Clause 16. — (Income under revocable and certain other dispositions to be treated as income of disponor.)

Orders of the Day — Finance Bill. – in the House of Commons on 13th July 1922.

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(1) Any income: (a) of which any person is able, or has at any time since the fifth day of April, nineteen hundred and twenty-two, been able, without the consent of any other person not being his wife or her husband, by means of the exercise of any power of appointment, power of revocation or otherwise howsoever, to obtain for himself the beneficial enjoyment; or(c) which by virtue or in consequence of any disposition made, directly or indirectly, by any person whether before or after the commencement of this Act, is payable to or applicable for the benefit of a child of that person for some period less than the life of the child;shall, subject to the provisions of this Section, but in cases under the above paragraph (c) only if and 60 long as the child is an infant and unmarried, be deemed for the purposes of the enactments relating to Income Tax (including Super-tax) to be the income of the person who is or was able to obtain the beneficial enjoyment thereof, or of the person, if living, by whom the disposition was made, as the case may be, and not to be for those purposes the income of any other person:Provided that in cases under the above paragraph (c) income shall not be held to include any income derived from capital which is required by such disposition to he held on trust absolutely for the child at the end of any period less than the life of such child.

Photo of Mr Dennis Herbert Mr Dennis Herbert , Watford

I beg to move, in Sub-section (1, a,) to leave out the words or has at any time since the fifth day of April, nineteen hundred and twenty-two been able. 5.0 P.M.

This Amendment, as I hope, is merely a correction in the drafting of the Clause. I do not know whether the learned Solicitor-General will take that view of it. The paragraph brings within the operation of the Clause the settlement made by a man who reserves to himself a power of revocation, so as to be able to recover the income for himself whenever he pleases. May I take an actual case within my own experience. One of two sons, for reasons into which I need not go, was considered not to be trusted with money, and therefore the elder generation left a double share of the money, so to speak, to the other, knowing that he would always look after the brother. The one who had the money; more than a year ago entered into a settlement with an entirely independent person as a trustee, covenanting to pay so much a year to that trustee to be used for the maintenance of this brother; That settlement contained—and perfectly rightly, I think—a power of revocation, which was not likely to be exercised unless some particular event happened, but, dealing with such a person as the one dealt with, it was considered advisable. That is a settlement, of course, which the Solicitor-General would not for a moment suggest, I think, was an unfair settlement. Since the 5th April the settlor has not revoked it but has entered into a supplemental deed giving up the right to revoke it and to recover the money. I suggest that the words in question are unnecessary, and would cause injustice.

Photo of Mr Leslie Scott Mr Leslie Scott , Liverpool Exchange

There is a misapprehension as to the effect on the Clause of the presence of the words which the Amendment proposes to omit. The words are necessary, and I think I can make it clear to the House why they are necessary. If they were not there, I think an argument somewhat on these lines would be possible, namely, that the person who wanted to argue that the income received by him prior to the coming into force of the Act would be outside the scope of the settlement, even although within this taxing year, might say: "It is true that from the commencement of the Act I am able to exercise a power of revocation and so obtain the enjoyment of future income and am therefore within the Clause, but I cannot to-day exercise that power retrospectively so as to obtain the enjoyment of the income from the 6th April, the beginning of this financial year, down to the present date, because that income has been in fact paid away to the beneficiary by the trustee, for the simple reason that during that period I have not in fact exercised my power of revocation." The Clause is aimed at the revocable trust during the whole of this current taxing year, and therefore, in order to make the Clause effective, we must deal with a power of revocation not merely from the date the Act comes into force but as from the beginning of the existing taxing year. As I understand the point of the hon. Member, it is this: You have had a trust with a power of revocation attached to it for a perfectly right and proper purpose, namely, the support of a brother by handing out the income to the brother in driblets because it was not advisable to give him control of his income generally. The hon. Member assumes that in such a case, as soon as this Clause becomes law, he will probably meet the Clause by giving up the power of revocation by a supple- mental deed, and his fear is that the insertion of these words would prevent his exercising that power, which he normally ought to have, to make a supplemental deed and escape from the scope of the Clause. The simple answer is that the words in question do not prevent that being done. In regard to the income down to the date when the Act comes into force, the income has gone and the power has not been revoked, and therefore, with regard to that, there is no trouble. If he then makes his supplemental deed, he will take the whole of that trust income out of the scope of the Clause altogether. I therefore suggest (a), that the words do not prevent what the hon. Member thinks ought to be done, and (b), that they are really essential to carry out the principle of the Clause as affirmed by the House already in Committee.

