TRANSFER OF ASSETS ABROAD: LIABILITY OF NON- TRANSFERORS (Hansard, 15 July 1981)

§ Sir Graham Page
I beg to move amendment No. 221, in page 33, line 2, after 'year', insert 'nor by virtue of section 76 of this Act been treated as his chargeable gains'.

Mr. Deputy Speaker
With this we may also discuss the following amendments:
No. 220, in page 33, line 17 at end insert 'but excluding income which has already borne the like charge to income tax as such income would have borne had it arisen to a person resident or domiciled in the United Kingdom'. Government amendment No. 224.
Amendment No. 222, in page 33, line 31, at end insert— '(5) After sub-paragraph (7) of paragraph 11 of Schedule 5 to the Finance Act 1975 there shall be inserted the following sub-paragraph:— (7A) Any amount treated as the income of an individual by virtue of the provisions of section 44 of the Finance Act 1981 shall be treated as reducing the amount of a distribution payment and in a case where income tax assessed under that section on an individual who has received in an earlier year of assessment a capital benefit paid out of settled property is paid on behalf of that individual out of the property comprised in the settlement such payment shall not be a distribution payment.".'. Amendment No. 223, in page 34, line 2, at end insert— '(9) In computing the amount of any relevant income, a deduction shall be allowed for foreign taxes and for administration and other expenses necessarily incurred and in computing the .:ax liability of the beneficiary, credit shall be given for any UK tax suffered on the relevant income.'. Government amendment No. 225.

§ Sir Graham Page
The position is that under the clause an individual who is ordinarily resident in the United Kingdom and who has no liability to tax under section 478 of the Taxes Act 1970, and who receives a capital benefit from a non-resident or non-domiciled person after 10 March 1981, will be assessed to schedule D, Case VI income tax on the amount or value of such benefit by 1290 reference to the relevant income—defined in the clause—of the non-resident or non-domiciled person arising on or after 10 March 1981.
So long as the capital benefit does not exceed the amount of the relevant income for years of assessment up to and including the year in which it is received, the capital benefit is to be treated for income purposes as part of the individual's income for the year of receipt. To the extent that the capital benefit exceeds the amount of the previous relevant income the excess of the capital benefit is carried forward to subsequent years and matched with the relevant income of those parts and treated as the individual's income for income tax purposes until the capital benefit equals the amount of relevant income.
In my view there should be a proviso in that part of the clause so as to avoid the taxation of the same sum twice. Any capital payment that is treated as a capital payment for the purposes of clause 76 and is therefore charged to capital gains tax for the purpose of that clause should not be part of the capital convened into income for the purpose of clause 44. It is amendment No. 221 that endeavours to remedy that position of a possible double taxation of the same sum.
There is another possibility of a double charge to tax as a result of the clause. The clause would apply, I think, to a case in which one of the trustees of a settlement is resident in the United Kingdom. The whole of the settlement income would then be assessed in his name, with the consequence that the income might suffer exactly the same rate of United Kingdom tax as it would have done as income arising wholly to resident United Kingdom trustees. If a beneficiary of such a settlement is chargeable under the clause on the balance of the settlement income the effect would be a charge to tax twice over on the same amount.
This situation can be remedied for the purposes of the clause and the definition of relevant income if that definition were stated not to include income that has already been assessed to United Kingdom tax in the name of a United Kingdom resident trustee. It is amendment No. 220 that seeks to put that right.
The clause requires also to be considered in the capital transfer tax context, in particular, paragraphs 11(7) and (8) of schedule 5 of the Finance Act 1975. As my hon. and learned Friend will know, the effect of those paragraphs is that distribution payments, which are income of a person for any of the purposes of income tax, are not within the charge to capital transfer tax.
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If the clause remains in its present form it appears that in some cases it will be impossible to determine the capital transfer tax liability arising on an appointment of capital to a beneficiary. The amount of such capital sum ultimately to be treated as income for income tax purpose under this clause cannot be determined either at the date when the appointment was made or even at the later time when capital transfer tax becomes due and payable.
If capital transfer tax is assessed and paid on the basis of the situation existing at the date of the capital appointment, it appears to me that in some cases the Revenue will be required to make annual repayments of capital transfer tax where the clause bites on future relevant income. In order to meet that capital transfer tax difficulty, amendment No. 222 makes an addition to paragraph 11 of schedule 5 of the Finance Act 1975, 1291 which, briefly, provides that any amount treated as the income of an individual by virtue of the provisions of clause 44 should be treated as reducing the amount of the distribution payment.
Those are the first three amendments in my name. The fourth, amendment No. 223, is of a different kind, but still in reference to clause 44. It is noticeable that clause 44 allows no relief for expenses incurred by overseas trustees. The full gross amount of the relevant income can form the basis of assessment under the clause. That is quite unreasonable. It should be recognised that the income may be reduced by necessary expenses. This amendment endeavours to take that into account.

