§ 7.45 p.m.
§ Question proposed, That the clause stand part of the Bill.
§ Mr. Denzil DaviesClause 22 comes under the heading
Miscellaneous and Supplementary ".That may seem rather technical and uninteresting.The Opposition register their dissent to this clause. They see it as a forerunner of 347 numerous clauses to come next year after the Chancellor has carried out his review of capital transfer tax. As a result of clause 22(1) we shall see a gradual movement towards a substantially changing capital transfer tax in relation to trusts and settlements.
The settlements mentioned in clause 22(1)(a) are discretionary settlements. There may be others. Discretionary settlements are in the main tax avoidance devices. Since the establishment of capital transfer tax there has been a gradual demise of new discretionary settlements. Here we see a slow resurrection of the discretionary settlement.
If the intention is to do away with the periodic charge and make other modifications, we may see the resurrection of the tax avoidance device—the discretionary settlement—when the Chancellor carries out his review of capital transfer tax That will be a slight irony. Income tax is being reduced at the top rates to encourage drive and initiative and enable people to establish businesses. We may find that there is an increase in tax avoidance by means of discretionary settlements as a result of this clause.
Clause 22(1)(b) extends the date for the capital distributions out of settlements —not just discretionary settlements. I remember the debates on capital distributions in Committee five and six years ago. The then Opposition argued strongly that tax should not be applied to settlements made before the tax was introduced—as if somehow settlements should be immune from the general yearly changes of taxation. Indeed, that argument won a concession, as there is now a transitional period. That period is now to be extended.
We are now hearing the first few shots in the battle that is to come, as the Government relax the rules for taxation of settled estates, try to take us back to a different regime, and free the taxation of capital from what we consider to be the sensible rules introduced under the previous capital transfer tax provisions. No doubt the hon. and learned Gentleman will respond. I am not really asking him questions but saying that we shall vote against the clause, because we see it as a forerunner of much that is to come next year.
§ 8 p.m.
§ Mr. Peter ReesI am always happy to respond to the right hon. Member for Llanelli (Mr. Davies). I think that his memory serves him correctly but I suspect that his hand has lost its cunning to a small degree. I have no doubt that when he settles back comfortably into private practice at the Bar it will re-acquire the cunning that it had before 1975, or whenever it was that he became a distinguished ornament of the last Administration.
The right hon. Gentleman is quite right in his broad description of clause 22 which is designed, as I am sure the Committee will have divined, to extend the transitional relief from the periodic charge for settlements without an interest in possession. I cannot now recall whether the periodic relief was introduced as a concession to pressure from the Conservative Benches in the Standing Committee which debated the capital transfer tax or whether it came from his own fertile mind, but it was designed to provide transitional relief until 1 April 1980. I must draw on my own memory here—I know that the right hon. Gentleman will correct me if I am wrong—but I suspect that the reason is that he and his right hon. Friends recognised in their heart of hearts that the new fiscal framework, the new capital tax which they had devised, bore a little hardly, perhaps, on discretionary settlements.
I regard the right hon. Gentleman, on the whole, as a very unprejudiced and candid hon. Member but I believe that, exhibiting one of his few prejudices—or perhaps here he is merely deferring to the prejudices of his hon. Friends below the Gangway—he feels that practically all settlements are great vehicles for tax avoidance. [Interruption.] The right hon. Gentleman demurs at that. Perhaps he will make a reservation in favour of strict settlements.
§ Mr. Denzil DaviesI made my reservation at the beginning. I made it quite clear that I was talking of discretionary settlements, and 90 per cent. of them are tax avoidance devices.
§ Mr. ReesI am glad to be able to clear away some of the ground work. I always like to establish a little common ground between the right hon. Gentleman and myself. This perhaps will ease our task when we come to debate the reforms 349 to capital transfer tax that we hope to put in hand. We may take it, then, that we shall not have too much difficulty from the right hon. Gentleman and his hon. Friends about a regime for strict settlements—settlements where there is a life interest only.
The right hon. Gentleman, exhibiting one of his few prejudices, has come to regard discretionary settlements as vehicles for tax avoidance.
§ Mr. Denzil DaviesThere are no discretionary settlements.
