By way of background, when the rules on settlor trusts were changed, it was the Government's objective to render the settlor liable to the gains of income of such trusts as if they accrued to him directly. The provisions of clause 50 have been generally welcomed, but they raise two questions.
If the clause is to apply to the deduction of losses from gains treated as accruing to persons, why should someone elect for it to apply the other way round, to deem losses to accrue and be deducted from gains realised by him? Given that the Government's main intention was to look through the trust, why does the provision work one way and not the other? Extensive legislation provides that settlors recognise trust gains as their own. As it stands, losses remain with the trustee and are netted off against gains within the trust before they are attributed to the settlor.
The amendment would extend the intended changes to trust taxation, to permit settlors to offset their losses against their direct gains. It would allow the taxpayer to choose between accelerating the benefit of losses in trust by taking the risk of higher taxable gains from the trust in future, and leaving the position as it stands.
The changes that we propose are designed to be compatible with schedule 11, irrespective of whether our amendments to that schedule are accepted.
Amendment No. 53 deals with a different issue, and I hope that the Economic Secretary will tell me that it is not necessary. As we understand it, the clause would also remove taper relief to settlors if they opted for the choice provided in it. We cannot see the logic for doing so when the trust's gains and losses are to be viewed as exactly pari passu, as if the settlor owned them directly.
I apologise for the length of new schedule 1, but we understood from the Bill Office that there was no alternative way to address the issues. It is necessary to achieve the transfer of losses and gains both ways, which requires a complete amendment to schedule 11.