NON-RESIDENT SETTLEMENTS WHERE SETTLOR HAS AN INTEREST (Hansard, 7 May 1991)

§ The Financial Secretary to the Treasury (Mr. Francis Maude)
Clause 77 is one of several clauses which give effect to the Chancellor's statement in the Budget that we would take steps on the tax treatment of non-resident trusts, a matter which has caused some concern. The clause sets out one of the three main components of the proposals—the requirement that the settlor of a trust caught by the provisions of the Finance Bill will be required to pay capital gains tax on the gains released by the non-resident trust as they accrue.
The other components of the proposals are in other clauses which are complementary. It is a packet, each part of which complements the others. The second element is that, in future, there will be what has been described as an exit charge on a resident trust. A trust at present resident will suffer capital gains tax on capital gains which have accrued up to the time of the trust moving offshore.
The third element is that for those trusts which are not otherwise caught and on which gains are not payable at the time that they accrue capital gains tax will be payable when the capital is remitted to this country. In those cases there will be a supplementary charge, effectively an interest charge, to reflect the deferment of capital gains tax from the time when the capital gains accrued in the non-resident trust. When the capital is remitted to the beneficiary here, there will be a charge which reflects the deferment of the tax.
It is a sensible, fair package of proposals to remedy a possibility of tax avoidance. I commend the clause to the Committee.

§ Mr. Nicholas Brown (Newcastle upon Tyne, East)
I thank the Financial Secretary to the Treasury for his introduction to clause 77 and to the matters that relate to it, which we will explore in more detail in Committee.
The clause and those related to it represent the fruits of the labours of the Government's working group on tax avoidance which was set up in 1988 to deal with a problem that the Government created in 1981. Last year, the Labour party drew attention to the widespread use of offshore trusts as a tax avoidance device. We put forward 682 proposals to curtail the use of those devices, but our suggestions were rejected by the Treasury team during the passage of the Finance Bill 1990.
In Committee last year, I said: Other major vehicles of tax avoidance remain. Offshore trusts are still an abused vehicle for imaginative tax planning. The then Economic Secretary, now, I guess, promoted, the right hon. Member for Mid-Norfolk (Mr. Ryder), replied: The hon. Member for Newcastle upon Tyne, East identified a problem about loopholes. They have not been used and the Inland Revenue does not know of any avoidance to date."—[Official Report, Standing Committee E, 12 June 1990; c. 183 and 184.] That is what he was required to say when representing the Government's view last year.
The position has changed substantially. Obviously it has not changed at any prompting of mine. I can only assume that it has changed at the prompting of The Sunday Times, probably a more authoritative voice with the Conservative party than mine in spite of all my efforts to the contrary. The hon. Member for Beaconsfield (Mr. Smith) shakes his head. I take that as a tremendous compliment; I am sure that it was intended as such.
Last year, on 21 October, The Sunday Times drew attention to the same issue on its front page under the headline Super rich in massive tax dodge". We can see that the newspaper is owned by the same people as those who own The Sun. The Sunday Times Insight team gave specific examples, one of which I should like to summarise as an illustration of the problem.
When Mr. Richard Branson, head of the Virgin airline and entertainment empire, sold 25 per cent. of his record company, the Virgin music group, to a Japanese group, Fujisankei Communications, in 1989, more than 75 per cent. of the ultimate number of the shares had previously been transferred by Branson into five Channel islands trusts.
In spite of him being the settlor and the discretionary beneficiary of all five offshore trusts, he was able to avoid a potential tax bill of £18.4 million, 40 per cent. of the capital gain of £46 million. The money was then reinvested in Virgin companies overseas. Branson's lawyers argued that since all five trusts were controlled by Morgan Grenfell in Guernsey and Coopers and Lybrand Deloitte in the Channel islands, the capital gains had been avoided because none of the profits were Branson's, he having distanced himself sufficiently from the assets so as to avoid taxation.
Hopefully such arrangements will no longer work as tax avoidance devices when clause 77 and its allied clauses and schedules are law. It is not our intention to impede the progress of these parts of the Finance Bill, which are designed as anti-avoidance measures. However, we shall want to examine the detail in Standing Committee.
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I want to give some examples of the sort of scam that we want to be caught by the new legislation. At present it is possible for those with a business to sell to transfer that business into an offshore trust and, under section 126 of the Capital Gains Tax Act 1979, the trustees could sell the business without any charge to United Kingdom tax. The trustees could then reinvest the money in the original owner's business, perhaps remitting the money back to the United Kingdom in the form of a loan. That sort of tax avoidance is legal, although hard to justify morally. 683 Indeed, the very existence of this Bill, from the post-Thatcherite Conservative Government, suggests that the Government have given up trying morally to justify it.
The example that I have just cited parallels the Richard Branson case that was quoted in The Sunday Times. A variation on that theme would be to transfer the asset for sale into a United Kingdom trust prior to disposing of it and then to move the trust offshore. The trustees could then proceed to sell it without any charge to tax. It is clear that the real relationship rather than the contrived relationship between the trustees and the settlor is of crucial importance.
It is useful to note just who the trustees are in the Branson example. Gone are the Rossminster days, when the Keith No. 1 trust, of which Mr. Keith Tucker was the trustee, played its part in the tax avoidance schemes of his brother, Mr. Roy Tucker. Today, the trustees are such firms as Morgan Grenfell and Coopers and Lybrand Deloitte—both of which Mr. Branson trusted with his wealth in the Channel islands. According to The Sunday Times, Touche Ross promotes a complete offshore trust package for £2,000, plus an annual fee of £3,000. Offshore trusts are now part and parcel of the mainstream tax planners' armoury.
Of course, there are reasons other than that of tax avoidance for setting up an offshore trust, such as the need to preserve commercial confidentiality. However, it is impossible to avoid the conclusion that the overwhelming majority of such arrangements have been entered into solely for the purpose of tax avoidance. A further 3,000 such trusts were notified to the Inland Revenue last year, but that probably represents only a small percentage of the number that have been established.
The arrangements work well enough to avoid capital gains tax bills, as they work well enough to avoid inheritance tax. Trusts cannot die. Offshore trusts can also have income tax advantages, provided that the senior and his spouse are not possible beneficiaries. An example would be a trust for children and grandchildren. In case anyone doubts that that works, I can tell him that, as far back as 1979, the House of Lords gave a ruling in a famous case involving the Vestey family. That case aroused a great deal of indignation.