§ Mr. ReesI think that the right hon. Gentleman is a little premature to suggest that there are no discretionary settlements. It is wrong for me to draw on my experience before 8 May, but I suspect that there are still a few. I say to the right hon. Gentleman—and, indeed to the rest of the Committee—that discretionary settlements have other advantages than purely fiscal advantages. They have a degree of flexibility that is not always to be found in all forms of settlement. There are perfectly reputable reasons—using the word " reputable " in terms, perhaps, of the right hon. Gentleman's rather narrow definition—for adopting discretionary settlements which might, although I doubt it, commend themselves to Labour Members.
I also remind the right hon. Gentleman and the Committee that we are not just concerned with discretionary settlements but with settlements without an interest in possession. Although this may seem a rather arcane point, it is a point of some importance, as I shall hope to demonstrate in a moment. I apologise for appearing to weary the Committee with technicalities in a highly technical field, but a settlement without an interest in possession may cover a wide range of settlements that would not in normal parlance be regarded as discretionary settlements. For example, an accumulating settlement may also be covered.
But I must return to the theme of the debate and say how well I recall the debates in Committee Room 10 that went on night after night on the structure and design of capital transfer tax. The right hon. Gentleman and his right hon. and hon. Friends felt it right to provide a transitional period, so as to give settlors—or, perhaps more exactly, trustees- 350 caught in the toils of this unattractive tax, a chance to readjust to settlements, if they legitimately could, so as to create settlements with an interest in possession, and thus avoid the periodic charge.
I am sure that the Committee is conversant with the way in which the periodic charge works, whether it be a decennial periodic charge or an annual one. I remind the Committee and the right hon. Gentleman—who perhaps did not entirely grasp the point—that subsection (2) is aimed at dealing with the case of settlements without an interest in possession which have foreign resident trustees, because they are in a special position. The right hon. Gentleman and his friends thought it right that there should be this transitional period, which was to run out on 1 April 1980. There was a tapering scale of relief to give this chance for trustees to make the necessary adjustments.
There are two reasons why we have felt it right to extend this transitional period from 1 April 1980 to 1 April 1982. The first is a relatively uncontroversial one and will, I hope, commend itself to each side of the Committee. It may, perhaps, enable the right hon. Gentleman to extricate himself from his untenable position and not press the matter to a Division. I may not have presented my arguments with sufficient lucidity, but he may perhaps recognise the point that I am attempting to get across to him and to his hon. Friends.
The reason why I spent a little time in discoursing on what is meant by an interest in possession is that it is crucial for determining whether there is to be a periodic charge. One would have thought. therefore, that the previous Administration would have given certain thought to what was meant by an interest in possession, because it is a crucial concept.
§ Mr. Denzil DaviesThey did.
§ Mr. ReesThe right hon. Gentleman murmurs " They did." I can only say that I pressed the right hon. Gentleman and his right hon. Friend the Member 'or Ashton-under-Lyne (Mr. Sheldon) on many occasions. Indeed, with a certain temerity I tabled an amendment which attempted to define in comprehensive terms what was meant by an interest in possession. The right hon. Gentlemen 351 sheered away from that. The best they were able to do was to instruct the Inland Revenue to produce a press release as to what they understood this important concept to mean. It is fundamental to the operation of capital transfer tax. Therefore one would have thought they would devote considerable care to the construction of this concept. They put out a press release on the basis of which, I understand, many trustees have adjusted their settlements.
This view of the Inland Revenue has recently been challenged in the courts in the case of the Commissioners of Inland Revenue v. Pearson. Both the Chancery Division and the Court of Appeal have found against the view which found favour with the Inland Revenue, which was presumably the basis on which the tax had been constructed. I am sure that the right hon. Gentleman, if he pays a little more attention to my argument—dull and laborious though it may be—will recognise that in the light of this decision it is necessary to re-think these provisions. It may be that the House of Lords will give permission to the Inland Revenue to take this case further, but at the moment application has been turned down. Everybody is left in a state of uncertainty and confusion. I do not think that I have to accept any blame for this, because it is a point that I have raised on numerous occasions with the previous Administration.
I am sure that the right hon. Gentleman, on reflection, will realise that this position, standing on its own, is a good enough reason for extending the transitional period so that some clarification can be sought, either from the House of Lords or possibly through legislation—inevitably, perhaps, through next year's Finance Bill.
But there is a more fundamental reason why we believe that the transitional period should be extended. Here I do not expect to carry Opposition Members with me. I am sure that what I have to say will commend itself to my hon. Friends. We have considerable reservations—expressed
§ on many occasions—about the structure and the rates of capital transfer tax. My right hon. and learned Friend pointed out in his Budget speech—and I know that this commended itself to my hon. Friends—that it is necessary that we should undertake a very thorough review and re-examination of this tax. Hon. Members on each side of the Committee will realise that it is a tax of considerable complexity and will require considerable thought and investigation.
