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The Lord Chancellor: It would be helpful if the salary or other emolument of that kind could be split in a way that suited the parties. It would be of tremendous advantage to many people. It is not such a mystery.

The position is that, ordinarily, a person's salary is taxable on the basis of that person's allowances. If one has other property, the right thing to do might well be to arrange matters so that the rest of the income is derived in favour of the wife. To that extent the recent changes are beneficial. But to take as a paradigm case an example where the husband receives quite a substantial salary and the wife is at home, working and supporting him in every way that she can to earn that salary, at present the reduced rates of tax based on allowances are all applicable to his salary. If he and his wife could arrange that, say, half the salary belonged to her and half the salary belonged to him, they would both be a good deal better off.

Lord Meston: I have heard of bogus marriages and now I hear of bogus divorces. Is there any evidence from any of the other jurisdictions which already allow pension splitting to support the argument that people will go through an artificial divorce?

The Lord Chancellor: I am not sure about that. I am not certain of the tax situation in other jurisdictions either. The point about people going through a bogus divorce is simply taking the argument to its logical conclusion. My point is that this power, as distinct from the arrangements made under the Pensions Act 1995, has the effect of enabling the pension itself to be split. Therefore, the income tax position of the two people could be substantially improved as a result. I want the Committee to understand that point. I hope that I am making it clear. I do not think that it needs any special knowledge of income tax or anything of that kind. It is quite a simple point. It arises from the non-assignability of the pension. In effect, this provision overcomes the non-assignability of the pension in the case of divorce. If the result were to be as I said, it certainly would be

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possible--I do not say that it would necessarily happen--as a tax efficient arrangement, if people agree to do it. I myself would not wish to encourage that.

Lord Milne: Surely that would only occur when the pension is practically the sole income of the pensioner. With single assessment, it is now perfectly possible for one spouse to transfer assets to the other spouse to equate the income of the spouses. So it will only occur when the pension is the main source of income and it must not be a great income.

The Lord Chancellor: That is precisely the point that I want to make. So far as other assets are concerned, they can be arranged between husband and wife in such a way as to be most tax efficient. But that is not true of a pension. I only mention the point in answer to the noble Lord, Lord Marsh, who explained that the pension is just a form of matrimonial property. Of course it is. It is the deferred earnings of the worker. But it is different in this respect.

I entirely agree that it applies principally in cases in which the pension is the main asset, but this problem is strongest in the case where the pension is the main asset and requires division, as the noble Baroness, Lady Hollis, said in her excellent introduction of this matter. That is where the problem arises. There is that effect.

Lord Williams of Mostyn: The noble Lord, the Lord Chancellor, is concerned about the floodgates being opened to the galloping throngs of those who intend to divorce simply to benefit their income tax position. Has any calculation been made at all of the net loss to the Revenue? Secondly, is not the principle for which we are contending that the tax regime and the regime of law ought to be the servants of just objectives, which every speaker has supported?

4.45 p.m.

The Lord Chancellor: The tax system should be a fair one for everyone, so far as possible. My point--it is for the Committee to consider what, if any, effect they feel that this point should have--is that it will confer a power in respect of pensions which is not available in respect of income of exactly the same type enjoyed by a couple in marriage. Of course the couple who are divorced are then in a different position from those in marriage. That is an important question. Therefore there is a comparison to be made between the situation of divorced people who are able to get over the difficulty of non-assignability of the pension and the situation of married people who will remain subject to that problem. So far as concerns the cost to the Revenue, I look at the matter from the point of view of the parties rather than that of the Revenue and the general tax regime with which we have been familiar for some time, and there is certainly an incentive there.

There are other matters to be considered in relation to this amendment. One of the most important is that it proposes that the benefits which are payable under an order of this kind would not be subject to the provisions of Part XIV of the Income and Corporation Taxes Act. That is an important part of the amendment. Certainly, it raises a technical question, but it is not a small

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question. There are very important questions of tax law about what the regime should be. Part XIV confers benefits as well as raising other matters--for example, in relation to lump sum payments. We need to know at some stage--not today, of course--the kind of regime that is envisaged for these payments.