§ Mr. Tim Smith
As the hon. Gentleman knows, one reason why trusts became more attractive after 1988 was that the rate of capital gains tax was increased from 30 per cent. to 40 per cent. That automatically made them more effective because more tax could be avoided. It is the Government's policy to link the top rate of income tax with the capital gains tax rate. Does the Labour party propose to raise capital gains tax to 50 per cent.?

§ Mr. Brown
We have no plans to increase capital gains tax. I am grateful to the hon. Gentleman for enabling me to make that quite clear. I know that the hon. Gentleman would not do it, but I hope that he will encourage his right hon. and hon. Friends not to misrepresent the Labour party's position. I repeat that we have no plans to increase capital gains tax.

§ Mr. James Arbuthnot (Wanstead and Woodford)
Does that mean that the Labour party will break the link between capital gains tax and income tax?

§ The Temporary Chairman (Mr. David Knox)
Order. That is rather wide of the clause under discussion.

§ Mr. Brown
I accept that, Mr. Knox, but I do not want to deny the hon. Gentleman an answer. I think that the implications of what I have said are clear. The hon. Gentleman has correctly followed the point to its logical conclusion.

§ Mr. Julian Brazier (Canterbury)
Answer the question.

§ Mr. Brown
I have just done so.
Clause 77 introduces the rule that, for certain categories of offshore trusts, capital gains realised by the trustees are to be treated as realised by the person who created the trust or by its beneficiaries, provided that the settlor, his spouse or any of their children or any company in any way associated with them can in any way, at any time benefit from the capital or the income of the trust. That is comprehensive. The Government have met the first of the points that we put to them in our debates last year and the year before.
I hope that in fairness, Mr. Knox, you will allow me in passing to refer, as did the Financial Secretary, to the fact that clause 71 introduces an exit charge if an existing United Kingdom trust becomes non-resident. We specifically called for that during our debates on the Finance Bill last year. The Government's adoption of our request is most welcome. I note that the Financial Secretary is gracefully accepting my thanks; roll on the Standing Committee stage, with all its long nights. Clause 71 is to be welcomed.
The second aspect of clause 77 is that it stops a settlor hiding behind an existing offshore trust by putting new assets into it that can share the favourable capital gains tax treatment that the trust already enjoys. Such a prohibition is necessary, and I am pleased that the Government have done that. However, the Government have not drawn the clause more widely to encompass offshore trusts where the beneficiaries do not include the settlor, his spouse, any of their children, or any company associated with them. I am not sure why the Government have adopted that approach, but it is something that we can explore in Standing Committee. The Financial Secretary may say that there are not many such trusts in existence. If he does, the suspicions that we have harboured about tax avoidance will be shown to have been well founded. If there is another explanation, I look forward to hearing it.
That brings me to the mystery of what we shall probably end up calling, "The Mystery of the Missing Decimal Point". The Sunday Times article referred to billions of pounds, or at least to £1 billion—[Interruption.] The Sunday Times referred to £1 billion; others have referred to substantially higher figures.

§ Mr. Maude
Only the hon. Gentleman.

§ Mr. Brown
The Financial Secretary is being mischievous. It is not only me.

§ Mr. Maude
We are puzzled about the figure of £1 billion that has found its way into the Labour party canon as one of those pots of gold that are just lying around waiting to be raided to pay for its spending. The Sunday Times referred to a sum of up to £1 billion. I am not aware of any other estimates that show anything like that amount. The actual amount is a yield in a full year of £10 million, and also preventing indirectly a revenue loss of £100 million. Those figures are very much more modest 685 than those suggested by the Labour party, although the proposals in the Bill are considerably more draconian than anything that the Labour party suggested last year.

