§ Mr. Patrick Jenkin (Wanstead and Woodford)I beg to move Amendment No. 254, in page 35, line 45, after wise ' insert:
'for the removal of doubt the retention of a reversionary interest which fails during the lifetime of the settlor or upon his death or upon the death of any other person shall not be 964 treated as the retention of such benefit as aforesaid and when such reversionary interest forms part of his estate it may at the option of the personal representatives be treated as an interest in expectancy for the purpose of ascertaining the aggregate principal value of all the property comprised in the estate'.I will begin by taking up the comment made by my hon. and learned Friend the Member for Northwich (Sir J. Foster), when he withdrew the previous Amendment. We come now to the estate duty provisions of the Bill. It seems that this is, par excellence, a case which supports his point. The procedure whereby we seek to enact complicated fiscal legislation is most inappropriate. My hon. Friend the Member for Guildford (Mr. David Howell) suggested that we should have a much more open procedure, with far more consultation. I was intrigued by the comment made by the Financial Secretary that a small Select Committee would perhaps be a suitable method. He will recollect that I put forward a similar suggestion on Second Reading.Clauses 30, 31 and 32 represent a useful consolidation of estate duty law as it effects settlement. The opportunity has been taken to tidy up, clarify, remove anomalies and to clear away uncertainties surrounding this complex branch of estate duty law. It is something which we must welcome. A number of people have been shaken by the complexity and length of the statutory provisions as they will be when we have finished with them. A great deal is due to the extension of the law on discretionary trusts, to which we shall come later. I want to clear up an uncertainly, or perhaps I should say to seek to codify a Revenue practice relating to settlements where the settlor has or might be taken to have reserved an interest out of the settlement so that he is not excluded from enjoyment of the property.
Under Clause 30(2)(b)(ii) the requirement is that
the deceased was not at all times during that period entirely excluded from possession and enjoyment of the property and from any benefit to him by contract or otherwise.7.0 p.m.It is obvious that if a man is to make a settlement, if the statutory seven-year period is to run and exempt him from estate duty, he should not be able to retain advantages under the settlement and, as it were, both have his cake and eat it.
965 The Amendment is concerned with the reservation of an interest in expectancy, a remainder, which fails during the life of the settlor or on his death so that it never becomes an interest in possession. Is that to be regarded as the reservation of a benefit within the meaning of Clause 30(2)(b)(ii)? Clearly, from a commonsense point of view, it is the reservation of a benefit; it is a potential benefit. But the fact that it does not mature cannot be known when he reserves it.
However, we must also have regard to one of the main features of estate duty law which is incorporated in Section 5(3) of the 1894 Act. In the case of a deceased man who had, as it were, an interest in a reversion which never matured—where he never enjoyed it—Section 5(3) says that is exempt from duty. It never becomes an interest in possession so as to constitute an asset in his estate. We have, therefore, a specific exemption.
It might be argued—indeed, it has been argued—that it would be illogical to regard the reservation of such an interest in expectancy as the reservation of a benefit which would prevent the seven-year period from running. Yet, we had a case from Australia, which was heard by the Judicial Committee of the Privy Council in London in 1929, where, on the comparable provisions in Australia, it was held that such an interest in expectancy could amount to a reservation.
We then come to the Revenue practice in this country. It might be convenient to refer a passage in the Sixth Edition of Green's Death Duties, page 170, where this matter is dealt with:
The exemption relating to the failure of an interest before possession would not appear to be in point. That exemption is restricted to claims arising by reason only of the failure or determination of the interest. Here"—and it is talking about the reservation of a benefit—the basis of liability is that the deceased was the settlor. In practice, however, duty is not claimed in this country unless the interest takes effect in the settlor's lifetime.That final sentence is a statement of the present Revenue practice.The purpose of the Amendment is to do no more than codify the Revenue practice. Later, we shall come to other examples where the Government have accepted that this is an entirely proper 966 thing to do in the context of this codification and restatement of the existing law.
For example, one need only mention pension funds and trusts. Amendment No. 254, if accepted, will make clear that if a settlor makes a settlement but reserves an interest in expectancy, which, in the event, never falls into possession during his lifetime, he will not be regarded as having reserved a benefit from the settlement to prevent the seven-year period running.
The last two or three lines of the Amendment made clear that when a reversionary interest forms part of the estate then, it having been reserved out of a benefit and falling into possession, the rules in Sections 7(5) and (6) of the 1894 Act as to valuation shall apply in that case as they apply in the ordinary case where reversion is in the estate.
This Amendment seems totally unexceptionable. I hope that the Government will feel able to take advantage of this codification to clear up yet one more uncertainty, one more extra practice, to make the legislation even tighter than it is now.
§ Mr. TaverneThe question which the lion. Gentleman has raised arises, to some extent, from fears which have been expressed that perhaps potential possession and enjoyment of an interest amounts to non-exclusion. The firm answer is that it does not.
I understand that the Amendment, in seeking to make this clear, deals not only with the narrow point of a reversionary interest, but the rather wider point of a contingent interest. Concerning a reversionary interest, on the determination of a settlor's life interest, the fact that on the creation of the settlement he might have retained an ultimate reversion would not, under the present law, amount to non-exclusion.
