Thursday, 1 July 1965
Dáil Eireann Debate
The object of this amendment is clear, I think, from its wording. It is proposed to ensure that the section will not have a retrospective effect. So far as we are concerned, we agree with, and can understand, the policy enshrined in the section which deals with the avoidance of death duties but we feel that if a person does something which is in accordance with the law, he should be entitled so to act and it is not right or proper that legislation to deal with the particular thing he has done should have retrospective effect. For that reason we move this amendment which is intended to ensure that while the section will be passed, it will operate from the usual time, that is, from the date of the Budget.
Mr. Cosgrave: I should like to support what Deputy O'Higgins has said. While we all can agree on whatever tightening up may be necessary to prevent deliberate avoidance or evasion, there is a well established rule and many precedents here over the years opposed to retrospective legislation. Professional advisers and others who have been consulted by people making their legal and other arrangements in order to provide for family and personal commitments of one sort and another are entitled to act in the knowledge that whatever the law is at a particular time will so operate. But, as this section is drafted, it means that, without warning, professional advisers, either legal advisers or accountants, or both, who have given advice in the light of the existing state of the law find that the proposed changes nullify that position.
I believe it is a bad precedent to set down that retrospective legislation should interfere with what has been the established legal position up to the enactment of this proposal. In general, Budget Resolutions and the legal effect of Budget decisions apply either from the day following the Budget in so far as they may have penal effect  or, in certain other cases, from a later date.
There has been considerable criticism by those who have the responsibility of advising people professionally of the effect of retrospective legislation in this regard. We believe that the retrospective provision in this section should not apply and that any gift made before Budget day should be exempt. As the section is at present framed, people who sought and accepted professional advice and made arrangements accordingly now find that that advice and the action taken in consequence of it can be set aside.
I believe it is a bad situation that the law may be changed with retrospective effect. On many occasions and on a variety of topics, criticism has been expressed in the past of retrospective legislation where a penal effect is involved. This particular section might well be put into effect from the day subsequent to the Budget day, 12 May. We regard any retrospective application of this proposal as opposed to the principles which should govern the enactment of legislation of this kind and which have in general been applied in matters of this sort.
For that reason, I would urge the Minister to consider the amendment which has been moved by Deputy O'Higgins and which we believe would allow the Minister's intentions to be implemented in so far as any avoiding action which could have the consequences envisaged but which at the same time would preserve the existing arrangements in respect of persons who acted in good faith and in the knowledge that the law was so framed up to the date of the Budget and who accepted on that matter professional advice and acted accordingly. For that reason, we believe this section should operate only from the date when the Budget took effect.
Minister for Finance (Mr. J. Lynch): Deputy O'Higgins's amendment and what Deputy Cosgrave says again go back to the question as to whether estate duty legislation operating from the time of death is retrospective or not. I submit that it is not retrospective in the sense that it is a question of application as to time and all down the years estate duty legislation has been made applicable from the time of death and even if transactions before death were caught up by this legislation—avoiding transactions—then the principle has been that such transactions are caught.
I am not going to quote Deputy Sweetman again because I think Deputy Sweetman's views are well known as expressed on a previous Finance Bill, on retrospection generally and the date of operation of legislation dealing with death duties, but I might, with your permission, Sir, quote an extract from Taxation which is the acknowledged journal in this field, in its issue of 1st June, 1957. I have not got the actual journal with me but I take it the House will accept this extract from it. In its editorial in that issue the following statement occurs:
We are sure that most professional advisers have explained to their clients that transactions of this nature are always liable to be upset by future legislation and therefore the taxpayer appreciates that there is some risk that his acts will be made of no effect. He will usually accept this risk because he is no worse off if he dies within the five-year period and would be much better off as a result of having made the gifts should he outlive the five years.
That is in general, Sir, but, in relation to this amendment and the subsection to which it refers, the amendment would seek to create a privileged position in relation to gifts inter vivos for gifts given by way of the formation of family companies. As the Bill is at present and at least up to the point we passed it last night, an outright gift inter vivos would be caught if made within five years but, under the section, if the gift is made three  years or more before the passing of the Act, it will not be caught.
A gift given by way of the formation of a family company within five years is still a gift inter vivos. The formation of a family company is a device whereby a person seeks to avoid payment of death duties and to make the subsection applicable only after 12th May would create a specially favoured position in relation to gifts given to members of a family by way of this device over outright gifts given within the same period and it would, therefore, be both illogical and inconsistent to accept this amendment.
Mr. Sweetman: The Minister in his reply to the Second Reading debate mentioned views I had expressed on the Finance Act, 1955, but he omitted to tell the House that the views I expressed then were views in support of the section which the Minister is now proposing to repeal. We shall have that discussion later on, but to quote views of mine in another context, when they were expressly stated for the purpose of asking this House to support the Act of 1955, which the Minister is now proposing to repeal, is, to say the least of it, taking remarks slightly out of their context.
There is, of course, one respect in which the statement just made by the Minister is entirely incorrect. The only precedent that exists in the statutes in relation to the extension of the gift inter vivos period is the precedent contained in section 59 of the Finance Act of 1910. In that section there was, very deliberately, no retrospection. The position up to the Finance Act of 1910 was that gifts inter vivos were not liable to duty if they had been made more than one year before the date of death. The Finance Act of 1910 extended that period to three years but the Legislature deliberately made the section operative only after the expiration of the period of one year, so that, in relation to any transaction effected one year, or more, before the operative date, which was 30th April, 1909, which was, I think,  the date of the Budget announcement at the time, and, in the event of a death within the period of that year, notwithstanding the three-year rule, they did not go back.
The amendment Deputy O'Higgins has here is phrased slightly differently but the principle is exactly the same. The only precedent we have in the whole death duty legislation for an extension of the gift inter vivos period is the precedent in section 59 of the Finance Act of 1910 and, in the period then stipulated, the 12 month period was quite deliberately protected so as to ensure that there would not be retrospection. When we are dealing with gifts inter vivos, we are certainly entitled to follow that precedent rather than any other and the Minister should, therefore, make sure that this section does not come into operation until after the period of three years from the date of his announcement the other day and thus follow the precedent already established. It is a precedent on which people are entitled to rely.
Mr. J. Lynch: I said on that occasion we were doing no more than was done on any previous occasion by making the operative date as of the date of death. I had no intention whatever of quoting Deputy Sweetman out of context in the slightest degree. I should like to repeat now that we have gone so far in this Bill as saying last night that, if a person dies, within five years of his death making a gift, the gift inter vivos will be subject to estate duty. That is an outright gift and the type of person who will be caught is not the person who usually has the resources or the means to form a family company. The person who has such resources and can pay for such a device and has formed a family company in some period up to  the passing of this Bill would be, through the device of the family company and the making of gifts to his relatives, in a preferential position as compared with other recipients of gifts inter vivos. I said I thought that was inconsistent and would not be equitable as far as the general mass of the community is concerned.
Mr. Sweetman: Would the Minister answer one question very deliberately, after consultation with his advisers, if he so wishes? Is it not a fact that the only occasion on which the gift inter vivos period was extended was on the occasion of the section I have quoted? Is it not a fact that that section was not retrospective and that it provided for the case of a person dying after 30th April, 1909, but it had a provision saying that it did not apply to a gift inter vivos made or effected before 30th April, 1908. In other words, if the previous period of twelve months had operated before the date of death, then it was quite clear of duty.
Mr. J. Lynch: I will read what I have here. Section 24 of the Bill follows the line of the earlier Act which related to gifts made by persons dying after 30th April, 1909, but was not confined to gifts made after that date. It had, however, a transitional provision exempting gifts which had been made one year, or more, prior to that date and which, therefore, would have been exempt under the previous legislation.
Mr. J. Lynch: Yes. Section 24, in fact, follows the lines of the earlier Act which related to gifts made by  persons dying after 30th April, 1909, but was not confined to gifts made after that date. It had, however, a transitional provision exempting gifts which had been made one year, or more, prior to that date and which, therefore, would have been exempt under the previous legislation. I must admit I do not follow that very clearly.
