NEW METHOD OF CHARGING TAX—TRANSITIONAL PROVISIONS (Hansard, 7 July 1971)

§ Mr. Patrick Jenkin

I beg to move Amendment No. 41, in page 88, line 20, leave out paragraph 2 and insert: 2.—(1) Where any provision, however worded, contained in an instrument (of whatever nature) made on or after 3rd September 1939 or in a will or codicil taking effect on or after that date provides for the payment, whether periodically or otherwise,—

(a) of a stated amount free of income tax other than surtax; or
(b) of an amount which, after deduction of income tax at the standard rate, is equal to a stated amount;

it shall have effect as follows. (2) If it is such a provision as is mentioned in sub-paragraph (1)(a) above it shall have effect as if it provided for the payment of the stated amount free of income tax other than such as exceeds the amount to which the person to whom the payment is made would be liable if all income tax were charged at the basic rate to the exclusion of any other rate. (3) If it is such a provision as is mentioned in sub-paragraph (1)(b) above, it shall have effect as if it provided for the payment of an amount which, after deduction of income tax at the basic rate, is equal to the stated amount. This is a complex matter with which I shall try to deal in two or three sentences.

It refers to the question of covenants which are expressed in one form or another to be free of tax. Chancery lawyers in the House will be familiar with the hideous complications of what is known as the rule in re Pettit. As the Clause 1414 was originally drawn, it had the effect of turning all free-of-tax covenants into covenants which would be unaffected by the rule in re Pettit. This was not our intention. Therefore, we have redrawn the Clause so that the covenants will continue to be interpreted as though they were in re Pettit covenants or other covenants—for instance, expressed in the form of such a sum as after the deduction of tax at the basic rate would amount to the given sum.

This is a technical matter which arises betwen annuitants and trustees. I think that the Clause as it will be if the Amendment is accepted will meet the purpose. However, I recognise that because this is a complex matter there may well be room for more than one view. We can, if necessary, have a second bite at it if during the year further consultations suggest that even now we do not have it absolutely right.