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Associated Operations

Volume 888: debated on Monday 10 March 1975

The text on this page has been created from Hansard archive content, it may contain typographical errors.

Amendment made : No. 97, in page 32. line 21, leave out 26th' and insert 27 '.— [ Dr. Gilbert.]

I beg to move Amendment No. 539, in page 32, line 32 at end add—

' (4) Where a transfer is made between spouses, then any two or more operations including that operation shall not be associated operations if they would not have been associated operations but for the transfer between spouses '.

No. 706, in page 32, line 32, at end insert—

' (4) The foregoing provisions shall not apply so as to make any transfer of value a chargeable transfer where that transfer is by one party to a marriage to the other and that other party subsequently or previously has made a transfer of value of an amount equal in value to the first mentioned transfer '.

No. 234, in Schedule 6, page 94, line 43, at end insert—

' (5) An arrangement between two spouses to enable each to contribute £5,000 as a gift within sub-paragraph (2) shall not be treated as an associated operation for the purposes of this Part of this Act '.

I thought that some of the confusion surrounding Clause 42 had arisen as a result of the original Press notice issued by the Inland Revenue, to which the Chief Secretary referred in Committee. The right hon. Gentleman admitted then that it had been a little misleading. Although I did not serve on the Committee I have read the passage in question. The Chief Secretary assured the Committee that transfers involving husband and wife would not be associated operations for the purpose of the Bill.

Until a few moments ago, when I saw a letter written by the Chief Secretary, dated 7th March, to my hon. Friend the Member for Gloucestershire, South (Mr. Cope) we had hoped that this would be a short debate. That letter has raised the whole question yet again and we shall have to start where we began the debate in Committee. During the course of the Bill the Chancellor has constantly made it clear that he has no wish to inhibit transfers between husband and wife. On many occasions he has emphasised the great benefit the Government are giving to the community generally by allowing these transfers in a more generous way than was the case hitherto.

Many delegations have been to see Treasury Ministers. I take one example, the delegation from the CBI which was concerned about small businesses. I can speak only on the basis of hearsay since I was not present. This delegation, like others, has been told by the Chief Secretary or other Ministers that if only the business man arranges his affairs in a sensible way and takes full advantage of the avoidance devices, which Treasury Ministers are prepared to explain to the business man, the full rigours of this tax will be much mitigated.

When Ministers speak from the Treasury Bench they constantly sound off about the evils of avoidance and how they are doing their best, as public-spirited citizens, to stop these loopholes. On the other hand, when delegates see Ministers they are told of the ways in which liability for capital transfer tax can be mitigated. The transfer between husband and wife has been demonstrated on several occasions as being one of those means. I shall not be breaching any confidences if I say that in private meetings my hon. Friends have an expression known as the "Gilbert and Sullivan Shop." I understand this to be a shorthand expression for explaining the kind of transactions which the Government understand might go on to minimise capital transfer tax liability. In spite of what was said in Committee a nagging doubt remains about Clause 42 which is much aggravated by this letter, to which I shall refer.

Treasury Ministers come and go, some rather faster than others, but the Inland Revenue's obsession about tax avoidance goes on for ever. Frequently its obsession about stopping up the tax avoidance loopholes leads to considerable fall out that is contrary to the interests of the ordinary taxpayer. The right hon. Gentleman may be certain of the Government's intentions on Clause 42 but in some mysterious way, as has often happened in the past, we may find the Revenue, in subsequent years when new Treasury Ministers have taken office contesting some transactions between husband and wife. In that situation the Inland Revenue may convince those new Ministers that what they are doing is fully within the terms of the clause.

I turn to the Chief Secretary's letter received today. It is confusing. It says:
" In a blatant case where a transfer by husband to wife was made on condition that the wife should at once use the money in making gifts to others, a charge on a gift by the husband might arise under the clause."
If there is a condition in the transfer, the situation could arise where Clause 42 might override paragraph 1 of Schedule 6. Where there is a condition, we are perhaps moving nearer to the "associated operations" type of case. The letter continues :
"It might even arise apart from the clause because in that case the wife would be a mere conduit pipe for passing the husband's gifts to their intended recipients."
That was obviously drafted by the Inland Revenue. The Chief Secretary has been extremely busy and may not have had as much time to devote to the study of this letter as he would have liked. 4.30 p.m.

