Clause 15 - Information from account providers etc.
Child Trust Funds Bill
9:45 am

Mr George Osborne (Tatton, Conservative)

I beg to move amendment No. 181, in

clause 15, page 8, line 6, leave out paragraphs (b) to (f).

Mr Joe Benton (Bootle, Labour)

With this it will be convenient to discuss the following:

Amendment No. 62, in

clause 15, page 8, line 12, after 'fund', insert—

'(ee) anyone responsible for the determination of matters specified in section [income disregard for purposes of income-related benefits, etc.](2),'.

New clause 3—Income disregard for purposes of income-related benefits, etc.—

'(1) In determining the matters specified in subsection (2), no regard shall be had of income and gains arising on—

(a) Inland Revenue contributions to,

(b) subscriptions to, and

(c) investments under

a child trust fund.

(2) Those matters are—

(a) eligibility for,

(b) entitlement to, and

(c) levels of

the benefits and credits specified in subsection (3) in respect of the holder of a child trust fund.

(3) The following are specified in this subsection—

(a) child tax credit,

(b) Council Tax benefit,

(c) housing benefit,

(d) income support,

(e) income-based jobseeker's allowance, and

(f) working tax credit.'.

New clause 8—Income disregard for purposes of benefits and tax credits—

'The value of a child trust fund will be wholly disregarded with respect to the calculation of entitlement to all benefits and tax credits in respect of—

(a) the parents of children holding child trust funds,

(b) children holding child trust funds, and

(c) persons holding child trust funds who are aged 18 or over.'.

Mr George Osborne (Tatton, Conservative)

I begin by giving hon. Members some good news: a member of the Committee has just become eligible, as a parent, for a child trust fund, as the wife of the hon. Member for Witney (Mr. Cameron) gave birth to a baby daughter yesterday. The first thing that he said to me was that he was looking forward to receiving the child trust fund voucher.

Mr Jim Fitzpatrick (Government Whip (technically Vice Chamberlain, HM Household); Poplar and Canning Town, Labour)

Where is he?

Mr George Osborne (Tatton, Conservative)

The Government Whip presses me to say why the hon. Member for Witney is not present. We have relaxed terms here. The hon. Gentleman is on paternity leave, but he is making an exception and breaking it next Tuesday evening to return for important Divisions in the House. He may also be around on Wednesday when we think we will be privileged to have early access to the Hutton report.

Having tried your patience, Mr. Benton, I will move on to the much more interesting subject of the amendments. The clause deals with the requirement for account providers to provide information to the Inland Revenue. Amendment No. 181 probes whether the wide-ranging powers proposed for the Revenue are really necessary. We have not yet seen the regulations, but the clause provides that they may require any relevant person

''(a) to make documents available for inspection on behalf of the Inland Revenue, or

(b) to provide to the Inland Revenue any information relating to, or to investments which are or have been held under, a child trust fund.''

The relevant persons include not just account providers, for whom a strong case can be made that they should fall within the remit of the clause, but any person who holds a child trust fund, any person issued with a voucher, any person opening a child trust fund, any person who manages a child trust fund and, indeed—it is striking—anyone receiving child benefit. That is pretty much every parent in the country.

Is it really necessary to give the Inland Revenue such wide-ranging powers, especially in respect of anyone receiving child benefit? That gives the Revenue

enormous scope. The amendment would restrict its power to requesting information documents from account providers only. They should have to provide information and it is important that they stick to the rules on matters such as the maximum subscription limits and the fact that the CTF scheme is set up on time, and so on. That is wholly right and proper, but is it really necessary to give the Revenue such extensive powers to poke its nose into everyone's business? I am happy to be convinced by the Minister.

Amendment No. 62 and new clause 3 are more important. They are an attempt to protect child trust funds from the clutches of the means test, and to prevent the Government from taking back with one hand what they have given with the other. At present, the Bill does not protect a child trust fund from being taken into account when an 18-year-old is being assessed for jobseeker's allowance or income support. Indeed, in such circumstances, one could argue that if an 18-year-old were applying for jobseeker's allowance or income support, the best thing that they could do is spend most of their child trust fund as quickly as possible.

