Retrospectivity
1.40 Clause 84 and Schedule 15 of the Bill change
the tax treatment of previously owned assets by imposing an income
tax charge on the benefits of enjoying such assets[27]
from the tax year 2005-06 onwards. They impose a new liability
to income tax in relation to the benefits received by a former
owner of property, subject to certain exemptions. The charge to
income tax is imposed on a person who continues to enjoy benefits
from property which he or she disposed of since 17 March 1986.[28]
Schedule 15 makes provision defining what counts as enjoyment
of such assets and quantifying the chargeable benefits.[29]
Certain disposals are exempt,[30]
including those to a "spouse".[31]
Transitional provision is made for a former owner who has made
arrangements which are potentially chargeable for tax in 2005-06
to elect to have the property treated as part of their estate,
and therefore as taxable for inheritance tax purposes, instead
of paying the new income tax charge.[32]
1.41 The effect of these provisions is that individuals
who have removed assets from their estates in order to avoid a
charge to inheritance tax on their death, whilst retaining the
ability to use those assets or other assets funded by the disposal,
will be subject to an income tax charge based on the benefit they
receive from the use of the asset. So, for example, an individual
who transferred his house to his children, but continued to occupy
it, will be liable to income tax chargeable as a proportion of
the rental value of the property.
1.42 The concern which has been expressed about these
provisions is that they amount to retrospective taxation, because
taxpayers who undertook transactions up to 18 years ago will now
be liable to a charge to income tax which was not contemplated
when the transaction occurred, and that for this reason (or for
some additional reason), the legislation may be in breach of Article
1 of Protocol No. 1 to the ECHR.
1.43 The Committee has considered whether the proposed
new tax is compatible with the provisions of Article 1 of Protocol
No. 1 as interpreted by the European Court of Human Rights.
1.44 Article 1 of Protocol No. 1 provides—
Every natural or legal person is entitled to the
peaceful enjoyment of his possessions. No one shall be deprived
of his possessions except in the public interest and subject to
the conditions provided for by law and by the general principles
of international law.
The preceding provisions shall not, however, in any
way impair the right of a State to enforce such laws as it deems
necessary to control the use of property in accordance with the
general interest or to secure the payment of taxes or other contributions
or penalties.
1.45 There is no doubt that the imposition by clause
84 and Schedule 15 of a new liability to pay income tax constitutes
an interference by a public authority with the individual's peaceful
enjoyment of their possessions within the meaning of Article 1
of Protocol No. 1: it is well established in Convention case-law
that taxation is an interference with the rights guaranteed under
that Article.[33]
1.46 However, taxation is prima facie justified
under the second paragraph of Article 1 of Protocol No. 1, which
expressly reserves the right of States to enforce such laws as
they may deem necessary to secure the payment of taxes.[34]
The Court of Human Rights has accorded States a very wide degree
of latitude in relation to taxation under the second paragraph
of Article 1 of Protocol No. 1, but it is not unlimited: the second
paragraph must be construed in the light of the principle laid
down in the first sentence of the Article.[35]
To be lawful under Article 1 of Protocol No. 1, therefore, even
a taxing measure such as that contained in clause 84 and Schedule
15 must satisfy the requirements of legal certainty and proportionality.
1.47 For an interference to be lawful under the second
paragraph of Article 1 of Protocol No. 1, it must satisfy the
qualitative requirements of accessibility and foreseeability:[36]
the law which imposes the tax must be published, intelligible
and generally available in a form which enables the individual
to organise their affairs knowing with reasonable certainty the
consequences of acting in different ways.
1.48 In our view, the imposition of the new tax by
clause 84 and Schedule 15 cannot strictly be said to be retrospective.
It imposes a prospective liability, from the tax year 2005-06,
in respect of the value of benefits received during those years.
It is true that this imposes, in relation to certain arrangements,
a tax which was not payable at the time that those arrangements
were entered into, but that does not make the change retrospective.
A retrospective provision would be one which levied the charge
in respect of the benefit enjoyed in previous years. Such a tax
would require very careful scrutiny for compatibility with the
requirement of accessibility and foreseeability.
1.49 However, that is not the effect of what is proposed.
Clause 84 imposes a prospective liability in respect of future
benefits, and allows individuals who have already entered into
arrangements whereby they have disposed of their assets to elect
for them to be treated as part of their estate for inheritance
tax purposes.