There is a definite distinction between what is contained in Clause 42 and what we are being assured by Treasury Ministers. We must sort out that difference in this short debate. The letter continues:
" There would, however, be no question of invoking the concept of the 'associated operation' so as to treat a gift made by a wife as one made by her husband merely because the wife's assets had come from her husband."
That is all right, but a general paragraph is included to ensure that the Revenue can always go for a situation it does not like. The letter continues:
"You will, I am sure, accept that there will, however, be other and more complex situations involving transactions between husbands, wives and others where the Revenue would wish to invoke Clause 42.
I am sure they would, but it is vital to have two assurances from the Chief Secretary. The first is that in no circumstances wil transfers between husband and wife be caught under Clause 42 unless the right hon. Gentleman can give us very specific examples where that general undertaking might have to be broken. Furthermore, I hope that he will be able to show the exact connection between Schedule 6, paragraph 1(1) and Clause 42.

In the Bill this matter is mentioned in the final three lines of Schedule 6, paragraph 1(3). I have read those three lines over and again and find them obscure. We seek an undertaking from the Chief Secretary so that we shall know whether in future years the Inland Revenue could come down on such a transfer.

Despite the limpid, not to say deathless, prose of the Chief Secretary's letter to my hon. Friend the Member for Gloucestershire, South (Mr. Cope), I must admit that I am confused and not a little alarmed. I understand from the letter that if a wife is acting as no more than a conduit pipe—a well-worn phrase but a somewhat unattractive one as applied to the relationship between husband and wife—in other words, when the wife is acting as no more than an agent of her husband, naturally the gift must be a gift by the husband. However, I am a little confused, and I hope that the right hon. Gentleman will be able to assist the House on how far motive creeps into the test.

I have done the best I can in construing Clause 42, and by a sudden flash of recognition I recognised that it derived from Section 478 of the Income and Corporation Taxes Act 1970 and that it had an even longer and more dishonourable history than that. In that section there is an overriding protective subsection letting out such transactions if it can be demonstrated that the person involved had no fiscal motive. I cannot detect that overriding protection in Clause 42. We are told that "associated operations" means
"… operations which affect the same property, or one of which affects some property and the other or others of which affect property which represents, whether directly or indirectly, that property…".
I should like to ask how motive comes into that provision if there is a mere physical connection between properties involved in a series of transactions. It seems to me that if there is an associated operation the consequences to the unwitting taxpayer could be incalculable.

I should like to put two examples to the Chief Secretary. Suppose the right hon. Gentleman were to approach me for a loan and were to say "I wish to set up a settlement in favour of my family. I wish to put funds into it, but it will involve my realising some securities. which, in the depressed state of the present market, I do not wish to do. Will you cover me for three months?" Knowing the good will that exists between the Chief Secretary and myself, after our long exchanges upstairs, I might say "Yes, I shall make a loan to you interest-free" in the knowledge that he would use that as the nucleus of a trust fund for his children. I hope that I would be innocent of any tax avoidance motive in involving myself in that transaction, but in that situation would I be regarded as having made a transfer to the Chief Secretary's children? If so, will he tell me by how much?

It might well be that the Chief Secretary would endorse my cheque to the trustees and say "Here is your trust fund ". It seems to me that one would have two operations affecting the same property On a strict reading of Clause 42, that would seem to involve a transfer between me and the beneficiaries of the Chief Secretary's settlement. Is that what he intends?

Let me put to the right hon. Gentleman an even simpler transaction. Suppose he approaches me and says "I wish to buy a Rolls-Royce Corniche. My official salary will not, however, cover it in the immediate future. Will you make me a loan of £10,000?" I reply "Certainly", and make him out a cheque for that sum, which he endorses over to the motor car dealer. Admittedly, the Chief Secretary does not intend to confer any gratuitous benefit on the motor car dealer, but I wish to confer a gratuitous benefit on the Chief Secretary because I am making him an interest-free loan. Again those two operations affect the same piece of property. Between myself and the Chief Secretary there is a gratuitous transfer, whereas there is no such transfer between the Chief Secretary and the dealer. How-over, as I understand Clause 42, they must be linked together. Because I am not entirely innocent of tax avoidance, and because I wish to benefit the Chief Secretary, does that operation corrupt and taint the second limb of the transaction? Do I find myself in the absurd situation that I have made a capital transfer to the motor car dealer? That is perhaps an extreme case, but we are entitled to have a clearer demonstration of the limits of the clause than we have had so far.

