is bound to be done before they are issued to the public in their tens of thousands. This would seem a reasonable precaution; and if there is a trivial error to which attention is drawn, it can be put right before the policies are circulated.

The alternative is to leave the Revenue liable to have shot at it minor variations in schemes. I will not repeat the argument which was used in Committee, although it related to a somewhat different Amendment. While I am enthusiastic for every statement made by my colleagues, my degrees of enthusiasm vary according to the statement. I would not say that the approach adopted to this problem would have sprung to my mind. While the insurance companies would not set out to cause difficulty, if they were allowed the power to submit to the Revenue any sort of variation and ask, "Is this trivial?" and the Revenue replied, "No", the Revenue would then be liable in the High Court for deciding such trivialities.

The rules which we are instituting for qualifying policies are singularly clear and are not complex. In any event, happily, the insurance companies are as erudite as the Revenue in dealing with this delicate question and they know what is required to comply with the rules. Partly due to the efforts of the hon. Member for Wanstead and Wood-ford and partly because of the spirit of co-operation on the part of the Inland Revenue, every effort has been made in our discussions to satisfy the life offices that none of their business will be harmed in the slightest by these rules

That being the case, and the rules being clearly understood—and remembering that these policies are issued by professionals—I cannot see that a case has been made out for encumbering the Statute and the Inland Revenue with this obligation to meet applications for variations.

Amendment 167 deals with losses. There is a misconception here in connection with the reason for applying Surtax to certain non-qualifying policies. If the man is not a Surtax payer then he will not pay Surtax on the policy. That is not tautologous, since while a man might take out a £10,000 policy, he will not suddenly become liable to Surtax even if it is a Surtaxable policy; we will "top slice" the £10,000 and a non-Surtax payer will not pay Surtax. The reason why we Surtax is the reason why I must reject the Amendment; that when a Surtax payer has a Surtaxable policy— if the principle of the Clause is accepted —the capital would have been Surtaxed income. If he is in that category, then he must pay the Surtax, whether or not he has lost money on any other policy that he has ever taken out.

The two matters are not in relation, although at first there seems a plausible case for saying that if a man has lost money on one policy he should be allowed to set it off against the Surtax to which he is liable on another. Although plausible, it does not stand up to examination because the two matters are not necessarily alike. A man is asked to pay Surtax on Surtaxable income, and in this case he is asked to pay Surtax on what should have been Surtaxable income. It appears in his pocket as a capital sum.

What he loses on a policy could be any amount. One would need to go into all the combinations of policy on which a man could lose to see if it had any relationship to a loss of income. One can set against one's plus amount for Surtax purposes not a low return on money but the actual loss of income on an investment in any period. It does not follow that because one loses money in an insurance matter, one has what would be the equivalent of a loss chargeable against one's Surtaxable income. In these circumstances, while the Amendment is fair-sounding and plausible, I must reject it because it does not stand up to examination. If a man happens to lose money on a policy, which is a rare event, that has no relationship whatever to his Surtaxable income.

I test it finally in this way. I appeal to the hon. Member, who is very fair-minded in these matters. If the loss of a policy is to be treated as the equivalent of something which one sets off against Surtaxable income, the Amendment does not go far enough. The hon. Member should claim the right to set it off against any other Surtaxable income. It is such a loss as would under our present legislation morally be justified to be set off against a man's Surtax liability. That is the only kind of loss which one could be entitled to be set off against this income.

If a man has a loss which stands up as a relief against Surtax income he would get it against his policy Surtax just as against any other Surtax, but that is not a loss which would come through a loss of a policy. In those circumstances I must ask the Committee to reject the Amendment.

Mr. Nott

I am, naturally, interested to hear the Financial Secretary's answer to Amendments Nos. 163 and 164. I felt quite certain that the Government would not introduce any type of a bar or disability on family income benefit policies, because, clearly, those policies are now increasingly used by the young salariat to protect their family against the death of the breadwinner.

