§ 'Without prejudice to the provisions of Part XVI of the Taxes Act 1970 the income arising to trustees of a settlement, on which the Treasury has given a direction under subsection (1) of section 78 below, under sections 16 and 17 of the Finance Act 1973 shall be treated as the income of the trustees and not of any other person.'—[Mr. Hordern.]
§ Brought up, and read the First time.
§ 3.15 a.m.
§ Mr. Hordern
I beg to move, That the clause be read a Second time.
I am glad to see the Financial Secretary in his place. Over the last two years during which we have had discussions on heritage amendments such as this, we have had the pleasure of the company of the Chief Secretary. Although his answers last year were relatively helpful, this year he has become stonier and stonier, so it is high time we had a change. I hope that the Financial Secretary's presence means that there will be a real improvement in the kind of answers we shall get.
The clause is concerned with the fund which is set aside to carry out repairs to heritage homes. When we discussed this matter in Committee it seemed that the Chief Secretary had not properly interpreted the purpose of the fund, a suggestion which we made a year ago. The Chief Secretary seemed to think that its purpose was that at any time it could be broken and that the resources in it could then be returned to those who had originally settled it, free of capital gains and capital transfer taxes.
My hon. Friend the Member for Bristol, West (Mr. Cooke) and I made it clear that that was not our intention. The purpose was to allow the fund to be applied for repairs and maintenance of historic buildings and for that purpose alone. Certainly, had the funds been distributed, capital transfer and capital gains taxes would have been payable. So the Chief Secretary misapprehended the basis of the fund in the first place. The new clause is intended to make it clear that the tax should be paid by the trustees of the fund and not by those who set up the fund or their successors.
596 To give an example of the kind of problem which arises, under the Bill as it stands, it is one thing for the settlor to be taxed on his income within the fund and on any expenditure which is made for repairs and maintenance. But after the settlor has disappeared from view or died, his successor will then be taxed not only at his own personal rate but, in the event of his carrying out any expenditure on repairs and maintenance, on the accumulated part of the fund—and all as if the income had been received in the course of the one year. Thus, on expenditure which might have amounted to£100,000 for a major repair, he could be taxed as if he had received£1 million or even more, because the accumulated sum by that time could be very large.
I hope that we did enough in Committee to show the Financial Secretary that there was no question of any tax evasion here. All that was required was the setting up of a fund devoted solely to repairs and maintenance. The principle was accepted by the Government if the fund was to be free of capital gains and capital transfer taxes. But now, if it is to be carried from one generation to another, it will be impossible to do these repairs at all, beyond one generation at any rate.
Those concerned with these matters are very worried about the position. They see no particular advantage in the fund as it has been put forward by the Government. I hope that the Financial Secretary will be able to give an encouraging reply. I am sure that he has had plenty of time to consider the matter and will recognise that this objective is welcomed on both sides of the House.
§ Dr. Jeremy Bray (Motherwell and Wishaw)
Since the provision for maintenance funds is very useful, would the hon. Gentleman agree to support the deletion of the clause altogether?
§ Mr. Hordern
My reading of the new clause must be very different from the hon. Gentleman's. With the solitary exception of the hon. Gentleman, I think 597 that there is widespread agreement on both sides of the House that we want to find the best way of maintaining these heritage houses as cheaply as can reasonably be done. The best way would seem to be to allow those who live in them to carry out repairs as expeditiously and cheaply as possible. I suggest that this is the best way to do that. I hope that the Financial Secretary will feel able to accept the new clause so that this purpose, which is commonly agreed on both sides, can be carried out.
§ Mr. Robert Sheldon
The hon. Member for Horsham and Crawley (Mr. Hordern) seemed to see some sign of hope in the fact that I was to reply to the debate. The hon. Gentleman mentioned the stony replies that he received from my right hon. Friend the Chief Secretary. I cannot offer the hon. Gentleman very much hope here, but I can offer some understanding of the problem that he explained.
We discussed this matter in Committee upstairs. The hon. Gentleman said that he believed that the Chief Secretary was under some misapprehension as to the purposes that he had in mind. Indeed, the hon. Gentleman said that he certainly did not wish to see the fund that he has described broken up and returned so that avoidance of capital transfer tax and capital gains tax was possible. The hon. Gentleman pointed out that his whole purpose was to allow the fund to be used solely for the maintenance of historic houses. If this money were distributed, he accepts that CTT and CGT should be payable.
The hon. Gentleman described the position after a settlor had died. I have been trying to follow his argument. As I see it, the clause would limit the income tax charge on the income from the maintenance fund set up in accordance with Clause 78 to the trust rate of 50 per cent., provided that the settlement was made by someone other than the owner of the historic house or his wife. Settlements set up by the owner of the house, or by his wife, would still be caught by the settlement provisions, so that the income from the fund would normally be treated as the settlor's income.
Clause 78 gives exemption from capital transfer tax on the setting up of the 598 maintenance fund and the new clause would give income tax concessions on the income from funds of that kind.
The current position under the income tax law is that, if such a fund is set up and the settlor is still living, income paid out on maintenance or accumulated in trust is taxable—the hon. Gentleman accepted that—at the settlor's marginal rate, which may be up to 98 per cent., as we know. But if the settlor is dead, the income paid out on maintenance is liable to be taxable at the new owner's marginal rate, while income which has accumulated in trust will be liable to tax at the rate of 50 per cent.
If the clause is accepted, we should be giving income tax relief as well as capital transfer tax relief. I do not know whether I am as stony as my right hon. Friend, but we believe that this is an excessive privilege. The relief we have accepted is the relief from capital transfer tax. We believe that we have been as helpful as can be.
These are early days. Obviously, as with the introduction of any new provision, we shall want to take advantage of the opportunity of seeing how the thing works out. I am sure that both the hon. Member and I will be around for some time to discuss the way in which these matters progress. I am sure that he will bring other matters to my attention, to which I shall be happy to listen with the respect that I always accord to whatever he puts before me. Perhaps if the arguments change in his direction I shall obviously be prepared to listen to them with understanding and possibly even with sympathy.
§ Mr. Hordern
The Minister's reply was disappointing. It was, however, couched in friendly terms. I am therefore certain that he will be subjected to a number of requests to discuss these matters. He may understand that this will cause disappointment to those who have put a great deal of time and work in proposing this fund, the principle of which was in any case accepted by the Government. Whether this matter is dealt with by the Chief Secretary or the Financial Secretary, the Minister will be asked to receive a number of submissions in due course. I hope that better considerations will prevail at the time of the next Finance Bill, despite whatever the hon. Member 599 for Motherwell and Wishaw (Dr. Bray) may think about it when it comes.
On that basis, I beg to ask leave to withdraw the motion.
§ Motion and clause, by leave, withdrawn.
§ Further consideration of the Bill, as amended, adjourned.—[Mr. Robert Sheldon.]
§ Bill, not amended (in the Committee) and as amended (in the Standing Committee), to be further considered this day.