In reply to the remarks of the hon. Member for St. Ives (Mr. Nott), I should like to point out that the only funny thing about the Gilbert and Sullivan shop is that the Opposition have made it fundamentally clear to us that they have no real understanding or conception of small shops and their problems over capital transfer tax. I am sorry the hon. Gentleman is confused because he knows how I hate to see him confused. I certainly hate to see the hon. and learned Member for Dover and Deal (Mr. Rees) confused because it makes his skin pucker and go red. That hurts me terribly.

In Standing Committee we were given a vast array of examples by the hon. and learned Gentleman. It is possible to give innumerable examples relating to CTT or to any other tax to make it sound confusing. I am sorry if in presenting examples the Opposition have so confused themselves that they have made it difficult for themselves to understand the tax.

I shall give only one example to show the purposes of the clause. I come immediately to the serious point that has worried a number of people about associated operations in relation to husband and wife situations. There were some misunderstandings because of what happened over the Inland Revenue Press notice. Therefore, I want to give the necessary assurance.

I assure the hon. Member for St. Ives that I read the letter to his hon. Friend the Member for Gloucestershire, South (Mr. Cope) before signing it—indeed, before it went for typing a second time —so I am well aware of its contents.

I want to explain the reason for the clause. As I said in Committee, it is reasonable for a husband to share capital with his wife when she has no means of her own. If she chooses to make gifts out of the money she has received from her husband, there will be no question of using the associated operation provisions to treat them as gifts made by the husband and taxable as such.

In a blatant case, where a transfer by a husband to a wife was made on condition that the wife should at once use the money to make gifts to others. a charge on a gift by the husband might arise under the clause. The hon. Gentleman fairly recognised that.

I want to give an example of certain circumstances that could mean the clause having to be invoked. There are complex situations involving transactions between husband and wife and others where, for example, a controlling shareholder with a 60 per cent. holding in a company wished to transfer his holding to his son. If he gave half to his son, having first transferred half to his wife, and later his wife transferred her half share to the son, the effect would be to pass a controlling shareholding from father to son. The Revenue would then use the associated operations provisions to ensure that the value of a controlling holding was taxed.

I hope that that is clear to the hon. Gentleman, and that he will recognise that that kind of situation could arise if the clause could not deal with it. That is basically the reason for the clause. The amendent would prevent a tax charge on the value of the controlling holding.

This is the main reason why I cannot recommend my hon. Friends to accept the amendment. I hope that the hon. Gentleman will not press it, because if it were put on the statute book the result would be that a controlling shareholder would not be taxed as such. I do not believe that that is the hon. Gentleman's intention, whatever he thinks about the tax.

Transfers between husband and wife will not be liable to the tax except in certain circumstances of the kind that I have outlined.

The right hon. Gentleman has not done me the courtesy of dealing with the rather simpler examples which I gave, and which I hope exemplify some of the difficulties of the clause. I hope that he will address his mind to them. I am still not entirely clear how far motive comes into the matter in the example the right hon. Gentleman gave in answer to my hon. Friend the Member for St. Ives (Mr. Nott).

If a father gives 50 per cent. of his shareholding to his son and 50 per cent. to his wife, and later the same 50 per cent. is passed on by the wife without intent to avoid tax, is that regarded as blatant because the property can be identified, or is motive the paramount test? The right hon. Gentleman should be a little more helpful than he has been so far.

4.45 p.m.

I do not expect the hon. and learned Gentleman to be fair and reasonable, or to make me any interest-free loans, nor do I expect to make such loans to him. I thought that I had been fair, and that I had clearly explained where a situation could arise in which a transfer of a controlling shareholding would not be taxed as such if the amendment were carried. At present we are not considering motive and whether it is done perfectly innocently. The motive comes up quite separately on the donative intent. That is a separate issue, which does not come under the clause. We are talking about associated operations. If the clause were not there, certain transfers of controlling interests in companies could be made without being taxed as such. I have given an example which clearly shows how that can happen.

Unless hon. Members can explain to me a situation in which that transfer of the controlling shareholding would not be taxed otherwise than as a controlling shareholding under the amendment, I shall not he inclined to accept it. The onus must be on them to prove to my satisfaction and that of the House that the amendment would do other than I have suggested.

This is an important matter. We have no interest in prolonging the proceedings, but what the right hon. Gentleman has just said will be read carefully outside the House, and it is vital that we have it clear.

