§ Mr. Taverne
I beg to move Amendment No. 10, in page 12, line 28, at end insert:(3) This section shall not apply for surtax purposes.The longer this debate goes on the smaller the Government's majorities become: as we proceed no doubt this pattern will develop in a most interesting way.
We now come to one of the most indefensible Clauses in the Bill. We have given in Committee our reasons for so regarding it, and our objections to the Clause as a whole are twofold. First, it destroys the principle of equity that was created as between taxpayers in similar positions, who are now to be treated differently. Secondly, it reintroduces an element of social injustice which had in cases of higher income previously been abolished.
§ The Amendment does not deal with the first of these objections. What we now propose is a rather narrower reform. It still leaves the inequity which exists between, for example, maintenance pay- 1268 ments made to a wife by an order of the magistrates' court, where the children's income will, in effect, be treated as part of the family income and taxed in an aggregated fashion, and other payments made after a settlement in the High Court, where an arrangement can be made and the children's income can be separated. That kind of inequity will persist.
§ But the Amendment would limit the scope of the injustice which is created by the Clause. It would exempt cases of special provision for children in regard to aggregation for income tax, but it would mean that in future there would still be aggregation for surtax. This is a distinction which is already well known in tax law, because it already exists in the case of covenants. The Amendment is, therefore, very much a second best.
§ What does it mean in practice? It means that if there is a family of modest means—modest, that is, compared with the main beneficiaries under the Bill—the children's income will be their income—by which I mean an income within the surtax range—there will be no tax benefit of any kind proposed in the Bill.
§ The Amendment is to a large extent a test of the Government's good faith, because when we have approached the question in the past it has been 1269 strenuously denied by Government spokesmen that what they were interested in was the kind of arrangement which would benefit the wealthier families. They said that the cases that moved them to this reform and led them in the past to object to our reform were those in the middle income groups; the case, for instance, of the widow left with her commitments who wanted to educate her children. It was not the surtax payers with whom hon. Members opposite said that they were concerned.
§ By this Amendment we give them an opportunity in fact to show whether this is the category with which they are concerned, that is only the widows and those with the middle range of incomes and not the surtax payers. If it is, it is clearly the task of the Government to accept the Amendment to show that this is what they have been talking about all along; if not, it will be plain what the true purpose of the Clause is.
§ 11.15 p.m.
§ Mr. Patrick Jenkin
It rather surprised me to see the Amendment on the Notice Paper after the debate which we had in Committee of the whole House last month. What it seeks to do is to apply the principle of aggregation solely for the purpose of surtax and, although I do not put too much weight on this, only for 1972–73, because by April, 1973, surtax is to disappear. The figure for the total cost of the concession in the Budget was £15 million and in Committee I gave the figures of £10 million for income tax and £5 million for surtax. So, although I accept that the hon. and learned Member for Lincoln (Mr. Taverne) did not accept the principle of the whole Clause, by this Amendment he seems prepared to settle for about one-third of it.
The crucial point is to realise how little tax advantage there would be in what has always been regarded as the case at which the aggregation Clause was aimed—the grandfather covenant. The reason for this is plain. Ever since 1965 any covenant made in favour of a grandchild has been ineffective to transfer income from the grandfather to the grandchild except for income tax purposes. It does not affect the grandfather's surtax.
Accordingly, when income under the aggregation provisions of 1968 is deemed 1270 to be the income of the parents of the child, it could not in those circumstances be the income of the parents for surtax purposes, because it remained the income of the grandfather for surtax purposes, and even Labour Members did not seek to make it the income of two different people for surtax purposes.
Therefore, the only advantage to be gained from making a covenant in favour of the grandchild, if it is to apply only for surtax purposes, is to make the child an income against which its own personal allowance may operate. But even then there is a limit to the advantage to the family, because we deliberately left the figure, at £115 above which the child allowance enjoyed by the parents would abate pound for pound.
Therefore, the Amendment's effect on the generality of grandfather covenants would be almost negligible. A very limited measure of aggregation would remain to take effect. On the other hand, there would be a substantial complication to the tax system, because in addition to the question of whether the child was at work, and it is only aggregated when the child is not in full-time work, we should be introducing once again the problem of the age of the child between 18 and 21. The parent-child settlement would continue to apply for surtax purposes for children up to the age of 21 and we should have to determine the aggregation provision depending on whether the income came from the parent or some other person. Furthermore, one would be creating new anomalies. If, for instance, a child has £400 of income under a trust and no other income, under the present law and aggregation provisions, it is aggregated with his parent's income for tax purposes. It is liable to surtax in the parent's hands, but the parents can claim a child allowance.
If the Amendment were to be accepted, so that the aggregation applied only for surtax purposes, the income would be taxed as a child's for income tax purposes, but in view of the amount the parent would not be entitled to the child allowance and it would follow that there would be no allowance due to the parent for surtax because the child allowance runs for surtax only when it applies for income tax. In other words, the income would be liable to surtax in the parent's hands without the benefit of the 1271 child allowance which can at present be claimed.
I cannot believe that that would be the intention of the hon. and learned Gentleman. Obviously, a grotesque anomaly would result from it, and that is an added reason why it would be inappropriate to accept the Amendment.
Perhaps the clinching argument about this is to remember the philosophy on which the aggregation principle was based. It was based on the concept of the common spending unit, that the parent and child would together be regarded as a single taxable family unit. But if it is to be only a single taxable family unit for the purpose of surtax, where does the principle go? The principle has largely been conceded if it is not to apply to the great mass of taxpayers which, as I said in Committee, probably ran into six figures where no question of any surtax is involved. If they are not to be regarded as common spending units, where is the logic of treating the family as a common spending unit solely for the purposes of surtax?
As we said in 1968 and in 1969, and as I said in Committee, we deplored the whole principle on which the basis of this process of aggregation of children's income was based. We regarded it as being a grave injustice to many tens of thousands and possibly hundreds of thousands of families. This is in no wit changed by the fact that this is to apply only to surtax. I can only advise the House to reject the Amendment.
§ Mr. Taverne
There is a simple answer to the Financial Secretary's points. People who make settlements of this kind take advice. If complications arise in the case of surtax, which the Financial Secretary has mentioned, the settlements will not be made.
§ The Amendment is moved precisely to prevent settlements being made which would produce this inequity among taxpayers.
§ Amendment negatived.