On the wider problem, as the hon. Gentleman has said, the practice has never been to regard an interest in expectancy as constituting non-exclusion from property subject to a life interest, or whatever it may be. The estate duty provisions in the Bill do not change the law in any material respect.
The hon. Gentleman has suggested that it would perhaps be useful to codify this and make it absolutely clear. But if the 967 Amendment is meant to cover a wider sphere, it does not seem to do so, and it is technically defective in this respect. My view is that it is superfluous, because an interest in expectancy does not constitute non-exclusion from the property in which the interest subsists.
The Amendment is again difficult because it envisages that, if the reversionary interest did not fail but was part of the settlor's estate on his death, it would amount to non-exclusion. The Amendment provides that there should be an option to be charged on the value of the reversion on the settlor's death instead of on the basis of a limited interest which ceased.
The intention is not entirely clear here and it may not be quite as suggested because different persons, I am instructed, would be accountable for the duty under the supposed alternatives.
It may be that there is a case for stating explicitly what has long been accepted as the practice of non-exclusion in gifts legislation. But if there is such a case for specific legislation, the Amendment does not achieve it. It creates uncertainties. It does not deal with the wider problem to which the hon. Gentleman referred. I submit that the practice is clearly established and that there is no ground for the fears which have been expressed.
§ Mr. Patrick JenkinI do not think that I put the case on the footing that fears had been expressed, but merely that it would be desirable to codify what the hon. Gentleman has conceded is a long established practice, but which, I remind him, is contrary to the decision of the Judicial Committee of the Privy Council under comparable Australian legislation.
I think that the Minister went part of the way to accepting that it might be desirable that this matter should be codified. No doubt he will consider this between now and next year. On the wider point of the option, I appreciate that the Amendment takes the matter a little wider than codifying present practice, but it seemed to me to be a useful addition. No doubt the Minister will also consider that.
The hon. Gentleman knows that we do not necessarily have the drafting resources available to Ministers. If the 968 drafting is defective, I can only offer my apologies. I am grateful that the Minister did not dismiss the Amendment out of hand.
Having said that, I beg to ask leave to withdraw the Amendment.
§ Amendment, by leave, withdrawn.
§ Mr. TaverneI beg to move Amendment No. 163, in page 36, line 1, leave out 'held by trustees on' and insert 'subject to'.
§ Mr. SpeakerWe are taking, also, Government Amendments Nos. 164 and 201; Amendment No. 256, in page 36, line 31, after 'aforesaid', insert:
'and notwithstanding any rule of law or equity to the contrary a person shall be deemed to be so excluded if being sui juris he has executed a deed renouncing any interest in the trust';and Government Amendments Nos. 166, 167, 169, 172, 173, 174, 176 to 179, 192 and 187.
§ Mr. Patrick JenkinOn a point of order—
§ Mr. SpeakerI promised the Opposition earlier this afternoon that I would take out Government Amendment No. 201. We will discuss it separately when we reach it.
§ Mr. JenkinI am obliged.
§ Mr. TaverneThe separate consideration of Amendment No. 201 will be extremely welcome to the Government as well as to the Opposition.
Amendments Nos. 163 and 164 clarify the new charge on property the income of which is wholly or partly subject to a discretionary trust by indicating that the charge falls, subject to the provisions in Clause 31 for measuring the relevant slice, on the whole property subject to such a trust.
There has been criticism of the provisions relating to discretionary trusts in the Bill as published. It was argued that they were not at all points apt to deal with the subject matter because a discretionary trust is one giving the trustees discretion only as to the application or distribution of income. Any advance or appointment of capital is outside the discretionary trust framework.
The Amendments make it clear that the charge under the discretionary trust 969 head operates where property is comprised in settled property which is subject to a trust conferring discretions on the trustees or some other person as to the application of all or part of the total income of all the property subject to the trust which is for the time being available for distribution.
The Amendments are technical. They do not affect the scope of the charges as was originally intended. Unless hon. Members wish me to go into greater detail, perhaps it might be sufficient if I explain the general scope of the Amendments.
Amendments Nos. 166, 167, 169, 172, 173, 174, 176 and 187 are part of the same technical Amendment and can be called a drafting series of Amendments. The Government Amendments to which I have not referred are, in a sense, minor Amendments which can best be referred to later on Amendment No. 201 because they accept the situation under that Amendment.
§ Mr. Patrick JenkinWe on this side accept that all the Government Amendments to which the Minister of State has briefly spoken are correctly described as technical Amendments. They do not seek to extend or modify the scope of the Section but merely define its operation more accurately. On that ground we welcome them.
We are also taking Amendment No. 256, which appears in the name of my right hon. and hon. Friends and myself. It raises an important issue on the whole operation of the new provisions relating to discretionary trusts. Its importance is rather topically highlighted by a letter appearing in The Times Business News this morning from Mr. Michael Nightingale which happened to be published when we are debating these matters.
Mr. Nightingale was concerned to draw attention to the very wide scope of the charge, particularly as it affects accumulation trusts. As I read his letter, the changes which have been made—and they are welcome—in Amendment No. 201 do not touch the case which he has made. The Minister of State appears to be somewhat doubtful about that. Perhaps he will be able to explain it.
7.15 p.m.
