HC Deb 29 March 1983 vol 40 cc127-8W
Mr. Murphy

asked the Chancellor of the Exchequer whether he will introduce legislation to reverse with retrospective effect the decision of the House of Lords in the case of Leedale v. Lewis.

Mr. Ridley

No. Section 42 of the Finance Act 1965—later section 17 of the Capital Gains Tax Act 1979—suffered from a number of major weaknesses. The decision of the House of Lords in the case of Leedalev. Lewis established that, in relation to discretionary beneficiaries who had received no benefit from the trust, the section did not in certain respects give effect to the intention of the then Government at the time when it was introduced. But experience in the operation of the section, and its examination by the courts in the course of the Leedale v. Lewis case, made it clear that it also had certain fundamentally unsatisfactory features whether or not it was construed as decided by the House of Lords.

In many cases the main effect of reversing the decision of the House of Lords would not be to reduce the overall tax burden, but to shift it from discretionary beneficiaries to beneficiaries with fixed interests in a way which would be neither fair nor reasonable. Accordingly, it would not be practicable to introduce retrospective legislation of the kind suggested. The Inland Revenue is therefore issuing assessements on beneficiaries under foreign discretionary trusts in accordance with the decision of the House of Lords.

The judgments in the House of Lords showed that in the generality of cases there should not be hardship in assessing a beneficiary who has received nothing from a trust since the section expressly provides that the tax bill can be met by the trustees without giving rise to any further charges. Nevertheless, there may still be potential hardship if the trustees refuse to take advantage of this facility. But this applies not only to discretionary beneficiaries, whose position was discussed in 1965, but also, and with greater force, to beneficiaries with fixed interests since they are less likely to be able to be reimbursed by the trustees if they are not also discretionary beneficiaries.

Prior to the decision of the Court of Appeal in Leedale v. Lewis it was not the practice of the Inland Revenue to assess mere discretionary beneficiaries who have not received any payment from a foreign trust; while the Finance Act 1981 provides that for the future gains will not be charged until a benefit has been obtained. Accordingly, I consider that it would be right to allow analogous treatment for the intervening years.

The Government will therefore be proposing at the Committee stage of the Finance Bill the introduction of a clause to allow any beneficiary of a foreign trust, whether his interest is fixed or discretionary, who has not received any benefit from the trust, to defer, without interest, payment of the relevant capital gains tax assessed on him for the year 1980–81 or any earlier year until such time as he, or any person connected with him, obtains either directly or indirectly a corresponding benefit from the trust. This will apply to any tax on assessments made under section 42 which has not been paid before today.

This proposal is designed to meet genuine cases of hardship without undermining the fundamental purpose of section 42 that gains made by foreign trusts set up by United Kingdom settlors for the benefit of United Kingdom beneficiaries should not escape taxation. The clause will give full details.