I have one or two questions to ask on the hon. Gentleman's summing up in connection with Amendment No. 166. This is on the reduction of premium policies. Going the other way for a moment, what would happen in the case of a policy which might be taken out by a young man who has just started work? He takes out a whole life policy at the low premium of, say, £50 per annum and in that whole life policy there is an option to convert, say, in five years, into an endowment policy without another medical examination. That is quite a common type of policy. I had one myself at one stage.

When a young man starts earning often his income is not adequate to enable him to pay the full premiums for an endowment policy but he can go for a whole life policy. In that case the premiums often treble when the conversion from a whole life policy to an endowment policy takes place. I do not ask the Financial Secretary necessarily to answer now, but if this is not covered perhaps it could be looked into.

What happens in the case of a five-year endowment policy which again might be taken out by a 20-year old man who wants to provide for his children's education. This may have been discussed in Committee. There are instruments which are broadly known as educational policies and very often they are not very satisfactory. A much better way of providing for a child's education is often by a five-year endowment policy where the capital sum becomes available five years after the first premium is paid. I hope that that comes within the Amendment and if not I should like the Financial Secretary to bear it in mind.

Another type of policy which is very common for young people is an indemnity policy which the building societies often require from a person who is purchasing a house on a mortgage for the first time. That person may not have quite sufficient savings to make the down payment required for the mortgage. The insurance company may demand 25 per cent. down and 75 per cent. of the total value of the property would be advanced in the form of a mortgage. If that young chap of 20 has not quite enough to pay the initial down payment he is able to go to a building society and take out a policy which indemnifies the building society against his premature death.

6.15 p.m.

As I read the Bill, this is nothing more than a single premium policy because a single capital sum is paid at the time when the young man goes to buy his house. This may be covered in the Bill. It is very common policy for those not able to afford the full down payment when they wish to buy a £3,000 semidetached house and the building society says that it wants a single premium indemnity.

I do not wholly agree with the Financial Secretary's general point about variation of policies. Our life assurance industry has grown up through its ability to tailor policies to individual needs. It would be a shame if the Clauses and Schedules of this year's Finance Bill drew too narrowly the type of policy which could be issued in the future precisely because the constant variation and flexibility of life insurance from which we have benefited so much in the past would cease.

It is fair to say that we might not have had a family income benefit policy today if a Finance Bill of this sort had been passed 10 years ago, because I do not suppose the Chancellor could then have foreseen the growth of family income policies. It is more than probable that such a Budget could have put a liability on mortgage protection policies, where again there has been a substantial growth to the benefit of the wage and salary earner.

I have some doubt whether the Bill might not be unduly restrictive on the development of life assurance in future. I am grateful that the Financial Secretary is amenable, willing to help and generous in his understanding of the very real concern which we on this side of the Committee have. I have no doubt that in the few days before Report he will think of some of these matters and perhaps incorporate them in further Amendments; if that proves to be necessary.

Mr. Harold Lever

I will relieve the hon. Member's mind as quickly as possible of doubt. A five-year endowment policy for education will not be exempt, but, of course, if the man is not a Sur-taxpayer that will not make very much difference to him, because he will receive the money tax-free. It is only the Surtax-payer who will be liable to the Surtax provisions. He may lose the reliefs, but the real question is whether he has to pay Surtax.

On the whole-life policy being converted to an endowment policy, if the endowment policy which is then taken out conforms to the rules laid down in the Clause it will be in order, and no problem will arise. If not, not. So that an endowment policy should have tax relief and freedom for Surtax liability, that endowment policy should be within certain rules. It follows that one cannot by a side wind escape from those rules by having a whole-life policy converted to an endowment policy which does not conform to the rules. So long as it conforms to the rules, it is exempt.

Mr. Nott

This may be the same policy —a whole-life policy is converted as the same policy into an endowment policy involving the trebling of the premium. The hon. Gentleman says that that is quite all right?

Mr. Lever

One can quadruple, quintuple, decuple, or multiply a thousandfold the premium, provided that the policy is for the first time an endowment policy within the meaning of the legislation. One can do what one likes so long as it conforms in the new policy to the rules laid down for endowment policies.