The right hon. Gentleman spoke about a gift from a mother to her son which gives the son a controlling interest in a firm in which his father had previously had the controlling interest, the father having given him half. The Chief Secretary said that as the mother's gift meant that the controlling interest passed into the son's hands, a chargeable event would have taken place when, some years before, the husband gave half the controlling interest to his wife, having previously given half the control to the son, or even if he gave it afterwards. I ask this not to make debating points, but in order to have the matter clear for the outside world. Are we to deduce that it is by the transfer from mother to son in later years, which is a chargeable event in its own right, that the chargeability of the transfer by husband to wife in previous years will be judged, and that the question whether liability to tax will arise will he determined by that?

Is that exactly what the Chief Secretary is saying?

There will be circumstances in which a husband and wife each transfer a half where there would be no liability under the clause. I can recall companies that started from scratch under the joint ownership of husband and wife, each perfectly legitimately holding 50 per cent. of the shares. In those circumstances, there would be no problem.

But we are talking about an associated operation of the kind of which I gave an example, where the father had a clear intention to avoid paying tax on the transfer of a controlling shareholding.

I hope that that is clear, or that it will be clear to hon. Members when they have an opportunity to read the example I have given of the kind of situation that would be caught by the clause.

There are ordinary, perfectly innocent transfers between husband and wife. For example, where a husband has the money and the wife has no money—or the other way round, which happens from time to time—and the one with the money gives something to the other to enable the spouse to make a gift to a son or a daughter on marriage, that transaction would not be caught by the clause. It would be a reasonable thing to do. I have made that clear in Committee upstairs, and I make it clear again now.

We are talking only of the sort of operation of which I give an example. In general, my assurance stands. I do not go back on the assurance which I gave in Committee and which I have repeated today.

If I may say so, the Chief Secretary has put a very reasonable case. I say that in no patronising manner. I understand exactly what he intends to happen, but the fact is that his intention does not appear in the clause. As Clause 42 stands, a transaction between husband and wife and the wife making gifts to a third party would be, to use the clause literally, an "associated operation ". Therefore, something more than an assurance from the Chief Secretary is required.

I cannot see how the courts could operate this clause in the reasonable manner adopted by the Chief Secretary in explaining its intention. There are occasions when the wife is being used merely as a pipe when there is a transfer from husband to wife and then wife to third party so that some transaction goes on which would otherwise be chargeable. I know that it is difficult to define such an operation. I know that it is difficult to draw the line between the associated operation, which is not to be taxable, and the operation which is to be taxable.

I ask the Chief Secretary if in some way he can put what he has told the House into reasonable language as an extra-statutory concession. There must be something for those who are concerned in these transactions to turn to so that they may know where the line is drawn. If I may say so, the right hon. Gentleman has drawn the line very reasonably today, but that is not in the clause. If a case comes before the courts the literal interpretation of the clause will be that transactions from husband to wife, or wife to husband, and then to a third party will be chargeable. I ask the right hon. Gentleman to consider putting his intention into words. Even if they did not appear on the statute book there would at least be available an extra-statutory concession so that people could understand the position.

Supposing a husband has an 80 per cent, holding in a business and he gives 40 per cent. to his son and 40 per cent. to his wife, and the Revenue classes that as a collective operation and charges him the full rate of tax under the clause. Supposing at a later stage the wife does not give her share to the son but gives it instead to her boy friend. Obviously the first transfer to the wife in those circumstances should not have been charged. Is there provision for repayment of the tax in those circumstances?

There will be occasions in many other aspects of the tax when repayment will be due. Nowhere do I see in the Bill an opportunity for the Revenue to make repayment where tax has been overcharged. I know that this is not an appropriate moment to raise such a matter, but there are few perfect moments when considering a guillotined Bill as badly put together as this one. Would it be right in such circumstances—and there are similar circumstances which I could describe, but I would be out of order in doing so—for repayment to be made where tax had been overcharged on certain assumptions which were not later fulfilled?

I am grateful to the Chief Secretary for writing to me on this subject in answer to my letter to him. I am grateful to him for setting out his views. They have been helpful to me in trying to understand what is in the Government's mind.

I find the Chief Secretary's assurance to be reasonable and satisfactory, but, like other of my hon. Friends, I do not think that the right hon. Gentleman's assurances can be found in the Bill. The right hon. Gentleman said, if I noted his words correctly, that where there is a gift to the wife and on the marriage of the son or daughter the wife passes it on to the son or daughter, the wife is then being used as a pipe. Certainly there would be an intention—that is the word that he used in another connection —that the gift should be handed on. Therefore, it would be caught by the clause. The right hon. Gentleman is relying on intention. He is also relying on motive. That is the same thing in another context. He assured by hon. and learned Friend the Member for Dover and Deal (Mr. Rees) that he does not wish to rely strictly upon the clause.