If we want the child trust fund to target lower-income families, to help people to understand the benefits of saving and investing, and to encourage children to develop the savings habit—to use the words in the policy document—it seems to be totally self-defeating if we demonstrate that after 18 years' saving, the whole thing can be snatched away from them. I am not alone in thinking that: the Treasury Sub-Committee, in its excellent report on child trust funds, made that point strongly. In its conclusions, it said:

''There is a potential interaction of the Child Trust Fund with the welfare system (or any other entitlements that might be affected by possessing an asset) which might deter additional contributions to the Child Trust Fund accounts from family and friends, if the result were to be a potential reduction in benefits for the child in the future, or an actual reduction in benefits for the contributor. The Government therefore needs to clarify the extent of this potential interaction, in order to overcome fears of potential disadvantage to the child in later life. We believe it is essential that this is done before the scheme starts, and we therefore welcome the statement by the Financial Secretary that this will be the case. We believe it would be helpful if these matters were clarified and resolved during the passage of the Bill through the House.''

The Sub-Committee made it clear that it thought the issue a problem, and when one considers the answers given in the evidence sessions by both the Minister and Mr. Holgate, it is not difficult to understand why. The latter was pressed by the hon. Member for Newcastle upon Tyne, Central, who asked:

''How does this Child Trust Fund interact with income-related benefits?''

Mr. Holgate said:

''When the child reaches 18, were nothing to change between now and then, then the normal rules would apply. It would be part of the child's assets.''

The hon. Gentleman continued:

''So my parents have saved this money for me and, as a result, I cannot claim Job Seeker's Allowance?''

Mr. Holgate responded:

''We are aware of the implication and we cannot say at the moment what exactly we plan to do about it—but we are fully aware of the implication that you draw.''

The hon. Member for Wallasey (Angela Eagle) then chipped in with a surprisingly aggressive question:

''Are you saying that you might be considering doing something about income-related benefits and the way that the benefit rules interact with savings at that point of 18? It does seem absurd.''

Mr. Holgate said—shock, horror—

''The problem is obvious. The problem has occurred to us but we cannot say this afternoon what we are going to do about it.''

The hon. Lady asked:

''You are looking at it, however?''

Mr. Holgate said:

''Yes.''

It is clear from Mr. Holgate's evidence that the Treasury is aware that there is a problem. The Minister was, of course, more circumspect when she was questioned. She said, to paraphrase her, ''We are aware there is a problem, but we would normally make an announcement at the time of the pre-Budget report or in the Budget.'' I am happy to take an assurance from the Minister today that there will be something about the issue in the Budget, even if she cannot say what it is. I do not understand why it cannot be revealed to the Committee or why it is so Budget-sensitive. We are debating this important clause, but we cannot see what the Government have in mind.

The Minister said on Second Reading that she has increased the threshold at which savings reduce eligibility for means-tested benefits from £3,000 to £6,000. That is welcome. As she pointed out, when I made my speech on Second Reading I was not aware that she had done that, nor was the Chairman of the Treasury Committee, so I thought that I was in good company. The change goes some way to addressing the problem, but it is not a long-term solution, unless she says that the threshold will regularly be increased to avoid this trap.

On Second Reading, the Chairman of the Treasury Committee, the hon. Member for Dumbarton (Mr. McFall), said:

''An 18-year-old receiving jobseeker's allowance or income support will be in an invidious position if his benefit is disregarded because of the extra income provided by the allowance. The Financial Secretary has come up with one or two surprises already, and I hope that that point may be clarified today, but if that is not possible it must be clarified in Committee.''

He went on:

''I am delighted to hear from the Financial Secretary that the disregard has been increased from £3,000 to £6,000, but it was pointed out that there is a barrier somewhere along the line. This scheme has the potential to have profound effects, but if the wrong message is given to those who will be adding to the savings—parents, grandparents and friends—that will do it no good.''—[Official Report, 15 December 2003; Vol. 415, c. 1357.]