The further point was on mortgage indemnity. The kind of situation which the hon. Member mentioned is covered. If it is a policy intended to secure the payment of the mortgage debt, or thereabouts, on the man's death, it is free from all liability. That is the purpose of the policy.

The hon. Gentleman complained that if we had enacted this Bill years ago without the power to vary we would be in difficulties today. I do not think that this is so. The principles applied would have taken into account every reasonable case. We are dealing with a vast number of companies with immense experience. They are liable to think up something new, but when they think up something new it has to be within these principles. If the variation is so trifling as not to be worth exempting there cannot be great difficulty in accommodating it to the rules which are sound in principle.

If the hon. Gentleman says that a wholly new kind of policy might come into being, which would not be within the rules at all, this Amendment would not meet that point. If we have not covered by our rules one of the special kinds of policy which the hon. Gentleman has mentioned it would require new legislation to bring it within the rules and it could not be said to be a trifling variation. It would be a wholly new idea and if the Revenue did its work properly it would introduce amending legislation to put the matter into order.

One of the difficulties is that when we legislate, and if something outside the legislation comes in, it cannot be accommodated by the hon. Gentleman's Amendment and the only remedy the House has if for any reason our legislation goes out of date is to act more promptly than we sometimes do.

Mr. Patrick Jenkin

I thank the Financial Secretary, first for his kind remarks about my own part in this, which has not been so great, and, secondly, for the attitude which he made clear once again in the Committee of the whole House, as he did upstairs, of the basic desire of the Government not to interfere with general life assurance. I can assure him that these will be taken at their face value by those who are concerned with assurance affairs outside the House.

I must go on to say—and this is the point which the Financial Secretary has closed on—that we are not all-knowing in this. Certainly we do not, when we are legislating, take account merely of the established channels of communication and established institutions who are acting in a particular field. We must always have regard to the fact that many of the most valuable innovations come from what may loosely be described as the invader.

Mr. Harold Lever

The point I made to the hon. Gentleman's hon. Friend was that if one brings in a variable innovation that cannot be regarded as a trivial matter that could not be brought within the Amendment even if I accepted it.

Mr. Jenkin

I concede that.

In drawing up this Amendment we had in mind something which would fit in roughly with the insignificant variation Amendment which the Government accepted upstairs. I do not think that this necessarily detracts from the general thesis. Indeed, he was perhaps unwittingly echoing what had been said by my right hon. Friend the Member for Taunton (Mr. du Cann), who has long experience in these matters. We do not know that we are covering every possibility.

I was told the other day that even now possibilities are coming to life which had thought to be dealt with. I know the hon. Gentleman's advisers are in regular contact with the organisations outside, but the concept of the invader who can come in from outside in the sense of a rogue elephant—I do not want to reflect upon his integrity—are often most valuable in livening up and introducing innovations into a field which can easily become dominated by established interests. It is most important, in these circumstances, particularly here—and I emphasise, once again, where the whole economy depends so much on the attraction of saving from the people through life assurance—that nothing we do here in Parliament out of a desire to check tax avoidance should cast any unnecessary obstacles in the way of that.

The Financial Secretary indicated the hope that everything had been dealt with and the hope that if it had not the Government would be prepared to legislate swiftly to put the matter right.

Mr. Harold Lever

Certainly, it was not my intention to say that except in so far as the Report stage was concerned. I hope that we have taken into account even future developments which are likely to occur, though I cannot pretend to know what they might be. If we have not taken into account unknowable and unknown future developments, it is the obligation of the Government to legislate swiftly.

Mr. Jenkin

I had not intended to say anything more. The language I used might have been open to misinterpretation. I would not wish to commit the hon. Gentleman to anything that he did not wish to be committed to.

On the Surtax Amendment, I am bound to say that I found his argument very unconvincing, which is strange coming from him. This is not a normal Surtax provision. His argument that if the logic were right the Amendment did not go far enough, and that we should have to make allowance for every insurance policy which shows a loss as computed in accordance with the Schedule, is not right. He himself has said that what we are doing is applying Surtax to what is, in effect, a capital receipt. We are not surtaxing income; we are applying Surtax according to a special formula to something to which it would not otherwise be applicable, namely, to the increase in value of a policy proceeds over the aggregate of premiums paid to secure those proceeds.