§ Mr. Brown
The point has found its way into the Labour party canon because it is such a good shot. I am not sure how the Financial Secretary arrives at his figures for the amount that has been avoided through offshore trusts over the past decade. I should welcome a year-by-year breakdown of the estimated sums that have been forgone. The Sunday Times suggested £1 billion. The Chancellor said in his Budget speech, referring to this year alone: I therefore propose to introduce measures to counter this tax avoidance"— he was referring to offshore trusts— and to prevent a revenue loss of up to £100 million in a full year."—[Official Report, 19 March 1991; Vol. 188, c. 134.] Assuming that the up to £100 million in a full year is par for the course, the Chancellor clearly thinks that the figure is closer to £1 billion than to £10 million—this is where the missing decimal point comes in—that is shown in the Red Book.
I must thank the Financial Secretary for writing to me about the matter, attempting to explain the difference between the £100 million to which the Chancellor dramatically referred in his Budget speech and the rather more modest £10 million that the Government's Treasury team are hoping to rake in as a result of the change. His answer is not convincing, but I understand the semantic exercise in which he is trying to indulge in justifying it. The truth of the matter is that a substantial sum of money that should have accrued to the Exchequer has been forgone with the result that the tax burden on the rest of us has been increased accordingly.
The Government need to take two further actions to convince us that they are serious about tackling unfair avoidance by the wealthy. The first is adequately to resource the Inland Revenue, particularly its specialist officers, so that more attention can be focused on these issues. When we say that, the Conservative party accuses us of planning more public expenditure on tax inspectors, as if that were a damning thing. But it is our belief—and the evidence is there to sustain it in the work of the Treasury and Civil Service Select Committee as well as in answers to parliamentary questions tabled by the Opposition—that a little extra investment may reap substantial rewards. Certainly we think that it would be more fruitful to explore that area than to spend the money hounding poor people on social security.
Secondly, we believe that we need to co-operate with our first world trading partners. The hon. Member for Beaconsfield (Mr. Smith) will have heard me say that before. I know that the point is controversial on the Government Benches, but we believe that we need to co-operate in a positive way with our first world trading partners steadily and collectively to block these tax avoidance devices so that at least one nation state collects tax when it would otherwise be due. It will be a long slow business, but I would rather see the British Government moving it along than kicking and screaming all the way.
Finally, I want to ask a question and then answer it. Why are we in this position in the first place? Why is clause 77 necessary? The answer goes back to the deeds of the 686 Conservative Government—I suppose that it is still legitimate to refer to it as this Conservative Government—in 1981 when they introduced section 80 of the Finance Act. That device was the work of the noble Lord Rees who was then Chief Secretary to the Treasury and a notable expert on tax law. Before becoming a Minister he advised on tax avoidance schemes, in the notorious Rossminster affair among others. In short, he knew what he was doing. The Opposition and the national press have repeatedly drawn the Government's attention to the loophole, but it has taken 10 years and a change of leader for the Conservative party to respond. Last year, the Economic Secretary was not even allowed to acknowledge that there was a problem.