The hon. Gentleman made that point forcibly, and he, like me, wants this scheme to work. I agree with him that if the Minister is going to clarify her position she should do so to the Committee, because if it remains the case that a child trust fund will interact with means-tested benefits at the age of 18, it is possible to envisage there being people, particularly among the poorest in our society, who will derive almost zero benefit from such a fund as it will be taken away at the age of 18 if they are not in employment.

Mr David Laws (Yeovil, Liberal Democrat)

I can talk briefly about this group of amendments and new clauses because the hon. Gentleman has outlined the key issues clearly. We have tabled new clause 8, the intention of which is similar to that of new clause 3: to try to ensure that the proceeds of the child trust fund are entirely disregarded in the calculation of the entitlement to benefit of all those associated with the CTF account—the children who hold them, the individuals who end up with a maturing account once they reach the age of 18, and the parents of children holding an account.

I thought that that would be the Government's intention. Surely we do not want to penalise people for saving in the account or to make the child trust fund and the whole benefit system any more complicated than it already is. I compare and contrast the Government's approach to this issue so far with their determination to ensure that people who make large contributions to the CTF accounts do not end up having to pay additional tax. We have discussed the Government's intention to disallow some of the existing legislation designed to counter tax avoidance.

Surely if it is right for people on higher incomes to want to save a lot into the CTF account, and if the Government want to make sure that the system is simple for them and that they do not end up paying extra tax as a consequence of making large contributions, the last thing that the Government would want to do, given their commitment to dealing with disadvantage and assisting people on low incomes, is to penalise those people who rely on the benefit system and who may end up having their benefits docked as a consequence of having money in a CTF account.

There was a clear indication in the Select Committee that the Minister appreciated the nature of that problem and intended to propose measures to deal with it. On Second Reading, there was a small announcement about that. Some hon. Members did not pick it up at the time, but the hon. Member for Tatton has referred to it. However, it deals with only a small part of this issue. I hope that the Minister will make a clear commitment to accept these excellent amendments and new clauses or to suggest measures that would have the same effect.

The Minister was willing to discuss the cost of the tax relief in the Bill in relation to CTF accounts and the disallowance of income tax settlement legislation. Will she be clear about what she anticipates as the cost consequences of accepting the amendments and new clauses so that we can know how much revenue will be at stake? I hope that the Minister will now take the opportunity to clarify the Government's position.

Ms Ruth Kelly (Financial Secretary, HM Treasury; Bolton West, Labour)

The two new clauses are designed to ensure that the child trust fund is not taken into account when entitlement to benefits is assessed. I can reassure the Committee that child trust fund assets and the income and gains on those assets do not affect family benefits and tax credits before the account reaches maturity when the child reaches the age of 18. After the person's 18th birthday, the account ceases to

be a child trust fund account. The Government's intention is that when the account matures, the funds can be rolled over into a tax-effective savings vehicle if the account holder wants. Such vehicles may vary 15 years from now, but one imagines that there will be some way of rolling over the money in the fund account.

Income from investment in tax-free saving schemes does not affect entitlement to tax credits, but I acknowledge that concern has been expressed about how saving in child trust funds and other vehicles might affect an individual's entitlements to benefits such as income support when they become an adult. The treatment of capital in income-related benefits needs to strike a sensible balance between providing targeted state support and not unfairly penalising those who have acted responsibly by saving.

I was surprised that the hon. Member for Yeovil (Mr. Laws) said that I made a small announcement on Second Reading, as I thought that it was a significant announcement, despite the fact that no one seemed to pick up on it. [Interruption.] The hon. Member for Tatton says that I did not leak it. It is my intention never to leak policy.

As a first step, I announced on Second Reading that from 6 April 2006 we will increase the £3,000 threshold above which savings reduce eligibility to income support, jobseeker's allowance, housing benefit and council tax benefit to £6,000. We are doubling the threshold in line with pension credit. The first child trust fund accounts will not start to mature until 2020, and it is unlikely that the rules on income-related benefits will still be the same. Nevertheless, I thought that it was important to announce the increase to reassure parents, carers, grandparents and friends that they can contribute to the fund in the knowledge that the child will not be penalised in the future by savings made now.