§ Mr. Peter Rees
If I may, I shall respond to the points so ably argued by my right hon. Friend the Member for Crosby (Sir G. Page) and also speak to Government amendments Nos. 224 and 225.
The principal point underlying amendment No. 221 was raised in Committee by my right hon. Friend and also raised at an earlier stage in correspondence by my hon. Friend the Member for Eastleigh (Sir D. Price), whom I am happy to see in the Chamber. The point is a good one, as one would expect coming from two such notable sources. It is to prevent a double charge to capital gains tax and income tax under section 478 in respect of the same payments.
We have been seized of the point, and I hope that I may say, without immodesty, that we feel that amendments Nos. 224 and 225 marginally deal with the point a little more effectively than the amendment in my right hon. Friend's name. I hope that the House will feel able to accept them in place of amendment No. 221.
In a different sense, amendment No. 220 gives added force to an old principle that income should not be subject to tax twice. In practice, it is extremely unlikely that that would arise in the circumstances likely to be affected by section 478 in other than a case of avoidance. My right hon. Friend may well cite back to me the words that I uttered in respect of the previous group of amendments, but there is a motive test in section 478(3). It will therefore always be possible for a taxpayer to establish that there is no hint of tax avoidance in the particular complex of circumstances in which the charge might be raised. Therefore, at least one set of assessments would fall by the wayside.
Just in case my right hon. Friend's fears should be justified, however, we should like to reconsider the position to see whether an amendment could possibly be introduced next year—I say "possibly" because, as my right hon. Friend will be the first to realise, it may be very difficult to link the underlying income on which one charge to tax in the United Kingdom may have been raised with the sum paid to the beneficiary or person resident in the United Kingdom. There are considerable tactical problems here, but we shall certainly address our minds to his to see whether we can introduce something taut and accurate in a later Finance Bill. I hope that with that assurance my right hon. Friend will not press amendment No. 220.
I must also tell my right hon. Friend that I think, again, that it is most unlikely that under the existing legislation a payment charged to income tax under section 478 could possibly be charged to capital transfer tax, because, as he 1292 knows, there is a specific exemption in capital transfer tax legislation in respect of sums transferred that have been subject to income tax. I hope that I can reassure my right hon. Friend on that point also.
Finally, on amendment No. 223, my right hon. Friend very persuasively argues for some kind of deduction in computing relevant income for foreign taxes, administration and other expenses. I certainly have sympathy with the reasons underlying that amendment, but it would be difficult for me to recommend its acceptance, certainly as it now stands, as it would be extremely difficult to operate and might produce rather capricious results. It is not always easy to determine what are legitimate expenses abroad; nor will it always be easy to link any foreign taxes that may be charged on the underlying income of the trust or company with the particular tranche of income or assets that may be paid to United Kingdom residents.
I think that in a sense this point was ventilated by my hon. Friend the Member for Croydon, South (Sir W. Clark) in Committee. We have applied our minds to this, but the precise correlation between the income that has borne foreign tax and the payment that might be made to United Kingdom resident beneficiaries has defeated us. I must therefore advise the House that that amendment No. 223 would not achieve the object that my right hon. Friend has in mind. Again, however, as this is clearly a real problem we should like to return to it next year, although I cannot assure the House that we shall find a perfect solution.
On that basis, I hope that the House will feel able to accept Government amendments Nos. 224 and 225 and that my right hon. Friend will feel that ample justice has been done to the important points that he has raised in his amendments.

§ Sir Graham Page
I am grateful to my hon. and learned Friend for dealing with the amendments in that way. I am, of course, happy with the Government amendments, which cover a considerable number of the points that I raised. I am a little disappointed about amendment No. 223, with regard to expenses. Nevertheless, I shall not seek to press any of my amendments.
I beg to ask leave to withdraw the amendment.