§ It will be impossible, I regret to say, to produce to the House before the next Finance Bill the necessary measures to make it a bearable tax—the kind of tax with which all the commercial, agricultural and individual interests of this country can live in the years to come. Provided we achieve a little goodwill from Opposition Members I am sure that we shall be able to find a common basis on which to humanise the tax. [Interruption.] The right hon. Member for Llanelli is showing that he has a closed mind on the subject, and I am sorry. On the whole the right hon. Gentleman shows himself to be remarkably free of prejudice. The matter evidently touches some deep and unattractive core in his make-up. I do not wish to pursue the right hon. Gentleman's prejudices. They are not prejudices that will commend themselves to my right hon. and hon. Friends.
§ 8 p.m.
§ Those are two substantial reasons, one of which is relatively unpartisan. On that basis I hope that the Committee will see that there is good sound sense and every reason, both in equity and in sense, why the transitional period should be extended until 1982. It is a very modest measure and I am sure that on reflection the right hon. Gentleman will realise that he will only be parading his prejudices if he presses the point to a Division.
§ I hope that I carry the Committee with me and that it will accept, without a Division, the modest measure of relief contained in clause 22.
§ Question put, That the clause stand part of the Bill.
§ The Committee divided: Ayes 199 Noes 144.
355| Division No. 49] | AYES | [8.01 p.m. |
| Aitken, Jonathan | Atkins, Rt Hon H. (Spelthorne) | Benyon, W. (Buckingham) |
| Alexander, Richard | Baker, Nicholas (North Dorset) | Berry, Hon Anthony |
| Alton, David | Beaumont-Dark, Anthony | Best, Keith |
| Arnold, Tom | Beith, A. J. | Bevan, David Gilroy |
| Aspinwall, Jack | Benyon, Thomas (Abingdon) | Biffen, Rt Hon John |
| Biggs-Davison, John | Hawkins, Paul | Porter, George |
| Blackburn, John | Hawksley, Warren | Powell, Rt Hon J. Enoch (S Down) |
| Bottomley, Peter (Woolwich West) | Heddle, John | Prior, Rt Hon James |
| Boyson, Dr Rhodes | Hogg, Hon Douglas (Grantham) | Proctor, K. Harvey |
| Bright, Graham | Holland, Philip (Carlton) | Rathbone, Tim |
| Brinton, Tim | Hooson, Tom | Rees, Peter (Dover and Deal) |
| Brooke, Hon Peter | Howe, Rt Hon Sir Geoffrey | Rees-Davies, W. R. |
| Brown, Michael (Brigg & Sc'thorpe) | Howells, Geraint | Renton, Tim |
| Bruce-Gardyne, John | Hunt, John (Ravensbourne) | Rhodes James, Robert |
| Buchanan-Smith Hon Alick | Irving, Charles (Cheltenham) | Ridley, Hon Nicholas |
| Budgen, Nick | Jessel, Toby | Roberts, Michael (Cardiff NW) |
| Bulmer, Esmond | Jopling, Rt Hon Michael | Ross, Stephen (Isle of Wight) |
| Burden, F. A. | Kaberry, Sir Donald | Ross, Wm. (Londonderry) |
| Cadbury, Jocelyn | Kilfedder, James A. | Rost, Peter |
| Carlisle John (Luton West) | Kimball, Marcus | Sainsbury, Hon Timothy |
| Carlisle, Kenneth (Lincoln) | King, Rt Hon Tom | St. John-Stevas, Rt Hon Norman |
| Chalker, Mrs Lynda | Knight, Mrs Jill | Shaw, Michael (Scarborough) |
| Channon, Paul | Knox, David | Shelton, William (Streatham) |
| Chapman, Sydney | Lamont, Norman | Shepherd, Colin (Hereford) |