Mr. Sweetman: “Had” made all the difference. This Bill has not got the same provisions as the other Act had. If this Bill has the same provisions as the other Act had, then to that extent it is not retrospective, but to that extent it has not.
Mr. T.F. O'Higgins: I will pose this question to the Minister. It may cover what Deputy Booth has in mind. If a person formed a family company four years ago and effected a gift inter vivos through that device, and dies, under the provisions contained in section 18 that property becomes liable to death duties; but if, in fact, another person gave all his property by means of a gift inter vivos four years ago, not using a family device, and dies, that property is not subject to death duties. In fact, not only are we dealing in this section with a person who sought to avoid the impact of death duties by doing something perfectly lawful, not only are we saying he shall not be able to do that in the future, but we are punishing him and putting him in an adverse position compared with the person who did not seek expert advice, did not do what he was advised to do and  did not act lawfully. We are putting that person in a worse position. That appears to me not only to be bad because it is retrospective, but also to be doubly bad because it seeks to single out and punish a person who has in fact acted lawfully.
Mr. Cosgrave: I should like to ask the Minister to consider further the reference that has been made here. If the Minister reads section 59 of the 1910 Act, he will see that, after providing that three years will be substituted for 12 months, it goes on to say:
Provided that this section shall not apply to any gift inter vivos, surrender, assurance, divesting, or disposition made or effected before the thirtieth day of April, nineteen hundred and eight, or made or effected for public or charitable purposes.
That was the Act in which the three years period was brought into effect instead of 12 months. In that case it was made quite clear that it would not apply to any gift before the 30th April, 1908, in other words, 12 months previously, I believe the Minister should favourably consider a similar provision if he is not prepared to go to the extent which Deputy O'Higgins's amendment proposes. As far as I can see, this is the first time this change has been made without allowing a ceiling. Although there is a difference as far as section 24 is concerned, as far as this section is concerned, as it applies to a gift inter vivos, there is no saver such as there was in the case of the Act passed in 1910.
Mr. J. Lynch: There is an exactly similar saver. The period operative up to the 1910 Act for the purpose of charging duty on gifts made inter vivos was one year. In the 1910 Act, it was extended to three years. But the 1910 Act, as Deputy Cosgrave has just said, expressly excluded gifts made in that preceding year, because that was the year of operation then. Now we are changing from the new period which came in in 1910, three years, to five  years. But we are including an exactly similar exclusion. It is the same type of exclusion except that we are changing the one year to three years.
Mr. J. Lynch: Because it is the same relationship. Up to then, you had the one year period established. Then you had the three year period introduced. That three year period has been established up to now. Now we are establishing the five year period. The relationship is exactly the same. The exclusion in relation to the three years is exactly the same as that in relation to the five years we are bringing in now.
Mr. Sweetman: Or anywhere else. I first read subsection (4) of section 24 as meaning that you were, but I do not think you are. You have to go to section 24 in order to understand this section. Subsection (4) of section 24 states:
This section shall have effect only in cases in which the deceased dies after the passing of this Act and the relevant disposition, surrender, assurance, divesting, determination or other transaction was made or effected after or within three years before such passing.
The “passing” there is not passing on death but the passing of the Act. For example, say this Act will be passed on 31st July, 1965 and the person made a disposition on 1st January, 1963. That person dies on 2nd January, 1966, that is, within three years from the passing of the Act. It is over three years from the date of the disposition. In other words, it is within the three year and five year period. That gift will be liable for duty now in contravention of the principle laid down in the 1910 Act. I admit quite frankly that the construction of subsection (4) of section 24 is difficult. But, when you get it down to exact dates like that, I do not think there can be any doubt  about the matter. This section should certainly follow the precedent laid down in 1910.
Mr. Booth: To follow what Deputy Sweetman has said, it is fairly clear to me that there is some differentiation between subsection (4) of section 24 and the subsections of section 18 in respect of which this amendment has been put down. I have a suspicion that what the Minister intended to do in section 24 was to follow the basic provisions in the 1910 Act, but to discriminate in some way in respect of gifts inter vivos made between an individual and a family company. From what he has said this morning, it seems to me he has been advised there is something rather naughty about a gift to a family company, but there is something slightly more respectable about a gift to a relative. I think there is a discrepancy between section 18 and section 24 and I should like to know why.
If a gift to a company is to be treated adversely, a gift to an individual should be treated just as adversely. Similarly, I would hope that, if a gift to an individual was to be treated comparatively favourably, exactly the same should apply to a gift to a company. I would agree with Deputy Sweetman that subsection (4) of section 24 is difficult to pin down, but I feel what the Minister had in mind was that section 24 should give preference to gifts to an individual.
Mr. J. Lynch: There is no question of preference at all. Section 24 provides that the section in relation to gifts inter vivos shall not apply (a) where the person dies after the passing of this Act and (b) where the gift was made three years or more before the passing of this Act.
Mr. J. Lynch: Section 24 provides that the section will not apply where two conditions are met: (1) when the person dies after the passing of this Act, and (2) where the gift was made three years or more before the passing of the Act.
Mr. Sweetman: At least we have got this far: we are down to an argument on what subsection (4) means. I think I have persuaded the Minister that what he wants to do is to follow the procedure of the 1910 Act. This is a different situation.
Mr. Sweetman: If a man dies say before 1st August, 1967, and has made the gift, he will be caught by the two years. I cannot see how subsection (4) deals with the situation. It would be much better to deal with it in the way  in which it was dealt with in the 1910 Act and the way which I copied exactly from the 1910 Act in amendment No. 37. However, that is section 24. At least we have got this far. There is no case whatever to be made for section 24 and section 18 not being on parallel lines. If what the Minister wants to do is to exempt a gift on the same basis as it was exempt in 1910, following the same precedent, in comparison, for the extension of three to five years, as was done from one to three years, then it should also be done in section 18. There is no case for dealing with the two sections differently.
Mr. T.F. O'Higgins: As Deputy Sweetman said we have made some progress. I want to get back to the point I raised before. Assuming— which is not the case—that section 24 (4) does preserve the position of a person who made a gift within three years of the passing of the Act, assuming that is the intention of the section, it still leaves the problem of the person who did form a family company four years before the passing of the Act and who, by means of that device, did distribute his property to the company amongst members of his own family. As section 18 stands, although what was done was perfectly lawful, and in accordance with the law, and in fact proved to be unnecessary because the person lived longer than three years and is in the fourth year and dies after the passing of the Act, under the section as it stands there is going to be a visitation of death duties which could never have been contemplated. It could never have been contemplated that if a man lived more than four years, death duties would have to be paid.
That seems to be carrying the degree of retrospection to the point of madness and it is quite wrong. If section 24 has the meaning intended by the Minister, then the person who does not form the family company and makes a gift to his family without a device of this kind and who lives for more than three years and dies after the passing of this Act has his position preserved and death duties will not  have to be paid. That is something that must be faced up to. I suggest the Minister might look at it again. I am sure the Minister could not have intended not only to legislate retrospectively but also to make two distinct classes and to deal with one person in such a way that not only would he be made to pay something the law said he would not have to pay at the time but would be punished for something that was lawful.
Mr. J. Lynch: Deputy Sweetman has proceeded on an assumption, and may I also proceed on another assumption? If we can be satisfied that the same pattern as was followed in 1910 is followed here, subject to the changed ratio of one to three years and three to five years, I take it that if section 24 (4) achieves that for the purpose of section 18, Deputies opposite will be satisfied?
Mr. J. Lynch: Yes. The suggestion I am going to make is this, that on both those assumptions, if we left it at that and between now and Report Stage I make sure that we are proceeding in accordance with those assumptions, would the Deputies opposite be satisfied?
Mr. T.F. O'Higgins: While preserving our position. Assuming that section 24 is as the Minister contends, would he be prepared to recommit section 18? We would still feel that section 18 in its retrospective position is not only retrospective but may in certain circumstances, such as the example I have given, create a particularly adverse position for a person who had acted lawfully.