Perhaps I may read the point which Mr. Nightingale makes, because it would 970 be met partly by our Amendment No. 256, which we have had on the Paper for some days. Having drawn attention to the basis of the charge on discretionary trusts, Mr. Nightingale goes on to say:
The Finance Bill as it stands at present has given the Revenue far wider powers than intended by the Chancellor. By taking Clause 29 (2) (b) (iii) (bb) in conjunction with Clause 30 (3) (c), now renumbered Clauses 30 and 31"—he was writing on the basis of the Bill as it was in Committee—it would seem that a person 'not having received any benefit under that trust' but nevertheless 'having been eligible to benefit' and having been 'not entirely excluded' can be treated as if he had received the income of the Trust. Therefore where trustees have accumulated all the income of the trust over a period of years and one of perhaps many eligible beneficiaries dies, it would appear that the total capital of the trust could be charged with his estate.Mr. Nightingale acknowledges that we debated these issues in Committee, but he accuses my right hon. and learned Friends and myself of timidity. I take the whole weight of that accusation on my shoulders, as I was dealing with the matter, in not pressing the Government harder. Perhaps I may try to make amends, because Amendment No. 256 goes part of the way to deal with the problem.As I mentioned in Committee, the structure of the charge on discretionary benefits is that the beneficiary must be both eligible to benefit and have received actual benefits. If there is a trust for accumulation, however, the appropriate slice can be deemed to pass even if no actual benefit has been paid to the deceased, provided that he is eligible to benefit.
In Committee, we moved an Amendment to provide that this should apply only to accumulations after Budget Day, hut this was rejected. Amendment No. 256 is another attempt to try to go part of the way to reach the same solution. It states that a beneficiary who is perhaps, unlikely to receive any actual benefits under the trust can firmly exclude himself so that after seven years he would be free from any risk of there being a charge to estate duty on his death as a result of his formerly having been a member of the discretionary class. That is to say, he is to be regarded as entitled to be removed from the category of those eligible to benefit.
971 It is the general view among lawyers who deal in this branch of the law that the object of a discretionary trust cannot exclude himself, because although he might bind existing trustees by his deed of exclusion, he cannot in law bind future trustees. Their discretion is in law to be unfettered. Therefore, he remains eligible in spite of all his efforts under the law as it stands, with the consequent potential liability to estate duty if the income of the trust is wholly or partly accumulated. Amendment No. 256 intends to make it clear that if he renounces his interest, he effectively ceases to be eligible to benefit and after the seven-year period the property is no longer at risk on his death.
The Government have admitted—the Minister of State made the point—that the new provisions widen the scope of the charge where there is a trust to accumulate. Mr. Nightingale's point on the Bill as it was originally put forward is a sound one. Amendment No. 256 would go, I admit, only part of the way, but it would be part of the way to meet the legitimate objection which his letter puts forward. I say it goes only part of the way because infant beneficiaries and beneficiaries who are unborn cannot renounce their interests. If there is no renunciation the risk remains.
I believe that this is a reasonable and necessary Amendment in the context of the new estate duty charge on discretionary trusts. Hitherto this has not been necessary because, unless the point was reached of the last two beneficiaries of the class, there was no risk to estate duty on the death of one of the class of discretionary beneficiaries. Now there is. Therefore, some provision must be made to enable a beneficiary to renounce his interest and, if he survives the seven year period, to take him out of the risk of estate duty liability on the trust property. I hope that the Government will feel that this is a reasonable Amendment and will accept it.
§ Sir E. ErringtonI do not quite understand how this position arises. It is a question of what the word "deceased" means. Does it refer to the deceased being a settlor, or does it refer to what happens on the death of one of the beneficiaries under this class of discretionary case? In other words is it 972 retrospective to the date of the actual settlement of the discretionary trust, or is it referable only to the date of the death of one of the persons benefiting from the discretionary trust? Supposing a discretionary trust was made in 1929 which included a number of people who are still alive. If one of them dies after 15th April, is that where the matter is, or does it go right back to 1929?
§ Mr. TaverneI am not quite sure that I have followed the question.
§ Mr. SpeakerI think that the question relates to Amendment No. 201, which we are taking later.
§ Mr. TaverneWith respect to the hon. Member for Aldershot (Sir E. Errington), perhaps I may return to the point he has raised when we deal with Amendment No. 201.
One cannot entirely disregard Amendment No. 201 in considering this Amendment and the criticism which is expressed in today's letter in The Times Business News. That letter relates to the Bill as originally presented and does not have regard to Amendments which are on the Notice Paper, including Amendment No. 201 and the later Amendment No. 175.
One of the criticisms made of the hon. Member for Wanstead and Woodford (Mr. Patrick Jenkin) was that he did not press further on the Question, That the Clause stand part of the Bill, a point which he had earlier raised. A similar criticism is made of me, that I did not refer to the point which he referred to in detailed discussion on the Amendment when we considered the Question, That the Clause stand part of the Bill.
There was a good reason for this. Before we came to the Question, That the Clause stand part of the Bill, I had stated to the Committee that we were intending to revise the provisions of the Bill as presented, and would introduce a seven year limitation of liability under a discretionary trust. This involved a recasting of several provisions of the Bill and, amongst others, the Clause 30(3)(c) which he strongly criticised and which is now Clause 31(3)(c) goes under Amendment No. 175, and so it is no longer there. The criticism in the letter is directed at the Bill as it stands without regard to the Amendments which we shall later be discussing.