It seems that the clause leaves a lot of discretion with the Revenue. I appreciate that it is difficult, as my right hon. Friend the Member for Crosby (Mr. Page) said, to frame in legislation what the House or the Government desire, but I dislike the more discretionary arrangements that crop up in our tax law. I do not pretend that it is a unique feature ; none the less, I dislike the more discretionary arrangements which occur. I would much prefer the Chief Secretary to say that he will consider making an amendment to the tax in a future Finance Bill, preferably the one that we are to have, unfortunately, in a few weeks' time.

Perhaps I may speak again with the leave of the House, Mr. Deputy Speaker. First, I say to the hon. Member for Cirencester and Tewkesbury (Mr. Ridley) that I always enjoy his examples. He always gives us some interesting ones. His example of a husband with an 80 per cent. holding is similar to the one that I put forward. In the hon. Gentleman's example, 40 per cent. is given to the wife and 40 per cent. is given to the son. The wife, instead of giving her 40 per cent., as was presumably intended, to the son, leaves her husband and gives it to her boy friend. That is an interesting situation that might or might not arise.

As I understand it, Treasury Ministers generally never like to give an answer to the kind of example that the hon. Gentleman always seeks to bring before us. On the first transfer there would be no problem. The husband transfers 40 per cent. to his son. No problem would arise on that. At a later stage much would depend on the nature of and the intention behind the transfer. I cannot go beyond that. We could go on for ever with extreme examples of all kinds. The hon. Gentleman's example could, I suppose, be described as reasonably extreme. I am not sure whether the wife's boy friend would wish to have a minority interest in the family business. However, that is another matter. On the other hand, I suppose that he might wish to have such an interest. Very interesting thoughts are brought to mind as to what could happen in those circumstances.

Next, I turn to the point made by the hon. Member for Gloucestershire, South (Mr. Cope) and the right hon. Member for Crosby (Mr. Page). It is true that the interpretation of clauses is always a difficult matter. Clauses in a Bill never include examples or the Chief Secretary's speeches. They would be rather long if they did. I know that all too often what we do in the House gives the lawyers a marvellous time in interpreting clauses and sections when relevant cases eventually appear before the courts.

Of course, it is not possible to imagine the enormous range of possibilities that lie behind these matters. Not every one has the imagination of the hon. and learned Member for Dover and Deal (Mr. Rees) or the hon. Member for Cirencester and Tewkesbury. I am obliged to hon. Members for saying that they felt that I had given an appropriate assurance and that I had been reasonable. Like many hon. Members, I am not happy about extra-statutory concessions. However, between now and next year we shall consider the matter and determine whether the interpretation could be other than that which I have given to the House. As I understand it, the interpretation which I have placed before the House is a rational understanding of the clause. If that is not the position, I give an understanding that I shall see whether it is possible to make the position even clearer.

5.0 p.m.

Our problem is that the courts do not have the Chief Secretary's speeches or undertakings before them when they decide upon clauses of this nature. That is why we are so concerned that Clause 42 should not slip through without examination. It is a very good example of a case where the vigilance of this House is crucial in Finance Bill debates.

When I was in a comparatively menial position in the Treasury, I had endless problems with interpretations of what was Section 28 and is now Section 460. I remember what happened when it was the other way round. Undertakings were given by a Minister from the Dispatch Box. The problem was to try to decide what the law was and not what undertakings Treasury Ministers had given.

I listened to my right hon. Friend the Member for Crosby (Mr. Page) with great interest. Rather than suggesting any extra-statutory concessions, would it be possible for the Revenue to issue another notice attempting to clarify this whole matter for the business community and for professional advisers? It seemed as if there would be some distinction made between innocent motive and culpable motive. Apparently it will be innocent motive where a husband transfers property to his wife in order to reduce the capital transfer tax on a subsequent disposition to the children, but it will be culpable motive falling under Section 42 if an attempt is made by a similar transaction to avoid tax on a controlling shareholding.

This places professional advisers and others in an extremely difficult position. I should be grateful if the Chief Secretary could arrange for that.

As we have indicated already, the Revenue will be issuing a statement on all the clauses after we have Third Reading. It will include in that some clarification of this point.

Amendment, by leave, withdrawn.