Mr. J. Lynch: No; I do not think it would be fair to recommit section 18 on that basis. There is a reference to section 2 of the Finance Act 1894— this is the question of the imposition of duties from the date on which they would apply. It relates to gifts made inter vivos and that must be read as amended by section 24. Section 64, subsection (8) ensures this. What I am saying is that what Deputies opposite seem to want is that the same relationship as the one year had to the three years in 1910 should apply to the three years and the five years that we are producing under this Bill. I am satisfied that what we are doing is on all fours with what was done in 1910, subject to the ratio, but I would be prepared to look at it again between now and Report Stage to ensure that this is so. I am satisfied it is; nevertheless, I do not think it would be fair to recommit section 18.
Mr. Sweetman: I do not quite understand what the Minister means by recommitting section 18. Does he suggest that section 18 should follow the pattern of section 24? We think it does not. Again, for the sake of example, does he believe that subsection (3) of section 18 in effect reads “where the deceased has after the 12th May, 1968 ... ” shall we say, which is three years after his Budget day or the passing of the Act, I do not mind which? Is that not what he means? Anyway, I think the Minister might admit that it would shorten discussion if he would agree to recommit to Committee the discussion on section 18, if he finds that his interpretation of words differs from ours, so that we can have a discussion then after both of us have looked into it, rather than today.
Mr. J. Lynch: If the House would accept what I say in respect of that, having due regard to the parliamentary draftsman's advice and otherwise, because we could easily argue the same thing all over again.
Mr. Cosgrave: If the Minister is given advice somewhat similar to the views which we have expressed here and, in consequence, brings in an amendment, then no difficulty arises, but if his advice is to adhere to the  present Bill, then we might want to redraft an amendment to section 18 and to have a Committee Stage discussion on that on Report Stage. I think that is reasonable. If we are to shorten this discussion now, surely it is reasonable to say: “If the position is as we believe it is, we are entitled to have that Committee Stage discussion on the amendment on Report?”
This is in relation to subsection (4). A case can arise in which the wording of the section does not achieve what the Minister intended to achieve. A period of five years here, of course, is an average period and is not a gift period, as we have just been discussing. Suppose, for example, we have the case of a company that was incorporated on this basis on 1st January, 1963, and that the person concerned dies on 31st December, 1966—so as to get away from the three years and the five years we have been discussing. The position there is that the company has been in being for only four years and you cannot, therefore, in that case, take a five year average. In this, the Minister takes the date to start as being the date on which income was paid to the deceased. In the case I have in mind, no income was paid to the deceased in the years A, B and C, 1963, 1964 and 1965, and, in 1966, he was paid income.
It seems to me that, on the true interpretation of the spirit of this section, the amount of income he was paid in 1966 should be averaged over the four years, but the Minister provides in that case for no average at all. It is only the last year in which he received income that is taken into account. It does seem wrong that where there may have been certain  very excellent reasons for the paying out of the amount, for example, to children in the earlier years and then perhaps, because of heavy illness or something like that, that something is paid out to the deceased in one particular year, that year is taken as the sole basis on which the slice of capital will be calculated.
I agree that the averaging period, five years, is perfectly fair. I think I agree that there must be a provision, in case five years have not run, for averaging purposes. Otherwise the section could be meaningless in certain circumstances. But, where you have not as long a period as five years, I suggest the spirit of the section should be to take your averaging from the commencement of the incorporation of the company rather than from the commencement of payment because if you take commencement of payment of the income alone, you can get an entirely lopsided position.
Supposing, for example, no payment had been made in the case I gave up to the last year and that, in the last year, nothing was paid for the first quarter to the deceased, nothing was paid for the second quarter to the deceased and nothing was paid for the third quarter to the deceased, but, for the last quarter, a payment was made equivalent to one-quarter of the annual income, it seems to me that, in that case, an entire slice of the capital would be charged, on the wording of this section, even though only one-quarter of the income had been paid to him in that year.
Mr. J. Lynch: The intention of the subsection is not so much to deal with companies incorporated within the five years period but before. I think Deputy Sweetman has a point that requires further looking into. If he will withdraw his amendment, I shall guarantee to bring back something on it on Report Stage.
where the income or benefits purport to be or to include remuneration for services rendered by the deceased to the company, the Revenue Commissioners shall deduct from the said average annual amount such sum as appears to them to be reasonable remuneration in all the circumstances of the case.
For the purpose of getting complete clarification on one point, might I put this to the Minister? If the words “to them” are left in, and a person goes to the court, is it clear that the court can say: “That decision by the Revenue Commissioners was wrong”? I am worried that, because the words “to them” are included, the court is restricted and cannot say that the Revenue Commissioners were wrong and can upset it only if the circumstances are such that the Revenue Commissioners should not have come to the conclusion they did. I think the court should have an absolute freedom in deciding whether such sum is reasonable remuneration in all the circumstances of the case; in other words, that there would be a full appeal from a determination by the Revenue Commissioners and that the Revenue Commissioners would not be the last judges of what sum was reasonable. I am afraid, as the subsection is phrased, it could be so held. I do not think the Minister would feel justified in standing over such an interpretation.
Mr. J. Lynch: I myself raised a similar point in relation to other parts of the Bill with the Revenue Commissioners, dealing with these rights of appeal. For example, the parts I referred to, values of estates or values of property in the opinion of the Revenue Commissioners——
Mr. J. Lynch: ——which is, in the opinion of such and such, and the taxpayer appeals against whatever assessment is made. On the strict interpretation of the section, one  appeals against what is or is not the opinion. These words were used right through the income tax statutory legislation ever since 1894. I am advised the phrase appears to them to be reasonable. It is exactly the same as the phrase “which, in the opinion of is reasonable”, In fact, the substance is appealable at all stages. Deputy Sweetman's apprehension in this respect is not well founded.
Mr. Sweetman: There is a special section that deals with the right of appeal specifically against the opinion of the Revenue Commissioners on market value but there is not any special section which deals with this one. However, we can perhaps deal with this, though it is not a very satisfactory way to deal with it by Ministerial undertaking not to make a case against the point I have made. Could the Minister say to me why, “as appears to be reasonable” would not do all that is required in this section? It seems to me that it would and it would get over any possibility of trouble. Would the Minister examine this between now and Report Stage and we can have a discussion then, if necessary?
There is a well-established section of the Act which exempts from estate duty heirlooms, chattels of national and historical importance and so forth. It has been laid down over the years that they are not to be subject to duty, if they are of national importance, unless they are sold. They are exempt under the provisions of section 15 (2) of the Finance Act, 1894 which says that pictures, prints, books, manuscripts, etc. as appear to  the Treasury to be of national, scientific or historic interest are exempt from duty. That section is being carried out in our legislation. In every schedule of assets, there is a blank space for the purpose of inserting items that come under that heading. It seems to me that the articles themselves would not be liable to estate duty if they were held as articles. Equally, in a company where they go back and treat the articles as being of importance rather than the shares in the company, the same exemption should apply.
As I said earlier, the amendments which have been drafted in relation to this and certain other technical matters are not drawn up in the nicest and tidiest manner but I consider my amendment makes perfectly clear what I have in mind. If the whole purpose of the Minister is to get behind the value of the shares and get to the value of the articles, the same exemption as is there for the articles should be included here.
“Provided however that the value of preference shares which carry no voting rights or which only carry voting rights when the dividend is in arrear, shall be computed on the basis of a capitalisation of the dividends paid and likely to be paid”.
This amendment is in respect of the valuation of shares provided by subsection (5) of this section. The subsection provides that in the case of stock, shares or debentures in a non-trading company which is controlled by the deceased, the value, for all purposes of death duties, of the securities shall be such sum as would have been payable in respect of them to their owner of the company had been voluntarily wound up. Very often, in the case of the company such as we are thinking of here, there are different types of shares. Class A may be given to the sons and Class B to the daughters. Class B shares have no value and the daughters have no rights in the winding up of the company. The effect, therefore, of the subsection is to give the shares held by the daughters a value which they could never have. This means they will be assessable for duty in the case of valuation in winding up. The shares are such that they could never really wind them up. I included this in the amendment.