973 Under Clause 30 as it is proposed to be amended, the charge is limited to eligibility within seven years of death, plus either actual receipt of benefit or actual non-exclusion from benefit, which amounts to the equivalent of benefit. The charging provisions will refer to two concepts, that of a person who was eligibile to benefit as a result of a discretion as to the application of all or part of the combined income of all the property from time to time subject to the trust and, secondly, that of a person who, having ceased to become eligible in that sense, was nevertheless not entirely excluded from possession of or enjoyment of the property and from any benefit to him by contract or otherwise, and that non-exclusion would extend the time by which one would look back as one has to do with a life interest.
The Amendment now before us, the purpose of which I find slightly difficult to follow, is intended to ensure that a discretionary beneficiary can take himself out of the class of potential beneficiary by a declaration under seal. That perhaps was relevant to the position under the Bill as formerly presented, but under the proposed Amendment No. 201 that position no longer has to be remedied. Since the terms of the Amendment are somewhat uncertain, and since the effect of the Amendment is somewhat uncertain—although the hon. Member explained it, I was not sure what he was intending—I think the House would be unwise to accept the Amendment and should look instead at Amendment No. 201 which meets the point to which this Amendment was fundamentally directed.
§ Amendment agreed to.
§
Further Amendment made: No. 164, in page 36, line 3, leave out 'income of that property' and insert
'of the combined income of all the property from time to time subject to that trust which is'.—[Mr. Taverne]
§ Mr. SpeakerWe come now to Amendment No. 201, which I have separated from the other Amendments which are grouped.
§ Mr. TaverneI beg to move Amendment No. 201, in page 36, line 10, leave out from 'age)' to end of line 31 and insert:
(aa) the deceased having immediately before the date of his death been eligible to benefit 974 as a result of the discretion aforesaid, and the property in question having at that date been subject to the trust, the deceased has so benefited at any time during the material period (that is to say, so much of the period of seven years ending with that date as falls after 15th April, 1963) at which the property was subject to the trust; or(bb) the deceased having ceased to be eligible as aforesaid, or the property in question having ceased to be subject to the trust, at a time within the period of seven years ending with the date of his death, the deceased has so benefited at a time during the material period (that is to say, so much of the period of seven years ending with the date when the deceased or, as the case may be, that property so ceased as falls after 15th April, 1963) at which that property was subject to the trust; or(cc) the deceased or the property in question having ceased as aforesaid before the beginning of the period of even years ending with the date of his death, but the deceased not having been entirely excluded from possession and enjoyment of that property and from any benefit to him by contract or otherwise at all times during that period, the deceased has so benefited at a time during the material period (that is to say, so much of the period of seven years ending with the date when the deceased or, as the case may be, that property so ceased as falls after 15th April, 1963) at which that property was subject to the trust; or.This is a major Amendment and it meets the major criticism on estate duty made in Committee, which I felt had some force. It means that if a beneficiary at the time of his death has had no income for seven years from a discretionary trust, then there is no charge on that beneficiary.If there has been property which has gone out of the trust within seven years of the death, or if the beneficiary ceased to be eligible within seven years of the death, then one finds the proportionate charge on that property by looking at the proportion of the income which the deceased received over the seven years before the property went out, or for the seven years before he ceased to be eligible.
If the property went out more than seven years before and there has been no non-exclusion, and if he ceased to be eligible more than seven years before and he did not retain any benefit, then no charge arises.
There is still the difficulty which I mentioned before of the diminution of estate duty through capital settlements being made instead of income settlements. Perhaps we can deal with that 975 when we come to a later Amendment, I think Amendment No. 175, which deals with that specific point.
The Amendment meets the major criticism on the Clause as a whole. I should perhaps add that the new charge leaves out altogether the charge at present in the Bill at page 36 under the heading (bb). That provided for a charge if the deceased had had no income benefits before the settlement was determined, or an advance of capital was made, but he had had an occupation or enjoyment of property or other benefit afterwards within seven years before his death. That charge was aimed at a possible avoidance of the new liability, but it came under severe criticism from the legal profession because of the great difficulties envisaged in operating it. There clearly was weight in those criticisms, and that charge has been dropped. The question of non-exclusion is only relevant in seeing whether or not the seven year period of time runs; whatever benefit one has retained will not give rise to a separate charge. I hope that this part of the new scheme will prove acceptable to the House.
§ Sir E. ErringtonWill this arrangement operate in regard to all existing discretionary trusts?
§ Mr. TaverneYes.
§ 7.30 p.m.
§ Mr. Patrick JenkinI am glad that the Minister of State has recognised the importance of this Amendment. I believe that it is the most important single Amendment in the whole of the estate duty Clauses. I felt that it would be more desirable to discuss it separately.
Subject to the point which the Minister has mentioned about capital withdrawals, the Amendment obviates the necessity which otherwise would have existed for trustees to keep records going back over the whole of the life of a trust to determine the liability for estate duty on the death of a discretionary beneficiary. This will be widely welcomed by the professions outside which have to administer these trusts.
They and the Opposition can legitimately share the credit for having persuaded the Government—and the Government also may take credit for having 976 been persuaded—that the original proposal was so burdensome as to be virtually unworkable. I shall come later to the problem of capital and will say no more about it now.