§ Mr. Maude
Apart from last year when there was a fleeting reference of about half a sentence in a debate on the Finance Bill, when else in the past 10 years have the Opposition drawn attention to the problem?

§ Mr. Brown
I have made a number of speeches on the subject of tax avoidance since I was appointed to the Opposition Treasury team in 1987 and I have specifically referred to the issue of offshore trusts. But to give credit where it is due, the issue attracted our attention when we all obtained copies of Mr. Nigel Tutt's book entitled "The History of Tax Avoidance" which has provided us with an interesting guide through the byways of some of these issues and from which we have obtained part of our agenda. The hon. Member for Beaconsfield keenly follows these matters and I see him nodding and smiling. He will recall that last year I presented the Economic Secretary with a courtesy copy of the book in order to help him in his own consideration of these matters. Instead, all he got was promotion. I do not know whether reading the book helped him or not, but I hope it did.
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The Opposition's bone of contention with the Government is not that they are doing what they are now—that is acceptable to us; we have been calling for it. It is that it has taken the Government 10 years to get around to doing it and in that time £1 billion—I will not quarrel with the Financial Secretary over billion or billions—£1 billion worth of revenue has been lost to the Exchequer. It logically follows that that increases the burden placed on the shoulders of our fellow citizens.
In debates such as this it is important to remember that some of our fellow citizens are poorly remunerated. The other side of the coin is that 3,700,000 of our fellow citizens earn less than £5,500 per year. There are no offshore trusts to help them; no chance for them to avoid their share of the tax burden, most of which is given not through direct taxation but through indirect taxation. The unfairness of their position when compared with the position of wealthy people, such as Mr. Richard Branson and Lady Porter, rightly arouses indignation among Opposition Members, and I think that the Government will find that it arouses indignation among the public as well.

§ Mr. Tim Smith
I welcome clause 77 as long as we have the capital gains tax regime that we have. It is clearly unfair that rich people should be able to take advantage of what has been a major loophole in the law so to arrange their affairs that they can avoid altogether paying capital gains tax. It clearly has not been an option open to people with moderate amounts of capital, since the hon. Member 687 for Newcastle upon Tyne, East (Mr. Brown) has just said that it cost £2,000 to set up one of these schemes and £3,000 a year to keep it going. That would obviously preclude it from being economically viable for people with moderate amounts of capital. Clearly the schemes were designed for rich people, and if we are to have a captial gains tax system everybody should pay that tax and not take advantage of a loophole.
However, on the question of the likely yield, the Committee needs to recognise that a change of this kind will fundamentally change people's behaviour. That is why I object to capital gains tax as a whole. We were talking previously about the way in which people's economic behaviour is influenced by whether or not a particular activity is taxed. There should be no doubt in the minds of hon. Members about what happens with capital gains tax. It is impossible to avoid paying tax on purchases—virtually impossible to avoid paying VAT or excise duty—and it is pretty difficult to avoid paying income tax on income, because it is paid as it arises, but when it comes to capital gains tax, one can work very hard to avoid paying it by simply avoiding making the gain and not realising an asset.
That is what happens. Whether the figure for the cumulative lost revenue is £100 million or £1,000 million, the idea that the yield to the Exchequer will be anywhere near that is ridiculous. People who were realising their assets will think two, three or four times before they do it, so the actual yield will be much lower than any so-called loss of revenue to the Exchequer. There is no doubt about that.
That is the unfortunate aspect of all this. Capital gains tax above all taxes—one of my hon. Friends made a powerful speech on that on Second Reading—distorts economic behaviour. It is self-evident that, the higher the rate, the more likely it is that the behaviour will be distorted. With the benefit of hindsight, I think that change was regrettable. I understand why it was made. The Treasury took the view that it was sensible to operate capital gains tax at the same rate as the top rate of income tax, which is now 40 per cent.
I was encouraged by the remarks of the hon. Member for Newcastle upon Tyne, East, about Labour's proposals. He told my hon. Friend the Member for Wanstead and Woodford (Mr. Arbuthnot) that Labour does not feel that it is absolutely necessary to operate the same rate. It is reassuring to know -that Labour does not intend to increase capital gains tax. Have I got that right?