Photo of Mr Dennis Herbert Mr Dennis Herbert , Watford

I am obliged to take the Solicitor-General's opinion, although I cannot quite understand it at the moment, but if he assure? me that in the case of a settlement which does contain a power of revocation and some time, some weeks or months, after the 5th April a supplemental deed is executed giving up that power of revocation, that then the settlement will not be hit by the Clause, I will ask leave to withdraw my Amendment.

Photo of Mr Leslie Scott Mr Leslie Scott , Liverpool Exchange

I beg to give that assurance.

Amendment, by leave, withdrawn.

Photo of Mr Leslie Scott Mr Leslie Scott , Liverpool Exchange

I beg to move, in Subsection (1, a), to leave out the words "not being his wife or her husband."

This is an Amendment which must be read in connection with an Amendment standing on the Paper, in Sub-section (1), after the word "person"["purposes the income of any other person"] to insert the words Provided that in cases under the above paragraph (a) —

  1. (i) where any such power as aforesaid can be exercised by a person with the consent of the wife or the husband of that person, the power shall, for the purposes of the said paragraph, be deemed to be exercisable without the consent of another person, except where the husband and wife are living apart either by agreement or under an Order of a Court of competent jurisdiction; and
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  3. (ii) where any such power as aforesaid is exercisable by the wife or the husband of the person who made the disposition, the power shall, for the purposes of the said paragraph, be deemed to be exercisable by the person who made the disposition."
It was felt in the Debate in Committee that there were cases where for practical purposes it was right to regard the husband and wife as one, so as to avoid an unintentioned operation of the first part of the Clause. It was felt that the words I now propose to omit were open to possibilities of misconception and misconstruction, and that it would be better to take them out and express quite clearly, in the form of a proviso at the end, what was really intended.

Amendment agreed to.

Photo of Mr Leslie Scott Mr Leslie Scott , Liverpool Exchange

I beg to move, in Subsection (1, a), after the word "howsoever," to insert the words by virtue or in consequence of a disposition made directly or indirectly by himself. In the Committee stage, on an Amendment moved by the hon. Member for Watford (Mr. D. Herbert), he took this case as an illustration. He said: A father of a family may have a close friend who dies and loaves a sum of money, the income of which is to be paid to that father's children unless and until the father should see fit to deprive them of the income and take it for himself. I cannot suppose that in those circumstances it would be intended that the father should be charged on income which is given by some other person altogether for the benefit of his children just by reason of the fact that the person who left the money, trusting the father, as being a good father, has given him a right to take that income for himself if he sees fit."—{OFFICIAL REPORT 20th June, 1922; col. 1202, Vol. 1.55.] I assented to that, and undertook to deal with the point by a suitable Amendment on the Report stage of the Bill. That is the genesis of the present Amendment.

Amendment agreed to.

Photo of Mr Leslie Scott Mr Leslie Scott , Liverpool Exchange

I beg to move, in Subsection (1, c), to leave out the words "whether before or after the commencement of this Act," and to insert instead thereof the words after the fifth day of April, nineteen hundred and fourteen. This Amendment is to take out of the ambit of the Clause the dispositions in favour of children for a period less than the life of a child if made before April, 1914, the Clause as it stands having no limit in point of time as to the date when such settlement may have been made, and although it was quite clearly pointed out in Committee that there was no retroactive effect of the Clause before, it was felt that it was a reasonable thing to do to take the 5th April, 1914, both in this Clause and in the next Clause, relating to companies, as the starting point for this type of legislation to stop the gaps through which tax has been slipping away.

Photo of Mr Arthur Samuel Mr Arthur Samuel , Farnham

Are we to understand that there is really no afterthought, that the learned Solicitor-General has nothing in reserve in his mind about this Amendment? Does it really mean that there will be no possibility arising of a retro-active effect?

Photo of Mr Leslie Scott Mr Leslie Scott , Liverpool Exchange

I am keeping nothing up my sleeve.