We very much welcome the disappearance of the original paragraph (bb). It always seemed to me to be a hypothetical risk of avoidance which it was designed to prevent, and it would have given rise to considerable difficulty of calculation of the duty. I am sure that the balance of advantage is firmly on the side of deleting it, as has been done by the Amendment. We warmly welcome the Government's readiness to meet criticisms on this matter and I know that the Amendment will be greeted with relief outside the House.
§ Mr. T. G. D. Galbraith (Glasgow, Hillhead)This is a complicated matter and I am not a financier. Could the Minister clear my mind on one point? In the case of a discretionary trust which is accumulating, with no payments made and one of the beneficiaries dies—a person who has had nothing and nothing has been distributed—is he or his representative liable for his share, assuming that he would get an equal share with the other beneficiaries? If he has received nothing, is there any duty payable?
§ Mr. TaverneIf he has received nothing for seven years, there is no duty. If he has received something for one year out of the seven, one must consider what proportion it bears to the total income paid out of the trust. That proportionate charge will be made on the capital of the trust.
§ Amendment agreed to.
§
Further Amendments made: No. 166, in line 35, leave out from beginning to 'or' in line 37 and insert:
'that settled property was held on trust to accumulate'.
§
No. 167, in line 40, leave out 'that income' and insert:
'any income of that settled property'.—[Mr. Taverne.]
§ Mr. TaverneI beg to move Amendment No. 168, in page 36, leave out lines 42 to 44.
§ Mr. SpeakerWith this Amendment it will be convenient to take Amendment Nos. 249, 261, 248, and Government 977 Amendment No. 183, and sub-Amendments, and Government Amendments Nos. 184 to 186 and No. 189.
§ Mr. TaverneAmendment No. 168 is a drafting Amendment. The reliefs in question are dealt with in the proposed new paragraph 8A of Schedule 17. This is to be found in Amendment No. 183, which is the main Amendment and has some Amendments to it by the Opposition.
Paragraph 8A does not give rise to any particular difficulty. It contains three separate exemptions from the estate duty charge on settled property. The first relates to charitable trusts and replaces the existing exemption for charity beneficiaries by a wider provision, taking the charitable trust completely outside the charge of duty. At the same time, it meets an undertaking which I gave in Committee to provide exemption for trustees of charitable trusts.
The second exemption in the paragraph merely restates, in slightly different form, an existing exemption in favour of a corporation sole. The third exemption puts it beyond doubt that the new charge on settled property does not apply on the death of a pensioner or annuitant whose benefit was provided under approved superannuation arrangements.
Paragraph 8B is a little more difficult It relates to the request for specific exemption for benevolent funds. This presented us with considerable difficulties. It is hard to draw a clear line between benevolent funds and family discretionary trusts. The opening words of paragraph 8B restrict the exemption to discretionary trusts as opposed to ordinary trusts conferring life interest. There are then further limitations imposed by the new paragraph. It is limited to certain classes only of beneficiary—those employed in a trade their spouses, relatives and dependants and charities. The further limit is that the exemption does not apply on the death of the settlor himself if he also is a beneficiary. Then it provides for associated operations to be excluded.
Under sub-paragraph (2) shareholders of a company controlled by not more than five persons are excluded if they are beneficiaries. If they die a charge arises. Then under sub-paragraph (3) "relative" is defined. This was the 978 only way in which we could draw the line between family discretionary trusts with which the whole of the new recasting of the charge is concerned and the kinds of benevolent funds with which hon. Members opposite are rightly concerned and which, under the new sub-paragraph, are exempted from duty.
§ Mr. Patrick JenkinHere again, the Minister of State has met substantially points which we pressed upon him in Committee. The charitable trustees remuneration which at first he was disposed to resist; he has clarified the position of pension funds. This is admirable that it is to be a statutory provision and that it does not rest merely on Inland Revenue practice. He has made some attempt to deal with benevolent funds as he has described to the House. But it is on this question of the non-charitable benevolent fund that the Government's new paragraph to Schedule 17 does not go far enough and could produce wholly ludicrous results. Under 8B, the Government's scheme is that a discretionary trust will be exempt from estate duty on the death of a beneficiary if the discretion was not exercised except to members of certain closely defined classes. Under sub-paragraph (b)—this is the provision to which I particularly wish to refer—we read that one of the conditions is that the deceased
… was neither a person by whom, or at whose expense, or out of funds provided by whom, the settlement was made nor a relative of such a person:I thought that the Minister of State was a little coy when he passed over that subparagraph, saying that, if benefits were paid to the settlor, that would preclude the exemption applying.I have no doubt that he had in mind the case of the proprietor of a family company who sets up a benevolent trust for his employees. Clearly, he could not escape estate duty by seeing that the income was paid to himself. But it goes much wider than that. If the deceased provided any funds at all, a liability to estate duty will arise on his death. That trust is wholly excluded from the exemption and it is this which makes the Government's Amendment far too restricted and why we have had to put down a number of Amendments to it.