The proper way of dealing with these non-voting shares is to compute their value on a capitalisation basis. If the Minister would prefer market value to the capitalisation value, it could be included, and I would be perfectly happy. It is not right that they should be valued on a liquidisation basis when they have no right whatever to enforce a liquidation either by coming together with the other members of their class or otherwise.
Mr. P. Belton: Further to what Deputy Sweetman states, when you are dealing with a private company, if A owns five per cent of the shares of the  company and has four brother owning 12 per cent each, then, on his death, his interest of five per cent is deemed to control this company. In addition, the Bill provides that five per cent of the company controls it, whereas, in law, for winding up purposes, three-fourths of the shares control it, and all these shares will be valued in liquidation on a realisation value, although the shares in a public company are not so valued. Further, if A controls the company with 75 per cent and another relation has one per cent, that one per cent has the value of controlling the company. For the purposes of this section, control means 51 per cent of the company. I would like to know what control means in subsection (1) line 11. There is no definition of control.
There is a great discouragement set up here against brothers going into business. When brothers are married and have separate families, nine times out of ten, they are further apart than businessmen coming together in a company. This section will certainly have the effect of making brothers decide not to go into business with one another. There is no incentive for brothers to be in business at all. Right through the debate on these proposals, the Minister has said he favoured the father handing over to his family as soon as possible. That is why five years was looked for instead of three years. This section is completely changed, because, where a man has a family of age to take over, he hands his property over but is himself the practical owner. At this stage the father is going to retire. He passes over the whole control and retains ten per cent, 12 per cent or 13 per cent in pension. The company is run by his family and the number of shares he holds as a pension are now deemed as controlling the company.
That means he is taxed on the realisation or liquidation value of this company, not on the shares. In a public company, you can have millions of reserves and still the shares are valued at the market value; but, in this, everything is added on. The premises must be sold based on saleable value and nobody can sell it in  law unless he has 75 per cent to sell, or controls 75 per cent. The Minister in this is parting families and there will no longer be the family business to give. I think it is one of the harshest things in this whole Finance Bill.
Mr. J. Lynch: I shall deal with the last point raised by Deputy P. Belton first. He seems to have in mind trading companies but the subsection refers specifically to non-trading companies. The subsection does not say the company should be wound up. It says that if in the circumstances the company were voluntarily wound up, then the hypothesis is that the Revenue Commissioners could revalue the shares. The purpose of this subsection is to enable the Revenue Commissioners to get behind the face value of the shares and get down to what the real value is. Accepting the amendment put forward by Deputy Sweetman would appear to open the way to avoidance.
Mr. J. Lynch: For example, if the amendment were accepted, the main shareholder, the controller, I suppose, in this case, in the context of the Bill could allot to himself preference shares carrying an artifically low rate of interest. It is not so much the winding up of the company we are interested in here as the death of that person. The object of the subsection is to enable the Revenue Commissioners to see what is the true value of these shares, and make an assessment accordingly. If the shares were, as I said, preference shares, carrying a low rate of interest, naturally enough, the value would be very low and would not be in accord at all with the income the deceased was in fact getting out of his property.
Mr. Sweetman: It would not open the door to avoidance. There is a lot of sloppy thinking here. If preference shares carry a low rate of interest and that is the only income the man is receiving, why should he be charged more than the capitalisation value of the interest he is receiving? If the position is that he has ordinary shares as well as preference shares, then the ordinary shares will rise in value as the value of the preference shares is depressed. If he is getting his income by means of a governing director's salary then he will be caught by subsection (4). The plain fact of the matter is that the proper reading of subsection (4) and subsection (5) is that the Revenue Commissioners can get duty on more than the value of the company, and there is no other interpretation open.
I am quite happy to accept the Minister's words—true value, market value—if he does not like capitalisation value. The position appears clear to me that you are valuing something here at an entirely artificially high value for the purposes of getting duty, and that is all wrong.
Mr. Sweetman: Will the Minister please explain to the House why he will not accept his own words of “true value”? What the Minister is saying now is that “true value” is to be the value the Revenue Commissioners think they should get tax on and not the value of the shares themselves. Either words mean something or they do not. The plain fact of the matter is that this section as drafted is a device for Revenue to collect tax on money in excess of the value of the shares, true value as the Minister himself said. It is a device.
Mr. Belton: In the case of a holding company which is a non-trading company, one member of a family can have a five per cent share in it and in the subsidiary company and each of the brothers or nephews can have an aggregate of 12 per cent each. In this case, if a person dies with five per cent, he is deemed to control that company and it is valued at a greater value; in other words, at a realisation value. It must be; that is what the Bill says. If that is the case, it would be valued at a higher rate altogether. In a public company, that does not happen. In other words, you are giving advantage to big companies which nine times out of ten, are big English companies. In Ireland, 90 per cent of the Irish-owned companies are small family-owned concerns.
Mr. J. Lynch: On the further point raised by Deputy Sweetman, I could not follow him down the avenue of company law. I am not fully with him and if he gives me till Report Stage, I shall look at it so that I may understand what he is getting at and what I propose to do.
This is the one that affects the trading company and, in fact, subsection (6) of this section, as I understand it, is the one that deals with the most common case we have here in Ireland, the family company which has been built up over the years and the profits ploughed back from time to time. The business is carried on, and the principal shares are held by the descendants of the original founder. Very often in this case, there are relatives who are co-shareholders but not directors and who, in fact, have no say whatever in the affairs of the company. Notwithstanding that fact, they are deemed in this subsection to be in control.
So far as I understand the subsection, notwithstanding the fact that they have no say in the direction or control of the company, this Bill provides that they are valued as controlling shareholders. In fact, the plain and unadorned purpose of this subsection is to overrule the Supreme Court decision in the Convoy Woollen Mills case. There is no other purpose in the section except to beat the Supreme Court in the Convoy Woollen Mills case. So far as I understand it, the decision of the Supreme Court is now overruled by subsection (6). I do not think it is very creditable for the Minister for Finance to come in here and propose this subsection for the purpose of overruling the Supreme Court decision.
Mr. J. Lynch: This applies again to the changing of the character of the company within a period of five years before the death. It refers particularly to a person who has control of the company by reason of shares and who, in order to avoid death duties, splits up that control into a number of minority holdings, leaving something of a very small nature in his own possession, when he finds that the value of his shares would become subject to duty. Again, where he does this breaking up of control by distributing a number of shares amongst his relatives and his family within a period of five years, that is deemed to be making gifts inter vivos. The purpose of the section is to aggregate these small shareholdings so that for valuation purposes each would be regarded as part of a control holding.
Mr. Dillon: As I listen to this discussion of the amendments relating to what the Minister described as the avoidance of death duties, it occurs to me that in our faithful adherence to British legislation, we are entirely forgetting the different circumstances obtaining in this country and in Great Britain.
Mr. Dillon: One would think that we were legislating here for drunken dukes avoiding taxation for the benefit of dissolute doxies. We are, in fact, dealing with very respectable people living down the country and trying to avoid leaving their widows and children virtually destitute on their deaths. Let us take the ordinary farmer or shopkeeper who, by prudent living all his life, managed to build up a solvent company or a solvent enterprise, has  grown weary of being kicked around the place by the local bank manager, and is determined that he will plough back into the business or farm sufficient capital to permit him to say with his head erect that he is in a position now to kick in the door of any bank in the town in which he lives. He arrives at the end of his life, or at the prospect of the end of his life, and he is faced with the appalling prospect that, having established his independence of the bank manager by his forbearance, thrift and care, he is now about to deliver his wife and family into the hands of the Department of Finance.
I say the Department of Finance deliberately, because the Revenue Commissioners carry out the laws we make very humanely, very courteously and very decently. If, in effect, we impose on the Revenue Commissioners the obligation to pursue the widows, and children, and families, of these people with whips and thongs, to extract from them the maximum we can by way of death duties, what that means is that without breaking up the provision the fathers made for them during their lives, it is impossible for them to meet the demands made on them.