| Churchill, W. S. | Lang, Ian | Shepherd, Richard(Aldridge-Br'hills) |
| Clark, Dr William (Croydon South) | Langford-Holt, Sir John | Sims, Roger |
| Clegg, Walter | Lawson, Nigel | Skeet, T. H. H. |
| Cockeram, Eric | Le Marchant, Spencer | Speed, Keith |
| Colvin, Michael | Lester, Jim (Beeston) | Speller, Tony |
| Cope, John | Lloyd, Ian (Havant & Waterloo) | Spence, John |
| Corrie, John | Lloyd, Peter (Fareham) | Spicer, Michael (S Worcestershire) |
| Costain, A. P. | Lyell, Nicholas | Squire, Robin |
| Cranborne, Viscount | Macfarlane, Neil | Stainton, Keith |
| Critchley, Julian | MacGregor, John | Stanbrook, Ivor |
| Crouch, David | MacKay, John (Argyll) | Steel, Rt Hon David |
| Dean, Paul (North Somerset) | McNair-Wilson, Michael (Newbury) | Stewart, Ian (Hitchin) |
| Dodsworth, Geoffrey | McQuarrie, Albert | Stewart, John (East Renfrewshire) |
| Dorrell, Stephen | Madel, David | Stokes, John |
| Dover, Denshore | Major, John | Stradling Thomas, J. |
| Dykes, Hugh | Marshall, Michael (Arundel) | Tebbit, Norman |
| Eggar, Timothy | Marten, Neil (Banbury) | Temple-Morris, Peter |
| Elliott, Sir William | Mates, Michael | Thorne, Neil (llford South) |
| Eyre, Reginald | Mather, Carol | Thornton, Malcolm |
| Fairbairn, Nicholas | Maude, Rt Hon Angus | Townsend, Cyril D. (Bexleyheath) |
| Fairgrieve, Russell | Mawby, Ray | van Straubenzee, W. R. |
| Faith, Mrs Sheila | Mawhinney, Dr Brian | Viggers, Peter |
| Fenner, Mrs Peggy | Meyer, Sir Anthony | Waddington, David |
| Fisher, Sir Nigel | Miller, Hal (Bromsgrove & Redditch) | Wainwright, Richard (Colne Valley) |
| Fletcher, Alexander (Edinburgh N) | Mills, lain (Meriden) | Wakeham, John |
| Fookes, Miss Janet | Mills, Peter (West Devon) | Waldegrave, Hon William |
| Fowler, Rt Hon Norman | Molyneaux, James | Walker, Rt Hon Peter (Worcester) |
| Fox, Marcus | Montgomery, Fergus | Walker-Smith, Rt Hon Sir Derek |
| Freud, Clement | Moore, John | Wall, Patrick |
| Gardiner, George (Reigate) | Morris, Michael (Northampton, Sth) | Waller, Gary |
| Garel-Jones, Tristan | Morrison, Hon Peter (City of Chester) | Ward, John |
| Glyn, Dr Alan | Murphy, Christopher | Watson, John |
| Goodlad, Alastair | Myles, David | Wells, Bowen (Hert'rd & Stev'nage) |
| Gorst, John | Neale, Gerrard | Wheeler, John |
| Gower, Sir Raymond | Newton, Tony | Wickenden, Keith |
| Gray, Hamish | Onslow, Cranley | Wilkinson, John |
| Griffiths, Eldon (Bury St Edmunds) | Page, John (Harrow, West) | Williams, Delwyn (Montgomery) |
| Griffiths, Peter (Portsmouth N) | Page, Rt Hon R. Graham (Crosby) | Winterton, Nicholas |
| Grist, Ian | Parris, Matthew | Wolfson, Mark |
| Grylls, Michael | Patten, Christopher (Bath) | |
| Gummer, John Selwyn | Pattie, Geoffrey | TELLERS FOR THE AYES: |
| Hamilton, Hon Archie (Eps'm&Ew'll) | Penhaligon, David | Lord James Douglas-Hamilton and |
| Hamilton, Michael (Salisbury) | Percival, Sir Ian | Mr. Robert Boscawen. |
| Hannam, John | Pollock, Alexander | |
| NOES | ||
| Adams, Allen | Cocks, Rt Hon Michael (Bristol S) | Dobson, Frank |
| Allaun, Frank | Coleman, Donald | Dormand, Jack |
| Armstrong, Rt Hon Ernest | Concannon, Rt Hon J. D. | Douglas, Dick |
| Ashton, Joe | Conlan, Bernard | Dunwoody, Mrs Gwyneth |
| Atkinson, Norman (H'gey, Tott'ham) | Cowans, Harry | Eadie, Alex |