§ Mr. Nicholas Brown
To avoid any doubt, I may say that we will have to live with what we believe to be a minor anomaly.

§ Mr. Smith
That makes the Opposition's policy clear beyond any doubt. I welcome that assurance, because any rate above 40 per cent. would be punitive, and would introduce distortion in a big way. That has already happened. There ought to be a much lower rate, or we ought to do away with capital gains tax altogether. It was introduced only as a short-term measure in 1961, and the Royal Commission that investigated its possibilities in the 1950s came out against it, for various good reasons.
Even with the change made by clause 77, the incidence of capital gains tax will still be fairly arbitrary and unfair. I will not detain the Committee with the details, because that would be to go beyond clause 77. However, although 688 the proposed change is very welcome, we must acknowledge that the yield is likely to be very low, and that the background against which that change is being made is anyway not very satisfactory.

§ Mr. Beith
There seems to be general agreement among all parties that clause 77 should be included in the Bill, and I certainly welcome it. It is designed to close a loophole that has existed for a decade which has been dramatically highlighted. That loophole has been known to tax advisers and experts for a long time, and it has taken a long time for the Government to get around to doing anything about it.
It is somewhat intriguing, given the timing of this debate, that Labour previously insisted that its incentives for investment could be met from the yield induced by closing the capital gains tax loophole. We included in our alternative Budget a proposition based on the assumption that closing the loophole would yield £500 million. Labour's alternative Budget is very specific: The investment expansion scheme costs would be more than covered by the revenues from closing the tax loopholes for offshore trusts, which currently cost the Government £1000 million. The Government produced a figure of £100 million, and, as the hon. Member for Newcastle upon Tyne, East (Mr. Brown) pointed out, the Red Book gives a figure of only £10 million for revenue resulting directly from closing the loophole in question. There is a necessary difference between the two figures, because presumably there would be a flow of investment into instruments that do bear taxation, which would show up in public revenue. I take that to be the major factor accounting for the difference in the two estimates.
When we produced our figures, and when Labour produced theirs, neither of us had the benefit of the Government's estimate of potential yield, because they were not canvassing any intention of acting against the loophole, and so had not produced a costing. However, the yield will obviously be a lot less than £1 billion. In view of the amount of money that is believed to have been involved, I hope that the Revenue gets back more than the £100 million that the Government estimated. I shall shortly propose amendments to tighten up the measure, to help achieve that objective.
There is general acceptance that it cannot be right, even at higher rates of capital gains tax, for methods of avoidance to be available that allow people with very large resources to spend significant sums on buying their way into overseas arrangements that entirely relieve them of their liability to capital gains tax.

§ Mr. Maude
This has been a delightfully ecumenical debate, with everyone agreeing that clause 77 is a splendid measure to introduce into the Bill. It is slightly remarkable that the hon. Members for Newcastle upon Tyne, East (Mr. Brown) and for Berwick-upon-Tweed (Mr. Beith) claim to have known about the abuse for some time, and have been clamouring to legislate against it year after year. They give the impression that, when the 1981 change was made, the loophole was transparently clear, and that it should have been closed then. History shows otherwise.