The first of these, Amendment (z) would extend the ambit of the exemption 979 to trusts not merely where discretion is operated but where, for instance, annuities are paid, as happens with many of these benevolent trusts. Our Amendments (bb) and (cc) to the Amendment are drafting Amendments, but it is Amendment (dd) which is the nub of our Amendments on this. With this, we want to bring into the exemptions a class of benevolent fund which is contributory. The point of the provision in sub-paragraph (b) of 8B is that anybody who contributes to a benevolent fund is to be treated, in the language of the Minister of State, as a "settlor". All contributors are persons who have provided funds and they are all to be treated exactly as if they were settlors.
For example, what about a trade union fund? This is clearly intended to be within the exemption, covering
… persons of a class specified in the trust instrument by reference to employment in a particular trade …".I am thinking of a fund in which the members contribute, perhaps, 6d. a week and the fund is available to make discretionary payments to members who fall on hard times, to their widows, to members who fall sick and have accidents and so on. If a member of such a fund dies, having had benefits in the previous seven years, the trustees of that fund will have to pay estate duty if, by reason of the size of the rest of his estate, he comes within estate duty charge.An example which comes rather nearer home is that of our own Members' Fund. Hon. Members will know that, every month, we have deducted from our pay the sum of £2, making £24 a year, which is paid to the Fund. It is not a charitable fund, but is available to ease the hardship of retired Members and members of their families. There is a scale of benefits, on which sums can be paid to individuals who fall on hard times and it is at the discretion of the management trustees of the Fund.
But because we are all contributors, because, in the words of Amendment No. 183, a member who dies would be
… a person by whom, or at whose expense, or out of funds provided by whom, the settlement was made …",the Members' Fund will be liable to the estate duty on the death of someone who has had a benefit from it. I cannot be- 980 lieve that that is the Government's intention. Therefore, I feel that they have not directed their minds to the question of the contributory benevolent fund.I feel strongly that we cannot let this Amendment go through with a contributory benevolent fund, such as our own Members' Fund, or a trade union contributory benevolent fund having a potential liability to estate duty—I would be delighted if the Minister of State can say categorically that this is not so—on the death of someone who has had discretionary payments from the Fund in the last seven years before his death. It is a complete nonsense and our Amendment (bb) will provide the way out.
7.45 p.m.
It would add a new sub-paragraph (d) to provide that a person who makes periodic contributions
…of reasonable amount in all the circumstances so as to constitute or add to the settled property …shall not be regarded as a person at whose expense the fund has been provided. Of course, whenever the word "reasonable" is used, some element of subjective judgment is introduced, but, having discussed this at some length with experts in this field, we have come to the conclusion that there is no other way by which one can exclude the contributory benevolent fund.I am delighted to see that the hon. Member for Bothwell (Mr. James Hamilton) has joined us. His position is well known as an important member of the Labour Party's trade union group. I have been explaining that a trade union contributory benevolent fund will become liable to estate duty under the Government's Amendment. The Minister of State will be entitled to say that there is no liability until the assets reach £10,000, and this will cover the great majority of people who are beneficiaries under benevolent funds. But if one has a house of any size in London, its value cannot be far short of £10,000.
A Member of Parliament may have lived in such a house. When he dies—we know, tragically that this can happen—he can leave a widow with relatively little to live on, in circumstances in which she is entitled to look to the Member's Fund for help. She may nevertheless be the owner of the house and may follow 981 her husband very few months later. The house may bring her within liability for estate duty and, if she has had benefits from the Members' Fund, the Fund will have to pay estate duty on her death. This can only be described as a bizarre situation and I cannot believe that the Government intended it.
Our new sub-paragraph (d) could, perhaps, give rise to some loophole for avoidance. We may not have drafted it with exactly that degree of skill which Government draftsmen might have used, but it would not be right to let this paragraph go as it stands. Our sub-paragraph (d) provides a way of exempting these contributory benevolent funds. Even if the Government's paragraph were on the Statute Book for only a year, so that it could he tidied up in next year's Finance Bill, if the Minister of State has any doubt at all, he should be prepared to accept our Amendment (dd).
It would not be essential to our case to accept the other Amendments, although we believe that they would improve Amendment No. 183, but Amendment (dd) is essential if we are not to impose a ludicrous charge to estate duty, which will fall, not on the widow in the case which I suggested, or the deceased trade union beneficiaries, but on the trustees of the fund.
Trade unionists, employees and others who gladly contribute their sixpences and shillings each week to build up benevolent funds to help colleagues who fall on hard times will resent their contributions being used to finance a charge to estate duty, particularly when such a charge has come in by a side wind.
We must remember that the Bill cannot be amended in another place and that this is the last chance of doing something to solve this problem. I trust that the Amendment will be accepted, even if it is law for only a year and is amended in next year's Finance Bill.
§ Mr. John SmithIf this legislation causes us to take a long, hard look at our Members Fund, a most old fashioned Fund miserably invested, we shall have received benefit from an unexpected quarter.
When drawing up discretionary trusts, people have been in the habit of making 982 the discretion wide and including in it perhaps more people than it was the settlor's intention should, in the ordinary way, benefit. There is a class of discretionary trust—I am thinking of a large one to which my attention has been brought—where the settlor includes members of his family, perhaps not necessarily close ones, as well as employees and past employees of his family business. Amendment No. 183 refers to the exemption applying only if
… the discretion referred to … has not at any time been exercisable with respect to any person other than …and it goes on to list the classes of person, one of whom is the class I have mentioned, namely employees or past employees. If such a trust includes members of the settlor's family, does that take the entire trust out of this exemption?If the trust includes members of the settlor's family but was not primarily intended for that purpose, is there anything which the settlor can do to put the matter right for the benefit of his family business, employees and past employees?