If the credit situation is easy, it may be possible for them to go to the bank and get an advance to meet the obligation which we are in the process of providing here by way of death duties, and pay them off over the years by a joint family effort, without breaking up the family assets. But do we want to do that? Is there anything wrong in a thrifty individual with a wife and family, when he reaches the autumn of his days, seeking to divide his property among his wife, children and relatives in such a way as to avoid their being crippled by estate duties and death duties when he comes to die?
I know the Minister may say that I have overlooked the fact that in making provision in section 18 he is trying to finance certain concessions he has in mind for widows and dependent children, but taking the whole picture of the discussions which proceeded heretofore on the amendments  proposed to the section, we must not lose sight of the fact that we are living in a country where there are not any dissolute dukes.
Sir William Harcourt introduced this whole scheme of death duties in Gladstone's last Budget in the late nineties for the purpose of making the big landed proprietors of England liable to taxation which at that time they substantially avoided. I believe that at the time Sir William Harcourt had in mind people like the Duke of Westminster who owned half of London, and other persons who drew vast revenue from the landed estates of rural England. As the years have rolled by, death duties and these other duties have come to affect a greater and wider section of the community. They were incorporated in our legislation in the nineties of the last century and have remained part of our taxation structure ever since.
Surely the time has come when the Minister should ask himself if, in following the British code of the Labour administration which is primarily concerned to prevent tax avoidance, it constitutes the same kind of evil as it may constitute in Britain. We know that in Great Britain every duke and marquis is a limited liability company and all sorts of strange devices are operated by very wealth men to establish companies and avoid taxation within the law and that highly-paid accountants and advisers spend the greater part of their time examining the Finance Acts of England to provide loopholes for these people. Nobody here wants to assist any shrewd individual to avoid his fair share of taxation, but in our zeal to achieve that end, do we want to make it impossible for an individual to leave to his wife and family a viable inheritance by way of a business of farm which has to be carried on? I think the Minister ought to pause and recognise that he may be creating a situation in which no family business or farm can be carried on if we continue to press the inheritance or estate duty aspect of our taxation system.
It may be that in the changing  world in which we live we have all suddenly come to the conclusion that the whole social pattern of our country should be torn up and that we should adopt the British social pattern. Do we want that? Every Deputy knows that there is in this country a vast number of relatively small family business and a vast number of small farms compared with the situation in Great Britain. By small farms, I mean farms of 100, 200 and 300 acres on which families live. Is that the social pattern we wish to preserve or do we want to destroy it? I put it to the Minister that the lines he is travelling at present are calculated to make the operation of a family business or family farm impossible. It is time we took a look at this whole situation and determined, as a policy, whether those are the lines on which we wish to proceed.
I think they are bad lines: I do not accept the proposition that everything that is new and foreign is better than the system we have built up for ourselves. There is a great danger in blindly following precisely what the revenue authorities may do in Britain or in Germany, France, Belgium or Holland. We have a different type of society and I think ours is the better and more stable type and one of the greater stabilising influences in our society is the family business and the family farm. I speak by analogy when I say this whole tendency to proletarianise all property in the country is wrong. We are losing sight of the family until and I think the more we depart from it the greater injury we do the foundations on which our society stands.
It is hard, in the context of section 18, which is the operative section, and the various amendments put down to it, to determine what is exactly the appropriate point at which to make the point I am now submitting, but I suggest to the Minister that, without recapitulating the whole argument when we come to consider the situation in its entirely, it is appropriate now to ask ourselves what we are trying to do. Do we want the family business and family farm made impossible of survival? If we do, we  are going the right way about it: if we do not, I suggest we should stop and consider whether, in following every development of British revenue law, we are serving the best interests of the kind of society we have built up in this country.
Mr. J. Lynch: Deputy Dillon has gone rather outside the specific terms of the subsection, although he could not be held to be out of order as this subsection is part of the whole structure of estate duty, but what is involved here is the family company, as he said, and the man who has the controlling interest giving that control or this interest to members of his family in such a way that if he had not done that, when he died his interest would be subject to a certain amount of estate duty. But in order to avoid the payment of that amount of estate duty, he splits up his control and gives a quarter here, a quarter there and a quarter somewhere else and still retains a quarter for himself. These are separate gifts inter vivos if he dies within five years and the value of these smaller portion or shares individually will be the value for estate duty purposes and will be far less than if all those shares were held in the one controlling hand. If he splits up his control in this way five years before his death, they are regarded as gifts inter vivos and prima facie at any rate—possibly more than prima facie—he has done it deliberately to avoid payment of the larger sum.
Mr. J. Lynch: The purpose is to aggregate these deliberately split-up portions into a whole and assess them on their value then rather than on their value in the fragmented condition. The subsection tries to combat that avoidance device and that is what it does.
Mr. Dillon: I accept substantially what the Minister very reasonably says: he is disarming in that he is so reasonable and anxious to explain the position. I have the uncomfortable feeling that the Minister is in substantial agreement with this side of the House but does not care to say so. Do we regard it as a criminal offence, or as an action which legislative steps should be taken to prevent for the future, for a father, who has had to exercise for bearance all his life, restrict his own spending and keep his family within certain limits and point out the necessity of making the farm viable and the family independent of the controllers of credit, to call his family around him in the autumn of his days and say: “I am approaching three score years and ten and will shortly be living on borrowed time. We ought to get together and determine how we are to carry on the business?”
If he does not do that, when he comes to die, if he leaves everything to his wife or to the eldest child or, as the Minister says, leaves the property to be aggregated for the purpose of death duty, what happens is that his widow gets a business or a farm which, to make it viable, requires the capital that is in it but she is called upon to pay over to the Revenue Commissioners £10,000. Where is the to get the £10,000? At the present moment she could not get sixpence from a bank. There is no place she can get it except by breaking up the business or breaking up the farm.
The alternative is that the man in question calls his family around him and says: “I am going to leave the wife such and such a provision and John, so much, and Mary, so much, and you may as well have it now as have it later on”. He divides it up and divides it up avowedly for the purpose of putting them in a position to meet a lesser charge than would otherwise fall on the aggregation of the family fortune that he built up so that they can carry on. Is there anything wrong in that?
I have got the feeling that the Government are building up a picture  that a man who accumulates a family business is a quasi-criminal. Is he? I have been reared to believe that such a person was an admirable citizen and somebody deserving of praise. The best situated citizen under this code of law as it closes in upon us is the man who in his 60th year says: “Let us be merry, for to-morrow we may die. Let us all go out and have a whoop-a-doop and we will leave the Revenue in the position that when they come to assess my estate, there will be nothing in it”.
Do we want to promote that kind of approach? I do not think it is a good approach to this whole problem at all and I would like to hear the Minister tell me, if it is the Government's view that the practice of building up a viable family business and so distributing it in the lifetime of the parent that it will be viable for the family after his death is a type of tax avoidance which the Government think it expedient to stop by law? Because I do not think it is. I should like to see that kind of thrift and prudence promoted but I think the tendency at present manifesting itself here and abroad for everybody to spend everything they can get their hands on and borrow as much more as they can and spend that, too, is catching up with society in Great Britain, the United States of America and elsewhere.
Mr. Dillon: I am going to put the case that if we pursue what appears to me the underlying philosophy of the trend manifested in section 18 and in the Minister's general approach to this Bill, that is the rational thing to do; there is no use exercising self-restraint and economising and living within your means if you are faced with the inevitable consequence when you come to die. Nobody hopes to take it with him. Nobody is hoping to go to heaven, purgatory or hell, taking it with them. The normal thing is to make provision for your parents, your family or your widow.
We are now appearing to take up  the position that we regard that as dishonourable, something that we ought to put an end to. I do not. I have much more respect for the man who lives within his income and frowns on the members of the family who clamour that they should spend everything as quickly as possible. If the trend of section 18 is to be pursued, what parent can honestly say to his children who clamour that they should have motor cars, colour television and anything else they can put their hands on, that we simply cannot afford it if we are to leave the family business viable after the parent has gone? The answer is that there is not the least use in doing that because, no matter what you do, the Government will take a great part of it, whereas, if we spend it now, we will have the enjoyment.