| Barnett, Rt Hon Joel (Heywood) | Craigen, J. M. (Glasgow, Maryhill) | Eastham, Ken |
| Benn Rt Hon Anthony Wedgwood | Cryer, Bob | Ellis, Raymond (NE Derbyshire) |
| Bidwell, Sydney | Cunliffe, Lawrence | Evans, loan (Aberdare) |
| Booth, Rt Hon Albert | Cunningham, George (Islington S) | Evans, John (Newton) |
| Brown, Hugh D. (Provan) | Dalyell, Tam | Ewing, Harry |
| Brown, Robert C. (Newcastle W) | Davidson, Arthur | Faulds, Andrew |
| Brown, Ronald W. (Hackney S) | Davies, Rt Hon Denzil (Lianelli) | Field, Frank |
| Buchan, Norman | Davies, E. Hudson (Caerphilly) | Flannery, Martin |
| Callaghan, Rt Hon J. (Cardiff SE) | Davis, Terry (B'rm'ham, Stechford) | Fletcher, Ted (Darlington) |
| Callaghan, Jim (Middleton & P) | Deakins, Eric | Foot, Rt Hon Michael |
| Campbell-Savours, Dale | Dean, Joseph (Leeds West) | Ford, Ben |
| Canavan, Dennis | Dempsey, James | Foster, Derek |
| Cartwright, John | Dewar, Donald | Freeson, Rt Hon Reginald |
| Clark, Dr David (South Shields) | Dixon, Donald | Garrett, John (Norwich S) |
| Garrett, W. E. (Wallsend) | Lewis, Ron (Carlisle) | Rowlands, Ted |
| Gilbert, Rt Hn Dr John | Lofthouse, Geoffrey | Shore, Rt Hon Peter (Step and Pop) |
| Ginsburg, David | McCartney, Hugh | Skinner, Dennis |
| Golding, John | McDonald, Dr Oonagh | Smith, Rt Hon J. (North Lanarkshire) |
| Gourlay, Harry | McElhone, Frank | Snape, Peter |
| Graham, Ted | McGuire, Michael (Ince) | Spearing, Nigel |
| Grant, George (Morpeth) | McKay, Allen (Penistone) | Spriggs, Leslie |
| Grant, John (Islington C) | McKelvey, William | Stallard, A. W. |
| Hamilton, W. W. (Central File) | McMillan, Tom (Glasgow, Central) | Stewart, Rt Hon Donald (W Isles) |
| Harrison, Rt Hon Walter | McNally, Thomas | Stoddart, David |
| Haynes, Frank | Marshall, David (Gl'sgow.Shettles'n) | Stott, Roger |
| Healey, Rt Hon Denis | Marshall, Dr Edmund (Goole) | Strang, Gavin |
| Heffer, Eric S. | Mason, Rt Hon Roy | Thomas. Dafydd (Merioneth) |
| Hogg, Norman (E Dunbartonshire) | Meacher, Michael | Thorne, Stan (Preston South) |
| Holland, Stuart (L'beth, Vauxhall) | Miller, Dr M. S. (East Kilbride) | Urwin, Rt Hon Tom |
| Home Robertson, John | Morris, Rt Hon Charles (Openshaw) | Wainwright, Edwin (Dearne Valley) |
| Homewood, William | Morton, George | Wellbeloved, James |
| Hooley, Frank | Newens, Stanley | Welsh, Michael |
| Horam, John | Orme, Rt Hon Stanley | White, James (Glasgow, Pollok) |
| Hughes, Mark (Durham) | Palmer, Arthur | Whitehead, Phillip |
| Hughes, Roy (Newport) | Park George | Whitlock, William |
| Johnson, James (Hull West) | Powell, Raymond (Ogmore) | Wigley, Dafydd |
| Jones, Rt Hon Alec (Rhondda) | Prescott, John | Wilson, Gordon (Dundee East) |
| Jones, Barry (East Flint) | Radice, Giles | Wilson, Rt Hon Sir Harold (Huyton) |
| Lambie, David | Richardson, Miss Jo | Winnick, David |
| Lamborn, Harry | Roberts, Albert (Normanton) | Woodall, Alec |
| Lamond, James | Roberts, Ernest (Hackney North) | |
| Leadbitter, Ted | Robertson, George | TELLERS FOR THE NOES. |
| Leighton, Ronald | Rooker, J. W. | Mr. James Hamilton and |
| Lestor, Miss Joan (Eton & Slough) | Ross, Ernest (Dundee West) | Mr. James Tinn. |
§ Question accordingly agreed to.
§ Clause 22 ordered to stand part of the Bill.