The words "at any time" are not familiar to me in this context and, having done no more than read the OFFICIAL REPORT of the Committee proceedings, I am led to wonder if the phrase "at any time" still means at any time since the start of the trust or whether it is modified by the provisions to which the Minister referred relating to the past seven years.
If there is a charge for estate duty—perhaps I should know the answer to this—is the rate of estate duty calculated solely by reference to the share of the trust or by reference to the share of the trust plus the deceased's own free estate, because in that case it could have deleterious effects on just the people whom the settlor wished to benefit?
§ Mr. TaverneI will first answer the questions asked by the hon. Member for the Cities of London and Westminster (Mr. John Smith). If a trust can be exercised in favour of member; of the family as such—not employees who happen to be members of the family—then there is no exemption for such a trust. If, however, they are employees and if the trust has been exercised in their favour, then while they themselves are not exempted and while the trust will bear estate duty in proportion to the 983 benefit that they have received, it will not lead to the disqualification of the trust as a whole. It means that, in so far as beneficiaries die and are not members of the family, their deaths will not give rise to a charge.
"At any time" means at any time since the trust was settled. It is not whether it has been exercised because the word used is "exercisable". Involved in this question is the matter of whether the family trust gave exemption to employees and members of the family or to employees who may have been members of the family as well. The estate duty is determined by the proportion which the beneficiaries' income bears to the total income from the trust, and that proportion of the trust will bear the estate duty.
If, therefore, there is an estate of less than £10,000 then, as I understand the position, there will be no charge. If the estate is more than £10,000, then there will be an appropriate charge. It will bear no relationship to the free estate of the deceased but will be determined by the chargeable portion of the trust fund itself.
As the hon. Member for Wanstead and Woodford (Mr. Patrick Jenkin) said, the Opposition do not intend to press the first four of the proposed Amendments, which are concerned with an interest in possession. There has never been an exemption from estate duty charged on the death of a life tenant, and in this respect the Bill has not altered the law.
It is to Amendment (dd) that the Opposition attach importance, and there are two points to be remembered about this proposal. First, I cannot advise the House to accept the Amendment because there seems little doubt that it is drafted in terms so wide that it could lead to the widespread use of the exemption in cases where it is not intended that the exemption should prevail. What are regular
…annual, weekly or other periodic contributions of reasonable amount in all the circumstances …when it is difficult to imagine what all the circumstances are?One may need to have regard to the total of the settlement or the total income of the settlor. It could cover settlements which could give rise to a payment if 984 there is a loss or a reduction of income, It could refer to someone who was himself the settlor and who would, therefore, get a considerable benefit. All the estate would escape a charge, when I do not think that that is intended by the Amendment.
However, while I cannot advise the House to accept the Amendment, I admit frankly that I am not entirely happy about the points of criticism that have been adduced in connection with 8B of the Amendment proposed by the Government. The official view is that the words
…neither a person by whom, or at whose expense, or out of funds provided by whom, the settlement was made nor a relative of such a person …are not an apt description of the sort of situation the hon. Member for Wanstead and Woodford has in mind. It is not apt to describe a person who makes modest periodic contributions to a fund and, therefore, the official view is that the Amendment is unnecessary.The kind of employees' contributory sickness or benevolent fund to which the hon. Gentleman referred is a different kind of arrangement from the settlements covered by 8B, in the general context of that provision, where the settlor, as the employer, makes provision for the benefit of his employees.
8.0 p.m.
So the official view is that the Amendment is unnecessary, but I frankly confess that I am not entirely happy about the official view. There is no intention whatsoever to exact a charge in the case of the benevolent or sickness fund, and I can give an assurance that in the kind of case the hon. Gentleman mentioned no charge will be made in the course of the next year. Nevertheless, I should like to look at the matter again, because it seems to me that one could possibly take a different view—that the contributors would be settlors and, therefore, unintentionally might be caught by 8B and that we might be settlors under the Membership Fund.
If, as is the intention of the Revenue, no charge will be made in the case of these funds, the usual objection which is raised, I think reasonably, by hon. Members that they do not wish to rely on undertakings made by the Revenue will not be as serious an objection as it normally is. I want to look at this matter myself very carefully in order to be quite 985 certain that this kind of situation is avoided.
There is some force in the point by the hon. Member for Wanstead and Woodford. The provision will not affect these funds in the course of the next year, but we want the law to be clear, and we do not want to rely simply on Ministerial or Revenue undertakings.
§ Amendment agreed to.