One of the great difficulties is that once a Minister gets the bit between his teeth and starts travelling a line of country like this, he is very loth to turn back. I would like to ask the Minister this specific question: does he think it a good thing for a family firm or a family farm to be passed on to the family after the father dies in circumstances which make it possible for the family to carry on?
Mr. Dillon: We are agreed on that, and we would envisage a family arrangement which would dower the daughters and allow one or two brothers to look after their mother and carry on the enterprise. I put it to the Minister, if that is to be done in a family farm, is not some kind of family settlement before the father dies a necessary and desirable precaution? I emphasise “necessary and desirable” from the point of view of the society to which we all belong. If the Minister is prepared to accept that proposition, which I think flows inevitably from his agreement with me about the first proposition I have made, why are we legislating to make that which is necessary and desirable virtually impossible?
I think that is whither we are unconsciously stumbling and we are  stumbling along in that direction because we have followed the British legislation which is designed to meet an entirely different social pattern. I earnestly press on the Minister the proposition that we here in Ireland have worked out for ourselves and our circumstances a better social pattern than the British have succeeded in working out and a better social pattern than is emerging in post-war Germany or, indeed, in the post-war continent of Europe. I urge on him that he is mistaken in moving in the direction in which he is at present undoubtedly moving, that is, the extinction of the family business and the family farm and, mind you, they are complicated and in many ways abstruse social consequences. I do not want now to engage in a dissertation, and tax the patience of the Leas-Cheann Comhairle by engaging in any dissertation, on the anthropological aspect of our rural society, but they are there. They ought to be considered and changes in our taxation policy which are calculated to disrupt that pattern ought to be undertaken only with a full realisation of their consequences.
I believe the Minister is in substantial agreement with the arguments I am putting forward but finds himself caught in a dialectic that we are bound to follow the general pattern which has emerged in Great Britain. I do not think we are and I do not think we should. I would like the Minister now to look at the whole philosophy underlying section 18 and reconsider the amendments that have been here submitted in the light of a review of that philosophy on which this whole scheme is founded.
Mr. P. Belton: I think 75 per cent should still be deemed to control a company for the purposes of this section. If a man dies and leaves shares to his family, these shares are valued; because the aggregate of the shares is 51 per cent, the people concerned may be forced to sell. They would not have enough money to pay death duty. If they are forced to sell, they must sell on share value only, not on liquidation value. Because they do not own 75 per cent of the company,  they cannot sell the shares at the value of the Revenue Commissioners. All the shares aggregated together owned by them amount to only 51 per cent.
This Bill deals with control and the only way in which a person or group should be deemed to have control is when that person or group hold 75 per cent and the shares are valued on realisation basis. If that is the position, they will be able to sell; but that will not be the position under this Bill. Under company law at the moment, 75 per cent means one can sell the premises, but 51 per cent does not. A holding of 51 per cent therefore cannot be regarded as a controlling interest, even if the holding is held by a group.
Mr. Sweetman: Certain other matters have been discussed in relation to this amendment but the amendment asking for the deletion of subsection (6) deals primarily with the position of the family company, the family company with which we are all familiar throughout the whole of this country. Subsection (6) is designed to hit that company, and the members of it, in an entirely unfair way. While I accepted the view the Minister first expressed at column 1337 of volume 216 of the Official Report of 23rd June last in relation to Financial Resolution No. 18, I am bound to say now that the more he goes on, the more I am beginning to wonder whether I was right in initially accepting his bona fides. I am beginning to wonder now whether the Minister was telling us the whole facts when he said he wanted to make it clear that no proposal was ever put to him. I doubt very much indeed that anybody put down that Resolution without his signed authority and, the more we go on discussing this subsection today, the more I am inclined to think that we are witnessing the same mentality in it. For that reason, as this affects family companies all over the country, I am not prepared to withdraw the amendment.
Blaney, Neil T.
Burke, Patrick J.
Collins, James J.
Crowley, Honor M.
de Valera, Vivion.
Fitzpatrick, Thomas J.
Gibbons, James M.
Gogan, Richard P.
Healy, Augustine A.
Hillery, Patrick J.
Kennedy, James J.
Kitt, Michael F.
Lalor, Patrick J.
Lemass, Noel T.
Millar, Anthony G.
Ó Briain, Donnchadh.
Ó Ceallaigh, Seán.
Burke, Joan T.
Clinton, Mark A.
Costello, John A.
Dillon, James M.
Dockrell, Henry P.
Dockrell, Maurice E.
Donegan, Patrick S.
Esmonde, Sir Anthony C.
|Fitzpatrick, Thomas J. (Cavan).
Harte, Patrick D.
Hogan, Patrick (South Tipperary).
Hogan O'Higgins, Brigid.
Jones, Denis F.
Kyne, Thomas A.
Lindsay, Patrick J.
Lyons, Michael D.
O'Higgins, Michael J.
O'Higgins, Thomas F.K.
Reynolds, Patrick J.
Subsection (8) of this section deals with the question of disposition to or for the benefit of a relative. I can visualise a case in which a brother of the deceased, who had no share  interest previously in the company but was acting as solicitor or accountant to the company, could be forced under the wording of subsection (8) to pay duty in respect of the capitalised value of the remuneration he had been given for his services to the company. That obviously should not be. In fact, it is something I do not think the Minister intended.
Mr. J. Lynch: I take it what the Deputy has in mind is a disposition in the form of payment for services. In that case I understand the amendment is unnecessary because of section 3 of the 1894 Act, which exempted property passing on the death of a person by reason of a bona fide purchase:
I am not terribly happy about this amendment. At first reading it appeared a situation could arise in respect of which there would be a quick succession. If it is on the principle we discussed before, that we were going back behind the value of the shares to the value of the property, it is appropriate that quick succession should operate. But, on a subsequent reading of the section, I am not entirely satisfied that is so.
estate duty has become payable on any property consisting of land or a business (not being a business carried on by a company), or any interest in land or such business, passing upon the death of any person, and that subsequently within five years estate duty has again become payable on the same property or any part thereof
Mr. Sweetman: I know it is a company, but the whole purpose of this section is to get behind the company to the business, and, having got behind the company to the business, the same provisions should apply.
Mr. Sweetman: May I put a case to the Minister? A transfers the business to the company and gives some of the shares to his son B and to C and so forth. A dies within the period and the shares he had given to his son B become liable for duty and the way in which those shares are valued is to go back and value the business and treat the gift of the shares to B as being a gift of a proportion of the business to B. Then if B dies within the five years provided, there should be a similar quick succession relief because I think the Revenue would get duty again. I am not very clear on it, I may say.
Mr. Sweetman: What I feel in relation to this is that here by reason of this section you are going back to the business for the purpose of attracting the liability to duty and in attracting the value of that liability, you should equally go back for the quick succession relief.
Mr. Sweetman: I want the Minister, first of all, to explain what is intended in line 31 by the words “or indirectly” which also come into subsection (6), line 35, on page 16. The first place they appear, however, is in line 31 and I want to know (a) what is intended and (b) who decides: is it the Revenue Commissioners or the courts? Again, I want to know what does the word “mainly” mean in line 31 of page 14? Does it mean in excess of 50 per cent or does it mean a higher percentage? I want clarification also on who is to determine the words “by any other means whatever” in line 43 on page 14. Who is to decide that? Is it to be the Revenue Commissioners at their absolute decision or is the court to be entitled to look back to it and see whether it does not conform to the principles?
I want to point out to the Minister that the word “benefits” in line 31, on page 15, has no definition and that for the similar word in the British legislation which we are copying—we are copying all the bad points and not taking some of the good ones out of it—there is a vast definition of “benefits”. These are contained in the  British Finance Act, 1946 and in the Finance Act, 1947. I find it difficult to understand whether the phrase “otherwise than for full consideration” in subsection (5) of section 19, is in fact imported into subsection (4) of section 18, paragraph (b), subparagraph (i). I have a good few more questions but I think that is enough for the moment.