§ Mr. Nicholas Brown
I do not claim that the loophole was transparently obvious in 1981—at least, not to me. I became aware of it after reading Mr. Tutt's book in 1987—just at the time that I joined the shadow Treasury team. I may add that it is not I but the Government who are 689 professionally advised, and who have available to them, year after year, the opinions of the Inland Revenue. When did the Revenue first draw the abuse to the attention of Ministers? I bet that it was in 1981.

§ Mr. Maude
The reality is that no new clause or amendment to deal with the loophole was introduced until 1990. In that year, a new clause, to which the hon. Member for Newcastle upon Tyne, East, referred, was tabled but not selected. On that occasion, my right hon. Friend who is now the Patronage Secretary did not refer specifically to the loophole, because the burden of his plaint in that debate concerned dual resident companies, not nonresident trusts. He referred to it only obliquely and in passing, which did not become a serious problem until recently. However, it is now being dealt with expeditiously and thoroughly, as has been acknowledged.
I have some sympathy with my hon. Friend the Member for Beaconsfield (Mr. Smith), who made it clear that the higher the rate of tax, the more attempts there will be made to avoid it—and the more strenuous the tax authorities will need to be in preventing avoidance. That analysis is exactly correct. Members of the Oppostion Front Bench are nodding wisely and sagely, and appear to be agreeing with all that I say—but the points that I reiterate have not made much impact on the Labour party before now.

§ Mr. Nicholas Brown
I always smile, in my genial, good-natured way. That is not something that has been brought on by the present Financial Secretary, because I exhibited the same behaviour to the last three Financial Secretaries that it has been my pleasure to know. I will accept entirely the Financial Secretary's assurance that the Government acted as expeditiously as possible, but only if he will reveal when the risk that the 1981 change would be used for tax avoidance was first brought to the attention of the Government by their professional advisers—specifically, the Inland Revenue.

§ Mr. Maude
I do not intend to tell the hon. Gentleman what advice I or my predecessors were given by our official advisers—any more than the hon. Gentleman or any of his predecessors who were Ministers in previous Labour Governments would do. I am sorry to disappoint the hon. Gentleman, but, on mature reflection, I am sure that he will understand.

§ Mr. Brazier
He will get over it.

§ Mr. Maude
As my hon. Friend says, the hon. Member for Newcastle upon Tyne, East, will master his disappointment.
The hon. Gentleman referred to the mystery of the decimal point. Labour's standard approach is to multiply by 10 the estimated yield from a tax change, but to divide by 10 the cost of a public expenditure commitment. In reality, the measure—the hon. Member for Berwick-upon-Tweed had it right—will prevent a tax loss to the Revenue of about £100 million. It is not possible to be precise, but it will produce a yield this financial year of about £10 million, and in a full year of £15 million. There is no great pot of gold that the hon. Member for Newcastle upon Tyne, East can use to finance Labour's spendthrift policies.

§ Mr. Arbuthnot
Does my hon. Friend agree that, in view of the fact that the measure will stop a loophole, it will change people's behaviour and that there is no predicting the amount of revenue that can be produced? In a sense, it is a misnomer to talk about the revenue that might come from it.

§ Mr. Maude
My hon. Friend is entirely right. All one can do in such circumstances is to estimate to the best of one's ability on the basis of accumulated experience and the Inland Revenue what the yield might be from these changes. Behaviour will change as a result of the proposals, but the best estimate is that there will be a modest yield from transactions that will take place.
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This is one part of a three-part approach which is a considerably tougher and more extensive approach to the problem than that recommended by the hon. Member for Newcastle upon Tyne, East. It will be effective. The hon. Gentleman asked why we should not spread the effect on beneficiaries more widely so that more settlements would be caught. That is the subject of a subsequent debate on amendments to be tabled by the Liberal Democrats. We can explore it then, and I shall explain on that occasion the reason for the approach that we have adopted.