Photo of Sir Henry Betterton Sir Henry Betterton , Rushcliffe

It was said by the Chancellor of the Exchequer that when the Government made a concession short of the original demand they got very little credit for it. I feel, therefore, that it would be rather ungracious and churlish not to thank the Chancellor of the Exchequer for this very small concession which he has made. At the same time, I think it would be idle to deny that the limitations which the Solicitor-General has added to the principles which I ventured to advocate in Committee make his concession of very little value. The Solicitor-General said he had nothing up his sleeve, but it is obvious that the reason why he put in the date of 5th April, 1914, was because the Income Tax in April, 1914, was either 1s. or 1s. 1d., and it is now 5s. He therefore excludes from the operation of this concession all settlements made since that date, and it is really of very little or no value. So, while thanking him for this concession, I must again express my opinion, and that of many of my friends, that the whole Clause, in justice and in equity, should not come into operation until after the passing of the Bill before the House.

Amendment agreed to.

Photo of Mr Dennis Herbert Mr Dennis Herbert , Watford

I beg to move, in Sub-section (1, c), after the word "child"["benefit of a child"], to insert the words "or children."

This Amendment is a purely drafting one, and is to be taken with the Amendment lower down to insert at the end of the paragraph the words "or one of the children." My Amendment is designed to meet the case of income payable in equal shares, or otherwise as the settlor may appoint, between several children, and therefore I think that it would be a more convenient drafting to make it read "child or children" in the first case and "the child or one of the children" in the second.

Mr. S. ROBERTS:

I beg to second the Amendment.

Photo of Mr Leslie Scott Mr Leslie Scott , Liverpool Exchange

I am afraid that the result of this Amendment would be to extend the scope of the Clause, and therefore cause it to be out of order. But, if I may, I will try to meet the difficulty in the hon. Member's mind. If he puts in those words, there will be this difficulty. Take the case of a man with four children. He makes a disposition in favour of child A and child B for the whole of their lives in each case, And in favour of child C and child D he makes a disposition only up to the end of their period of education. As the Clause is worded at present, the income in regard to children C and D would be subject to tax. In regard to children A and B it would not be subject to tax. If we insert the words which the hon. Member desires, it will be possible for a legal interpretation to be adopted, under which it would be necessary for the father, in order to escape Income Tax at all, to make his trust for the life of all four children, for the whole of their lives: and if there were a trust in regard to his children, and it could be said that it was, in regard to one of the children, not for the whole life of that child, then the whole of the income, even as regards the three-fourths of it which was assigned for life, would be subject to tax. That is not the intention of the hon. Member. But it shows the kind of difficulties that there are in the insertion of this sort of verbal Amendment. As regards charge, suppose that that were the interpretation it would increase the scope of the charge. In such circumstances, it might be argued that the income would be payable for the benefit of the children of the settlor for some period less than the life of one of the children. If so, it would enlarge the scope of the Clause and tax the whole of the income, whereas, as the Clause now stands, it only taxes the income payable to those two children who are to have it for less than the whole period of their lives.

Photo of Mr Dennis Herbert Mr Dennis Herbert , Watford

I ask leave to withdraw the Amendment.

Amendment, by leave, withdrawn.

Photo of Mr Dennis Herbert Mr Dennis Herbert , Watford

I have put down an Amendment, to move, after the word of"["child of that"], to insert the word "that person or the life of."

This was accepted in principle in the Committee, and I see that it is included in the Amendment of the Chancellor of the Exchequer at the top of the next page.

Lieut.-Colonel SPENDER CLAY:

I beg to move, at the end of Sub-section (1, c), to insert the words unless such person has irrevocably deprived himself of any beneficial interest in such income. I am not at all sure whether these words should come in here or among the provisos later on. The object of this Amendment is to protect the person not having any beneficial interest himself, but who has got the power of appointment of a certain income anions; either children of his own, or, perhaps, wards confided to his care. I think that this is within the scope of the Clause, and the intention of the Government.

Photo of Mr Leslie Scott Mr Leslie Scott , Liverpool Exchange

This is an Amendment to which I have given very anxious consideration. When it was put before us we understood that it was for an object somewhat different from that which is suggested by the hon. Member. We understood it was designed to meet such a case as this. Take the case of a woman who has children by a husband who dies. She then marries again, having property. She wants to settle it upon her children by the first husband absolutely and does so. But, having regard to the possibility that it is desirable to leave some discretion as to the proportions which the different children shall share, she reserves to herself a power of appointment, so as to give one child more than another. It was feared that that case might not be excluded from the Section as drafted. We considered it very carefully, and came to the conclusion that the Section as drafted does clearly shut out that case, and that there would be no risk of that case being brought within the Section, it being a case in regard to which obviously it would be wrong to attempt to treat the income which is disposed of absolutely for the benefit of the children as a whole, as within the scope of this taxing provision. This particular Amendment, as framed for that purpose, would not do, even if there were any doubt about the wording of the Clause without it, because it would seem to have certain undesirable effects.