Mr. Sweetman: Very well; I will produce some more points. What does “control” mean? Deputy P. Belton raised this in regard to section 18 (1) “Control” under the Companies Act can be 51 per cent and in certain aspects of the Control of Manufactures Act and it can be two-thirds in certain other circumstances, or it can be the percentage required for the passing under the Companies Act, 1963 of a special resolution, which is 75 per cent of those entitled to vote and intending to vote. May I also go back to the five year and three year period which we were discussing earlier and which is mentioned in subparagraph (b) of the definition in subsection (1) of a company controlled by a deceased? Does that three years follow the pattern of section 59 of the Finance Act 1910 which we discussed at some length this morning?
May I refer also to subsection (2) to “the majority of the voting power or shares”? Does that include shares that only get the right to vote in certain circumstances, such as where a dividend has not been paid? Is it clear in subsection (4) that the holder of an office is the definition of an  officer under the Companies Act 1963? There is no definition here nor, I think, in the Finance Act of 1894, of the holder of an office but there is a definition of the officer of a company in the Companies Act, 1963, sections 174 and 175. Supposing, in subsection (4), a house is let on a full rack rent to an officer of the company. Is it clear in such cases, when he is paying the full rack rent, that his family will not have to pay in addition, if he is unfortunate enough to die in the period that is covered here? I think I have given the Minister enough problems for the moment. My ingenuity is not yet defeated, though. I can come back on a few more of them.
Is the Minister clear that there is an absolute appeal in respect of market value in the opinion of the Revenue Commissioners? I think there is, but I want to get it clear beyond question on the record.
This section deals with discretionary trusts and with liability for estate duty  in respect of funds that remain within the discretionary trust. As I understand the matter, if a discretionary trust of a certain amount is set up and the settler in the discretionary trust provides that the income from the fund can be paid to his children, it is usual also to provide that it can also be paid to the wives of the children and the issue of the children as well. In the case I have in mind, if the income from half the fund is paid to child A, then, on the death of child A, a slice of the discretionary trust fund is taken equivalent to half the income, which would be half the fund. Duty, on the death of that child, is payable on that fund.
Though nobody likes paying duty, I must confess that I find the method by which the value is taken of the discretionary trust funds deemed to pass not to be an unfair one in respect of that first death. That having been done, duty has been paid on half the fund. The discretionary trustees then go on, after the death of child A, to pay the income from what is the equivalent of half the fund to the widow of child A for her life and then she comes to die. If this were not a discretionary trust but were an absolute trust, then there would be no death duty on the widow's death. The second spouse would be exempted by reason of the provision of section 14 of the Finance Act, 1914. But, in this case, it is a different situation. We are valuing the slice of the capital by reference to the amount of income paid out and, while the slice would have paid, and properly paid, duty on the death of child A, it would not obtain the spouse exemption and would fall to be valued for slicing on the second death in so far as the income again represented a proportion of the fund.
I know that subsection (2) of section 5 of the Finance Act, 1894, exempts property that has already borne duty but the effect of that subsection in this would be only to exempt half the fund that fell for duty on the death and, in respect of the other half, there would be a second claim for estate duty following the death of the spouse.
 Let me admit quite frankly to the Minister that it is an even more complicated transaction than some of the other ones that we have made. However, because he is adopting the slice method in relation to the discretionary trust, there is no doubt that we have to take the slice of the whole fund that is under the discretionary trust. That means therefore that to the extent of one moiety of the fund in which the son first, the widow, secondly, got a life interest, duty will be charged which would not be charged if the spouse exemption were provided here as it was for regular trust property.
Mr. J. Lynch: The same exemption as is provided by section 14 of the Finance Act, 1914, as regards an enforceable annuity under a non-discretionary trust, would apply here to section 19 and relates to discretionary trusts.
Mr. J. Lynch: It applies to this section. What applies in the case of enforceable annuities would also apply to the case of a discretionary trust. Again, I cannot go into the intricacies of these hypotheses Deputy Sweetman has put forward here. I believe that where estate duty is payable on the death of one spouse none is payable on the death of the other.
Mr. P. Belton: I should like to ask the Minister, if a discretionary trust fund is set up for a family, are the children allowed their educational and university expenses out of it but no profit  otherwise? How is that affected or is it affected at all?
Mr. J. Lynch: I am afraid the answer is that these payments would come in for assessment in relation to the parents' death. There would be a release of that kind, even though there is not a change in the trust fund.
Mr. Sweetman: I should like to raise a question on subsection (2). I have heard two different cases argued on this in relation to subsection (2). One argument is that because of the provisions of this section, you can never wind up a discretionary trust at all. If you try to wind it up and any of the people to whom you give the fund dies within a period of five years afterwards, there would be a claim for duty on the trustees. Therefore, they must retain a part of the fund to meet that claim and, equally, during the period during which they retain the fund. Therefore, it is going round in circles in saecula saeculorum.
That was my reading of the section and it was so read by an eminent counsel. I do not think it is entirely accurate because I think the position is governed by subsection (2) where it says that the trustees “select and one or more of those persons dies or die during the continuance of the discretionary trust fund”. If you wind up a discretionary trust by paying the funds to people who are alive at the date you pay them, there cannot be any liability afterwards in respect of that sum so paid when those people die.
It means the Revenue are getting it twice if that interpretation is not right. If there is a wind up by making  a discretionary trust fund to a person who is alive, and if there is still liability under section 19, the person has got the money into his own hands, and if so, he has got to pay duty on it. It would not obviously be equitable that he would also pay the discretionary trust provision. I would like, therefore, if the Minister would confirm that as long as the trustees pay the capital of the fund to one of the beneficiaries in whose benefit the trust fund is, when that person is alive, then there cannot be any liability for duty in so far as the discretionary trust is concerned. When that person dies afterwards, there will, of course, be liability in respect of his free assets and in respect of the discretionary trust fund.
Mr. T.F. O'Higgins: I move amendment No. 25:
Before section 20 to insert a new section as follows:—
“For the purposes of chargeability for estate duty a mortgage of land or other property situate outside the State shall be regarded and treated as movable property.”
I observe the note put at the end of this amendment says that acceptance of the amendment involves the deletion of section 20. I do not know whether that is correct or not. As I said on Second Reading, it appears to me that the object of section 20 is to deal with the Jersey mortgage and to that extent its object is to deal with another device for the purpose of getting out of the liability for death duties. We are concerned, however, with what appears to be the general scope of the section. We also are concerned with what may well be the effect of a section of so general a nature as this on the  domicile of choice of a number of people over a number of years who have invested, or may indeed invest money in this country.
It is not necessary for me or any other Deputy, to remind the Minister for Finance that at this time we cannot afford to have a disappearance of cash and a flight of capital from the country itself. There is not only an overriding need to preserve what we have but clearly it is becoming apparent we need a great deal more than we possess. If the fears we entertain are justified that section 20 may have the effect of frightening people who already have a domicile base here or who may be contemplating such a step, then obviously, whatever tax evasion is involved, it creates a situation in which we may lose in the long run. May I remind the Minister, as I did on Second Reading, that under the 1949 British Finance Act, when they took a step similar to this, it had the result in England that quite a number of wealthy people proceeded to change their domicile. One of those people was the proprietor of The Times. That was the result in England, which may have been able to absorb the loss and weather the storm but I doubt if we could afford to set up a similar trend here.
It is for that reason that I have endeavoured in this amendment, and I do not say it is the proper way to deal with it, to suggest that some effort should be made, if we want to deal with the mortgage of property where the law of the land where the property is situate holds the property to be immovable property, to legislate in those terms and not try to do something which may have an unintended effect and may widen the scope of what is being done. I therefore tabled this amendment so that there might be a discussion and an explanation as to whether it is possible to narrow the scope of the section.
An Ceann Comhairle: Will the Deputy look at amendment No. 26 and amendment No. 28 and see if they can be discussed together?
Mr. T.F. O'Higgins: I know Deputy J.A. Costello would wish that  amendment No. 28 should be excluded for the moment.
An Ceann Comhairle: We can take amendment No. 25 and amendment No. 26 together.
