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Clause 26—(Amendments Restricting Finance Act 1940, S 55, Where Deceased Did Not Have Voting Control Of Company)

Volume 529: debated on Monday 28 June 1954

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3.40 p.m.

I beg to move, in page 29, line 18, to leave out "or partly."

I will not take up the time of the Committee for very long. The Clause as it stands provides that if a deceased person has control of a company for a continuous period of two years falling wholly or partly within the five years ending on the death of the deceased, the assets basis for valuation of the estate for death duty purposes shall apply. If the words "or partly" were allowed to stand the test period of five years would be extended in an extreme case to seven years. Therefore, I feel that these words ought to be deleted.

I am glad to be able to tell my hon. Friend that the Government are prepared to accept this Amendment, which makes a slight alteration in the Bill but one that improves its operation.

Can we be given an assurance by the Solicitor-General that the Government are prepared to accept this Amendment and stick to their decision should the 1922 Committee decide to go against them, and that on this occasion the Government will not give way to that Committee?

I should like to thank my right hon. and learned Friend for the gracious way in which he has accepted my proposal.

Amendment agreed to.

I beg to move, in page 29, line 30, at the end to insert:

"For this purpose the expression debenture' shall have the same meaning as in subsection (4) of this section."
I do not propose to delay the Committee in what is, after all, a very simple point which may arise as a result of an error of drafting. The object of this Amendment is to ensure that the expression "debentures" in this Clause shall have the same meaning as in subsection (4). In this Clause it is clearly laid down that temporary debentures shall be excluded from the calculation when determining whether a deceased had a beneficial interest in one-half of the capital.

It is surely only logical, when determining whether the beneficial interest is equal to one-half on the basis of income, that dividends from temporary debentures should also be excluded. As the Clause at present stands, interest on temporary debentures is not excluded from the calculation and the proposed Amendment ensures that temporary debentures shall be ignored in determining the income, as is the case in determining the capital. I very much hope that my right hon. and learned Friend will be prepared to accept this Amendment.

3.45 p.m.

I am sure that my hon. Friend will be delighted to know that the Government are prepared to accept this Amendment for the reasons he has advanced. I would only say that the wording of the Amendment may not be entirely acceptable and it may be necessary to make some improvements in it on the Report stage.

I wonder whether the right hon. and learned Gentleman has been answering the correct Amendment. The first Amendment on the Paper in the name of the hon. Member for Beverley (Mr. Odey) is in page 29, line 25, to leave out "one-half" and to insert "three-quarters."

I gather it has not been selected, but I listened as carefully as I could to the speech of the hon. Member, and he seemed to be speaking to that Amendment and not to the one in line 30.

Amendment agreed to.

I beg to move, in page 29, line 37, to leave out the second "or," and to insert "and."

My right hon. and learned Friend has accepted the last two Amendments and I hope that he will accept this one. Subsection (4) re-enacts a test previously contained in Section 55 (1, c) of the Finance Act, 1940. It is only now to be applied in the circumstances laid down in subsection (5). The wording, however, would appear to draw a material distinction between the position for the future and the position in the past.

In the terms of Section 55, the test was that the deceased had a beneficial interest in possession of shares in, or debentures of, the company representing one-half or more of the aggregate nominal amount of the shares in, and debentures of, the company then issued. In subsection (4) as now drafted the word "or" is utilised in substitution for "and." The result would therefore appear to be that the test is where the deceased held 50 per cent. or more of the shares issued or of the debentures issued. This cannot but be wrong, and I suggest that it was correct in its previous form. The Amendment is designed to adjust it to that form.

I am sure my hon. Friend will be gratified to know that the Government are prepared to accept this Amendment which corrects a small drafting error.

Amendment agreed to.

Motion made, and Question proposed, "That the Clause, as amended, stand part of the Bill."

After the kindness of the Government in accepting three Amendments from my hon. Friends, it may seem a little unkind for me to criticise the Clause. The first 10 lines of subsection (1) do away with considerable injustices from which companies and other individuals have suffered, but from the eleventh line onwards it seems that a great many difficulties are put in the way of those members of a family who succeed to shares in an estate.

Above all, the position is made extremely difficult where a gift of shares is given during the lifetime of the deceased, or under a disposition as indicated in the Clause, and the recipient is someone who, through them, obtains control or the equivalent of control in a company in conjunction with relatives. We believed that one of the main objects of this Clause was to make it a little easier for the family companies to carry on, but all the latter part of it, from the eleventh line onwards, re-imposes many of the existing difficulties on those who desire to pass their shares on to members of their family. Therefore, I ask the Solicitor-General to explain exactly what advantage is given to family companies as compared with their position under the present law.

I think it is right to say that this Clause makes things a little easier for family companies to carry on. The principle behind the subsection to which my right hon. and learned Friend has referred is that where the exchange of shares does not result in the family losing control of the company, and does not mean that the assets value cannot be realised, it is right that the basis of valuation should be the assets value. That principle runs throughout this complicated Clause.

For instance, if there were a transfer from one member of the family to another member, it might be that while neither individual had control separately, jointly they could exercise control and could realise the assets value. Where that possibility exists, we feel that it is right to retain, for the purposes of Estate Duty valuation, the assets value basis.

I want to draw to the attention of the Solicitor-General the point that we thought the idea of Clauses 25, 26 and 27 was to bring relief to family businesses to enable them to carry on from one generation of the family to another. My right hon. and learned Friend said that if there was to be no realisation of the shares of these private companies, the assets basis must be used. Many of my hon. Friends on this side of the Committee will not agree with that.

We are exceedingly grateful for the concession given in Clause 25 that, when that valuation has been arrived at, the Estate Duty payable is to be reduced by 45 per cent., but in principle many of my hon. Friends and myself feel that the assets basis as distinct from the earnings basis—the genuine valuation of that company—is the worst possible basis that could be devised. I am exceedingly sorry that it has been thought necessary in Clause 25 to introduce a concession with one hand and in Clause 26 to take away a very large part of it with the other, and I venture to register my protest.

Question put, and agreed to.

Clause, as amended, ordered to stand part of the Bill.