There are fundamental issues in relation to this matter which I have sought to mention in respect of divorcing couples, particularly as this is a family law Bill. I want the Committee to understand that. I shall not go into them, but there are other fundamental issues about the tax regime which will apply to withdrawn or divided pensions. As an example, let me take the case of the husband, who is the earner and has the pension, and his wife who is not in employment. The regime applying to what she receives would not be the ordinary employee regime. The rules of the pension schemes are extremely complicated and there is a lot of policy involved. One would need to look very closely at what the policy should be in regard to these new types of pension scheme which are related to but not the same as the provisions relating to employee pension schemes.

There are also questions relating to where the pension fund is situated, particularly perhaps, so far as I am concerned, trust funds that are situated in Scotland. There are various matters of that kind which have to be considered.

I wanted to make that particular consideration clear to the Committee because it is relevant to concerns that some Members have expressed in relation to these proposals. Therefore, I suggest to the Committee that we should consider this amendment carefully. I should wish to have it considered carefully and sympathetically. Personally, I understand well that the Committee would like to see something along these lines carried into law. I should not like the Committee so to act without fully appreciating the point which I made earlier. I have now sought to discharge my responsibility in that connection. I have at least tried to make the point clear to the Committee.

In the light of the discussion, I should certainly wish to consider sympathetically this series of amendments, with the proviso that I believe that there are a great number of quite difficult questions associated with this matter that we would have to consider and try to resolve. I feel that their resolution would be likely to take a little time.

Lord Mishcon: I hope the noble and learned Lord will forgive me for submitting a very humble suggestion for his consideration. At present this Bill operates, as regards divorce, based on a declaration that the marriage has irretrievably broken down. If that were made the subject of a statutory declaration, would not the party that the noble and learned Lord is thinking about, who is merely trying to get a divorce in order to pay less income tax, be guilty of perjury if they made the statutory declaration that the marriage had irretrievably broken down?

The Lord Chancellor: I had thought about that. I wondered whether it might be possible for them to say that that marriage had irretrievably broken down, but

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they were hoping, perhaps as a result of the financial changes made, to enter into a new one. It may be that the Committee has given more emphasis to the particular illustration I gave than I intended. The really important point is that those being divorced are able to do, in relation to a pension, what people in marriage cannot do.

Earl Russell: I am most grateful to the noble and learned Lord for the concluding words of his speech. I have admired him for many things, although it has never previously occurred to me to compare him to Cleopatra, but on this occasion he has truly shown an "infinite variety". The noble and learned Lord has never surprised me quite so much as he has this afternoon.

The noble Lord, Lord Marsh, hit the first nail on the head. These are not normally matters on which one acts on a strictly economic calculation.

I recall a long series of exchanges with the noble and learned Lord in 1991 as regards the benefit penalty in the Child Support Bill. His argument implied that he believed that people breaking up marriages, when considering whether to name the father of their children, would act on a strictly economic calculation. I thought that that would not happen. I believe that events have shown that I was right. If people acted on a strictly economic calculation most of us would not get married. There are limits to complete, dogmatic, economic theory.

Were anyone to consider such a proposal it would have a very severe and detrimental effect on their own marriage. When I left home this morning I was happily married. Were I to decide now to take advantage of the noble and learned Lord's suggestion, and organise a divorce for financial benefit, I believe that when I reach home tonight my marriage would have irretrievably broken down, in which case I would be unwittingly telling the truth.

The noble and learned Lord's argument cuts equally seriously against the reduction in the married couple's allowance--a point with which we on these Benches agree. That also has the effect of creating an incentive to be apart in order to have two personal allowances. If the Government and the Treasury were taking the noble and learned Lord's argument seriously they would not have done what they have about the married couple's allowance.

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