Mr. Sweetman: The primary purpose of this section is, as Deputy T.F. O'Higgins has said, to catch what is commonly known as the Jersey mortgage and, in relation to that, we must all agree that the Minister is perfectly entitled to legislate and provide that a Jersey mortgage will be liable to duty here. I say a Jersey mortgage because this is the normal form that is used. There may be a Guernsey mortgage or a Sark mortgage or an Isle of Man mortgage in the same category but I do not know. If, by the law of any other country, what we consider personal estate is deemed to be immovable estate, then I think it is fair and proper for the Minister to assess such for duty because, in fact, it is merely taking these mortgages as a means of avoidance.
I do not think, however, that the same position arises in what I call genuine immovable property and, particularly, it is not right in a case where we have not a Double Taxation Agreement with the country concerned. The case of immovable property per se very often arises where somebody in this country is left such property in the other country and I think the Minister, by providing that such immovable property is liable to duty here, is flying rather in the face of international law. The British Finance Act of 1962 which dealt with this in, I think, section 28, did not go so far, as far as my information goes, as the Minister has gone. I think the British Act rather provided, first, for the case where the immovable property was, in fact, personal property like the Jersey mortgage and, as well as that, provided for the case where it had been purchased by the deceased. But this section covers not merely property which has been purchased by the deceased but property to which the  deceased has become entitled by any other means.
There is in the British Finance Act, 1962, also, I think by virtue of section 29, provision for a double taxation agreement which does not appear to be here. Because of that, it would seem to me that it would be desirable that an amendment, either on the lines of that put down by Deputy T.F. O'Higgins, or on the lines I have put down, would be fair in all the circumstances, catching the avoidance case, and will not hurt the genuine person who has succeeded to property abroad.
Mr. J. Lynch: As the Deputies have observed, those provisions were primarily designed to catch the Jersey mortgages and rightly so, as the Deputies opposite agree. There will also be cases where people can go to some other countries and invest in mortgages of genuine immovable property, in countries which may have a very low estate duty or none at all. I thought it was not unreasonable to seek to tax that property on death. However, now to prove that I am capable of second thoughts, I am beginning to have second thoughts about this. I think it might be reasonable to limit the section to Jersey mortgages and, while I would not like to go as far as Deputy J.A. Costello's amendment, I think where the purpose of this amendment is to limit the scope of the section to Jersey mortgages, I shall think more about it. I am inclined to agree and I shall bring in a suitable amendment.
Mr. P. Belton: The side effect of this would be disinclination of aliens to decide to reside in this country. Many who are already here would leave if this section is put in. I suggest we should make exception if these people have lived for a certain number of years in the other country.
Mr. J. Lynch: That is a different set of circumstances. The Americans who come here would not be domiciled here.
Mr. Sweetman: They might. When the Minister is considering whatever amendment he might think desirable in relation to this, would he bear in  mind in that consideration, and it will save time to-day, the matters raised by me in amendments Nos. 29 and 30?
Mr. J. Lynch: Yes.
Mr. Sweetman: Both amendments have some allowance for double taxation relief in cases where we have not a Double Taxation Convention. As the Minister is aware, if there is not a specific allowance like that, the duty that is paid in a foreign country is only allowed as a debt and you could get a very unfair position in relation to that. By mentioning it in these two amendments in this way, I presume I am retaining my right to put them down on Report Stage when dealing with that question. I think the Minister has met us fairly in that. I should like to raise another point which may or may not arise.
An Ceann Comhairle: Has the Deputy finished with amendments Nos. 25 and 26?
Mr. Sweetman: Yes.
Amendment, by leave, withdrawn.
Amendment No. 26 not moved.
An Ceann Comhairle: Amendment No. 27 was dealt with in conjunction with No. 11.
Mr. Sweetman: Are we entitled, if we do not move those up to No. 30, to put them down again on Report Stage?
An Ceann Comhairle: Yes.
Amendments Nos. 27 to 30, inclusive, not moved.
Question proposed: “That section 20 stand part of the Bill”.
Mr. Sweetman: If I understand paragraph (a) of subsection (2) of this section correctly, it means as the section is drawn that if the gift is made at any time—even more than five years ago—there is a liability attaching. I do not know whether or not I misunderstand it, but it seems that there is a liability, no matter when the gift was made. That may be qualified by subsection (3) but I should like the Minister to consider  it when he is considering the other matter.
Another question is: is the effect of paragraph (b) of subsection (4) to make an executor liable even though he has not enough funds under his jurisdiction? There could be a case under the section in which a person would have very little assets here and substantial assets abroad. The substantial assets abroad might not vest in the executor, and the executor would be personally liable for the amount of duty payable, even though he had not enough funds in his hands to pay the duty as the personal representative for the property in Ireland. If that is so, that case should be provided for also.
Mr. Cosgrave: There is one other point I should like to bring to the Minister's attention. We appreciate the fact that he will give the matter further consideration or, as he described it, that he will have second thoughts. A great deal of the discussion here on Second Stage was on the position of wealthy people who have come here, or wealthy people we are anxious to attract because of their investments here, or because of the fact that they bring artistic treasures or some other benefit of a particular kind.
While it is very desirable from that point of view that we should attract that type of person, I think the Minister might well consider the position of people who are either long resident in this country, or who are Irish by origin, and who have considerable investments here both in property and in business and who also have property outside the State. As Deputy Sweetman said, in many cases that property was acquired because some relative, or some other person in close contact with them, left the property to them, or in some cases they may have acquired it themselves. We should consider, if necessary, the special position of these people and, if need be, we should possibly have a different approach to them.
Leaving aside for the moment the fact that we are most anxious to attract to this country and facilitate in every way possible people who are bringing wealth to this country and  making investments of one sort or another, we should consider the special category of Irish people who because of one circumstance or another—and there cannot be a great many of them —have property elsewhere, and also have investments and involvements in industrial development in this country, which are not merely considerable but in many cases are of long standing.
In discussing a matter of this type, one does not like to mention names of individuals for many reasons, but it is easy to recognise the type of person concerned and their value to the community for a great many years.
Mr. J. Lynch: I suppose they would not be affected if it were restricted.
Mr. Cosgrave: If it were restricted on the lines suggested, that would be all right.
Question put and agreed to.
Amendment No. 31 not moved.
Mr. Sweetman: I move amendment No. 32:
To add a new subsection as follows:—
“(7) Any sum paid by the deceased to enable him to acquire the property or an estate therein may be deducted from the value on which duty is payable under this section.”
Section 21 is, I think, the section that deals with enlargement of life interest, and it follows section 30 of the Finance Act, 1941, which dealt with the disposition or determination of life interest. It seems to me that some difficulty could arise in respect of the effect of this section in a case such as this.
Suppose for example that there is a fund the total value of which is £50,000. The tenant for life gets the appropriate actuarial calculation and the value to the remainder man is determined and agreed between the tenant for life and the remainder man at, let us say, £15,000. The tenant for life pays the remainder man £15,000 and he is enlarged, and he has a fund in hand of £50,000. It is understandable  where he had the £15,000 to pay to the remainder man, but I am interested in the case where the tenant for life has not got £15,000 and where he goes to a bank, for example, and borrows £15,000 for the purpose of buying out the remainder man, and he then has property worth £50,000 in hands. Now, it is not clear under this section that he is entitled to make a deduction for the debt he incurs in respect of that property, and had to incur for the purpose of buying in the whole property.
There is a provision in the Bill that in certain circumstances one is not entitled to claim as a deduction a debt incurred in that way. That is obviously wrong. If the person has his own free estate and uses it for the purpose of buying out the remainder man, his free estate is reduced by that amount, and the value of the property he has bought is added. If he has not his own money and has to borrow money to buy in, the sum so borrowed by him should be allowed in the calculation of the value of the property he bought.
Mr. J. Lynch: I shall deal first with the second point raised by Deputy Sweetman about the free estate. I forget the figure taken by Deputy Sweetman but let us say the property is worth £40,000 and the value of the interest is £15,000. If the person has a free estate out of which he buys in the remainder man's interest, it would be natural for him to seek to reduce the value of his free estate by that sum. The purpose of the section is to avoid such a thing happening.
Progress reported; Committee to sit again.
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