This is a highly artificial transaction. We have not voted against it. The general desire to prevent people getting tax relief for single premium policies is something we have gone along with, but it surely follows that when there is a transaction of the same sort, namely, an insurance policy which on the same rules of computation, artificial though they are, gives rise to a loss it must be right to strike a balance and only tax the difference.

It may be that our Amendment goes too far and does not draw the distinction about policies which arise at the same time or in the same year. Where a policy has had to be surrendered according to the terms of the policy and there has been a loss, and in the same year one has surrendered another policy and shown a gain, I cannot see why the hon. Gentleman regards it as taking an unfair advantage that one should set off one against the other. This seems to be an immensely logical suggestion we are putting up and I am sorry that the Financial Secretary thought it necessary to reject it.

Mr. Harold Lever

Can I try again to win the hon. Gentleman to an understanding of the position? What is being taxed is Surtax which is at present, as it were, received in the form of capital. The purpose of this Clause is, in effect, to undress that from its capital dress, which is a dressing artificially created by the concession we are giving on insurance policies, and to bring it out in its effect as crude surtaxable income. That is why the hon. Gentleman did not vote against the proposal. We should surtax as surtaxable income what is, in fact, surtaxable income, though it appears in the guise of capital.

Once one concedes that that is a legitimate undressing procedure undertaken by the Inland Revenue, in which one brings this capital sum back into its true form for legal purposes as surtaxable income, the only thing one can allow against that charge is a loss of a character which would properly be chargeable in diminution of surtaxable assessment.

6.30 p.m.

I will give an example. If one had a trading loss which could be set off against surtax, that would be appropriate, and so one could set it off under the law as it will stand under the Bill. If I accepted the hon. Gentleman's proposal, he would be able to set off, against what is truly surtaxable income on the analysis I have offered, what is nothing more or less than a capital loss.

I give another example—although I am thinking on my feet and am unprepared for it. Suppose I have two policies, one which will be allowable to Surtax in due time and another which, for some reason, after paying one premium, I surrender at the loss of the whole of the premium. The whole of the loss on the first policy, on which I claim to have sustained a loss allowable against my Surtaxable later receipt, is nothing more or less than a capital loss. I have taken out the policy I wanted and within a year have packed it up and made a loss on the premium.

That loss is undoubtedly a capital loss, nothing less, and should not be set off against any form of Surtaxable income. Once one concedes that the only income we are to tackle under this policy is Surtaxable income, one must insist that the only losses one can set off against it are losses appropriate for surtaxable income and they are already taken care of.

Mr. Nott

Why should it be a greater sin to offset surtaxable income so that it results in a capital aggregate at the time of maturity of the policy, and not a sin in the eyes of the Government to do a similar thing with non-Surtaxable income? What is the philosophical justification for treating these two types of income differently?

Mr. Lever

Would the hon. Gentleman repeat the question? I did not take it all in?

Mr. Nott

I would rather not repeat it.

Mr. Lever

These are two different types of income. We are not here dealing with the two types, but only with one —that is to say, Surtaxable income which appears in the form of a capital receipt. The hon. Gentleman cannot show me any other kind of income. What he can show is a capital loss of some kind sustained on an insurance policy, and it is that capital loss which it is hoped should be set off against what is truly Surtaxable income, although not appearing in that form.

Mr. Patrick Jenkin

I think that we must bring the debate to a close. The hon. Gentleman is engaging in sophistry which is untypical of him. It would be more typical of the Chief Secretary. He takes the capital sum if it is profit and converts into notional income and taxes it. But if it is a loss, he leaves it as capital and refuses to allow it to give relief against Surtax. It seems unfair. However, he has been kind enough to accept in principle most of the Amendments we have put in this group, and it would be wrong to seek to divide the House on the matter. I therefore beg to ask leave to withdraw the Amendment.

Amendment, by leave, withdrawn.

Question, That this Schedule be the 9th Schedule to the Bill, put forthwith pursuant to Order [11th June] and agreed to.