The principal objection to the Amendment is this, that whereas the object of the Clause is to say that if any man puts aside income merely for the purpose of educating his children, and is therefore doing what an ordinary citizen has to do as his duly, the ordinary citizen being under an obligation to pay Income Tax on the income out of which he does educate his children, the person who puts money out of his control during the educational life of his children ought not to be put in a better position, as regards taxation, than the man who keeps the money under his control, and carries out the obligations of the ordinary citizen. The question was discussed in Committee, that the mere accident that the father in question arranges that after he had educated his children he would irrevocably dispose of the income to some stranger was no reason why, during the period In which it was his duty to educate his children, he should not educate them on the same principle as everybody else, and pay the same tax as everybody else. This Amendment would rule out of this Clause altogether the father in such a case as I have described. That would be contrary to the genera) idea of the Clause and the intention of the Committee, and we could not accept this Amendment.

It may be convenient now to deal with the difficulty which led to the proposal of this Amendment. The rule of law being that the singular includes the plural, and the scope and object of the Section being clear, we are satisfied that there is no danger of the Courts not applying the ordinary rule of interpretation that the singular includes the plural. So in such a case as the one which I have given, where the whole of the income was made applicable for the benefit of the children, as a family or group, for the lives of those children, then that application of the income would be outside the Clause altogether. By one of the other Amendments, which I shall have to move in a moment, we make a further qualification of this Clause that, if the father alienates the income for the whole of his life, it shall have the same effect of taking it outside the scope of this Clause and therefore out of taxation. With those safeguards the object of the Mover of the Amendment is met.

Amendment, by leave, withdrawn.

Amendment made: In Sub-section (1), after the word "person"["and not to be for those purposes the income of any other persons"], to insert the words Provided that in cases under the above paragraph (a) —

  1. "(i) where any such power as aforesaid can be exercised by a person with the consent of the wife or the husband of that person, the power shall, for the purposes of the said paragraph, be deemed to be exercisable without the consent of another person, except where the husband and wife are living apart either by agreement or under an order of a court of competent jurisdiction; and
  2. "(ii) where any such power as aforesaid is exercisable by the wife or the bus-band of the person who made the disposition, the power shall, for the purposes of the said paragraph, he deemed to be exercisable by the person who made the disposition."—[Sir I., Scott.]

Photo of Mr Leslie Scott Mr Leslie Scott , Liverpool Exchange

I beg to move, in Subsection (1), to leave out the words Provided that in cases under the above paragraph (c) income shall not be held to include any income derived from capital which is required by such disposition to be held on trust absolutely for the child at the end of any period loss than the life of such child, and to insert instead thereof the words: Provided also that—

  1. "(i) the above paragraph (c) shall not apply as regards any income which is derived from capital which, at the end of the period during which that income is payable or applicable for the benefit of the child, is required by the disposition to be held on trust absolutely for, or to be transferred to, the child, or any income which is payable to or applicable for the benefit of a child during the whole period of the life of the person by whom the disposition was made; and
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  3. "(ii) for the purposes of the said paragraph (c) income shall not be deemed to be payable to or applicable for the benefit of a child for some period less than its life by reason only that the disposition contains a provision for the payment to some other person of the income in the event of the bankruptcy of the child, or of an assignment thereof, or a charge thereon being executed by the child."

Photo of Mr Dennis Herbert Mr Dennis Herbert , Watford

I hope the House will forgive me if I ask to be allowed to express my thanks, and the thanks of other Members, to the Chancellor of the Exchequer and to the Solicitor-General for the way in which they have met us with Amendments on this Clause. It was an extremely difficult Clause, and I think I am right in saying that, so far as the Amendments moved by myself in Committee are concerned, the Solicitor-General has been good enough to meet me to my complete satisfaction, certainly on all Amendments which were on questions of principle. The only differences there have been between us have been on the question of drafting.

Amendment agreed to.