§ Mr. Patrick JenkinI beg to move Amendment No. 255, in page 37, line 14, at end add:
'and when a partnership agreement provides that on the death or retirement of a partner his share in the partnership assets shall vest in the continuing partners who shall pay to him and on his death to his widow (if she survive him) or to his dependants an annuity and such provisions have been in force for at least seven years before the death of the partner the property which vests in the continuing partners on the death or retirement of such partner shall be deemed to have passed to them by reason only of such a bona fide purchase as is referred to in the said section 3'.The Amendment deals with the vexed case of partnerships. In Committee, the Minister of State sought to allay the anxieties that I have expressed, and which have been expressed outside, that the new provision brings in a new charge on the death of a partner. The hon. and learned Gentleman said:I can assure the Committee that there is no change in the position of partnerships. The new charge does not extend the existing charge at all."—[OFFICIAL REPORT, Standing Committee F, 24th June, 1969; c. 730.]I must tell the Minister of State that that assurance has not succeeded in allaying fears.He will remember that the Ralli case in 1936 held that where partners make a mutual agreement that on the death of one, the reserves and good will, etc., should vest in the survivor, it was to be regarded as a case where consideration had been given, and should be excluded. But I am told that, in practice, the Inland Revenue is extraordinarily reluctant to apply the rule. It does not seek to treat the case of the accrual by survivorship to surviving partners as a passing, as it was in Section 1 and, it is now suggested, within this new substituted Section 2(1)(b).
I myself am quite sure that this is wrong. This is a mutual promise, and full consideration has therefore been given. Therefore, it is wise, in view of the fears expressed, and what I am told 986 is the practice of the Estate Duty Office, to state the position fairly and squarely so that no doubt can in future arise. That is what the Amendment seeks to do, and I very much hope that the Minister of State will feel it right that it should be incorporated in the Bill.
§ Mr. TaverneI really do not understand why these fears persist. Paragraph (e) of the substituted Section 2(1)(b) which is to be inserted imposes a charge on the partnership interest which passes on death to the continuing partners. It does not extend the existing charge on partnerships in any way. The charge under paragraph (e) relates only to partnership property passing otherwise than for consideration. The kind of arrangement which is referred to in the Amendment where the annuity is payable to the widow, quite a common arrangement, is one where the annuity is valuable consideration. There is no doubt about this whatsoever. The annuity itself does not attract duty. It was not chargeable to duty before, because of court decisions, and as Section 2(1)(d) is being repealed annuities as to widows under partnership agreements will never be chargeable to duty. But that fact does not in any way prevent them from being valuable consideration. Therefore, as I say, I do not see where the doubts can arise.
Even if the supposed difficulty about annuities had existed, I am afraid that the Amendment would not have been a suitable way of dealing with it. The hon. Gentleman himself understands that an Amendment which appears to be appropriately drafted can never, perhaps, have been as fully discussed by a large number of people looking at all the difficulties, as happens with Government Amendments, and it is inevitable that some points will from time to time be overlooked.
There are some difficulties here. The Amendment refers to an interest vesting on death or retirement, although the charge under paragraph (e) arises only on death. Again, instead of providing for the annuity to be treated as consideration for the passing of the share, it provides that the share itself is to be treated as passing by reason only of a bona fide purchase, however small the annuity. But under the existing law, if the value of the obligation to pay the annuity equals the value of the partnership there is full consideration, but if it 987 is less there will be a proportionate exemption only. There would be a total exemption under the Amendment.
Finally, the requirement in the Amendment that the agreement must have been in existence for seven yars before death is illogical, because if the disposition is to be exempted as a bona fide purchase it should be exempted whenever made.
I therefore cannot recommend the House to accept the Amendment. I do not see the need for it. I do not see how any possible argument can be mounted that the charge has been in any way extended. It is only because the old difficulty under Section 1 has led to the repeal of the Section that specific words are needed, but they do not in any way extend the existing law.
§ Mr. Patrick JenkinI am sure that what the Minister of State has just said will be read by those concerned in the matter outside the House. I hope that in his second attempt he will prove to have succeeded in removing the anxieties that have been expressed. I beg to ask leave to withdraw the Amendment.
§ Amendment, by leave, withdrawn.
§ Amendment made: No. 169, in page 38, line 11, leave out 'received by the trustees in their capacity as such' and insert 'of that property'.—[Mr. Taverne.]
§ Mr. TaverneI beg to move Amendment No. 170, in page 38, line 27, after 'on', insert:
'or at a date ascertainable only by reference to'.The Clause as it stands provides thatIn the enactments relating to estate duty … the expression… 'settlement' … shall include a lease of property which is for a life or Lives or for a period ascertainable only by reference to a death or which is terminable on a death, that property"—is to be treated:as the property comprised in the settlement.This definition does not cover the lease of property for a period terminable, not actually on death but on a date ascertainable only by reference to death; that is., three months after death. The Amendment is intended to meet this point.
§ Mr. Patrick JenkinThe Minister of State will know that we objected in Com- 988 mittee to this extension of the charge to estate duty to cover leases terminable on death. It would be out of order if I pursued that case on this Amendment. We recognise that if the charge is to be made this Amendment is necessary to make it comprehensive, but I should like the Minister to realise that our hostility to this provision remains unabated.
§ Amendment agreed to.
§
Further Amendments made: No. 171, in page 39, line 16, after 'and' insert:
'(notwithstanding the provisions of section 34(2) of this Act)'.
No. 172, in line 37, leave out 'held by trustees as' and insert:
'subject to such a trust as is'.
No. 173, in line 47, leave out from 'interest' to end of line 3 on page 40 and insert:
'subject to that trust subsists, shall be treated for the purposes of that sub-paragraph as being the property subject to that trust'.
No. 174, in page 40, line 4, leave out from 'to' to 'shall' in line 6 and insert:
'the income of any property'.—[Mr. Taverne.]