1.50 In any event, the requirement of legal certainty
in Article 1 of Protocol No. 1 does not amount to an outright
prohibition on retrospective taxation. In National Provincial
Building Society v UK, for example, the Court held that a
taxation measure which had been enacted with retroactive effect
did not violate Article 1 of Protocol No. 1 because the interference
was justified.[37]
1.51 We therefore conclude that the provisions of
clause 84 and Schedule 15 are lawful for the purposes of Article
1 of Protocol No. 1 in the sense that they are sufficiently accessible
and foreseeable and therefore "subject to the conditions
provided for by law".
1.52 We have also considered the proportionality
of the interference, which in this context requires consideration
of whether the interference in question strikes a fair balance
between the demands of the general interests of the community
and the individual's fundamental rights. We have done so against
the background of the Court's well-established case-law that in
determining whether this requirement of proportionality has been
met, "a Contracting State, not least when framing and implementing
policies in the area of taxation, enjoys a wide margin of appreciation
and the Court will respect the legislature's assessment in such
matters unless it is devoid of reasonable foundation",[38]
and provided that the measure does not amount to arbitrary confiscation.[39]
1.53 We consider that imposing a charge to tax in
respect of the benefit derived from continued use of assets which
have been disposed of in order to avoid liability to inheritance
tax cannot be characterised as an arbitrary confiscation, devoid
of reasonable foundation. We consider that, applying the fair
balance test, the interference with the rights protected under
Article 1 of Protocol No. 1 is justified by the public interest
in safeguarding the public revenues and is proportionate to the
end to be achieved.
1.54 We therefore conclude that
clause 84 and Schedule 15 of the Finance Bill do not give rise
to any significant risk of incompatibility with Article 1 of Protocol
No. 1 to the ECHR.
Spouse Exemption
1.55 However, we are concerned about the human rights
implications of one other feature of Schedule 15, namely the spouse
exemption.[40] Disposals
are not chargeable under the Schedule where the property was transferred
to a "spouse" (or to a former spouse under a court order).[41]
1.56 The term "spouse" is not defined in
this Bill, nor in the Inheritance Tax Act 1984, but is interpreted
by the courts as meaning "parties to a lawful marriage".
Confining the benefit of the exemption in paragraph 10 of Schedule
15 to the parties to a lawful marriage excludes from the scope
of that exemption homosexual couples who live together as de facto
spouses (but are legally unable to marry), heterosexual unmarried
couples who live together as de facto spouses and people sharing
a home on the basis of a long-term or family relationship which
is not a sexual relationship.[42]
1.57 The spouse exemption in Schedule 15 to the Act
therefore engages Article 14 in conjunction with Article 8 and
Article 1 of Protocol No. 1 ECHR: by discriminating on grounds
of sexual orientation and marital status, it raises the question,
what is the objective and reasonable justification for excluding
de facto spouses from the benefit of the exemption. We
draw this matter to the attention of each House.
26 Treasury Committee, Sixth Report of Session 2003-04,
The 2004 Budget, HC 479-II. See Appendix 2. Back
27
Whether land, chattels or intangible assets. Back
28
Including where he or she has funded the acquisition of an asset
for their use by a third person, and where the asset initially
disposed of or acquired has been replaced by other assets enjoyed
by the chargeable person. Back
29
In relation to land, in Sched. 15 paras. 3-5; in relation to chattels,
in Sched. 15 paras 6 and 7; and in relation to intangible assets,
in Sched. 15, paras 8 and 9. Back
30
Sched. 15, para. 10 Back
31
Sched. 15, para. 10(1)( c) and (d) Back
32
Sched. 15, paras 20-22 Back
33
See e.g. Spacek v Czech Republic (2000) 30 EHRR 1010 at
para. 39. Back
34
Ibid, para. 41 Back
35
See e.g. Gasus Dosier-und Fordertechnik Gmbh v The Netherlands
(1995) 20 EHRR 403 at para. 62. Back
36
See e.g. Spacek, above, at para. 54. Back
37
(1998) 25 EHRR 127.The measure in question was s. 53 of the Finance
Act 1991, retrospectively validating taxing Regulations which
had been held to be invalid by the House of Lords. Back
38
National Provincial Building Society v UK, above, at para.
80. Back
39
Gasus Dosier-und Fordertechnik GmbH v Netherlands, above,
at para. 59. Back
40
Sched. 15, para. 10(1)( c). The exemption includes the case where
the property is held in trust and the spouse or former spouse
has an interest in possession: para. 10(1)(d). Back
41
The provision reflects the "spouse exemption" from liability
to inheritance tax under s. 18 Inheritance Tax Act 1984. Back
42
These are matters which may also need to be considered in the
content of the Civil Partnership Bill. Back