I announced the doubling of the threshold on Second Reading, but I also said that it was the first step. The hon. Member for Yeovil will see in the pre-Budget report that we said that we will keep the treatment of capital under review, and we will do that as the account progresses.

Mr David Laws (Yeovil, Liberal Democrat)

I never know when the Financial Secretary is going to end her comments, so she may be about to answer my earlier question. If not, will she tell us what she estimates as the cost of the new clauses?

Ms Ruth Kelly (Financial Secretary, HM Treasury; Bolton West, Labour)

That is an incredibly difficult calculation. If we disapplied the capital benefits for just the child trust fund at the age of 18, it would be difficult to segregate that from other capital that the child could have available and the fact that those funds could be rolled into other savings vehicles. It is not an insignificant calculation, so I am afraid that I cannot give the hon. Gentleman an exact figure. However, I can say that if the capital rules were to be abolished altogether, we would not be talking about trivial sums. To give a ballpark figure, it would be £100 million or so.

Mr David Laws (Yeovil, Liberal Democrat)

I again ask the Minister whether she feels that her treatment of how people's benefit entitlement will be affected by child trust fund accounts is even-handed when she is disallowing tax avoidance legislation for people on upper incomes. There are equal problems in assessing the cost of each measure, but she has been willing to set aside the tax avoidance legislation. Why is she not willing to be more generous on benefits legislation?

Ms Ruth Kelly (Financial Secretary, HM Treasury; Bolton West, Labour)

The Liberal Democrats want the Government to spend on every conceivable occasion, but we must target spending appropriately. Increasing the threshold of capital to be disapplied for income-related benefits from £3,000 to £6,000 was a generous first step, and I am surprised that it was not welcomed more fully.

Mr David Laws (Yeovil, Liberal Democrat)

My point is that the Government are targeting the wrong people. They are targeting for exemption those people on upper incomes who will make large contributions and who can take advantage of the setting aside of tax avoidance legislation. They should target those on low incomes, whose benefit entitlement will be affected by the legislation.

Ms Ruth Kelly (Financial Secretary, HM Treasury; Bolton West, Labour)

Somehow, the hon. Gentleman thinks that the child trust fund vehicle is a tempting way for wealthy parents to avoid tax. Our assessment is that it will scarcely be used as a tax avoidance vehicle, for the reasons that I outlined.

Amendment No. 181 would restrict the categories of relevant persons from whom the Inland Revenue could obtain information. We aim to keep the administration of child trust funds as simple as possible, which is why we have built on existing systems. Nevertheless, if we are to ensure that accounts operate as smoothly as possible, we need powers to collect information.

In some cases there may be doubt about the validity of a child trust fund account. For example, a father and mother may each submit what appear to be valid vouchers. We might need to verify that the responsible person is who they say they are, or that the child is resident in the United Kingdom. In such cases, we might have to ask for information from those persons listed in paragraphs (b) to (f), or we might need to collect information on a family's residence status. However, we will ensure that requests for information are kept to a minimum. With that reiterance, I ask that the amendment be withdrawn or rejected.

Mr George Osborne (Tatton, Conservative)

I accept what the Minister said about the powers needed by the Inland Revenue, despite the fact that they are wide-ranging, and we have only the Minister's assurance that they will not be overused or too onerous. Those powers include the power to request information from anyone in receipt of child benefit. Since child benefit is almost universal, we are giving the Inland Revenue the power to intervene and request information from virtually any parent in the country. However, given the Minister's assurance, I will withdraw amendment No. 181.

However, I am minded to press amendment No. 62, because I have not received an adequate explanation from the Minister. She said that the treatment of child trust fund income would remain under review. She also gave broad pledges that, although the Government believe that the problem is some way off and they have dealt with it in the short term by increasing the disregard from £3,000 to £6,000, they accept that there is problem. Mr. Holgate was more forthcoming in acknowledging that there is a problem with the interaction between the child trust fund income and benefits received at the age of 18.

I understand some of the complexities in dealing with the income that the Minister spelt out. The income might be moved into another account, but there must be a device to protect it. After leaving full-time education, people often enter periods of unemployment, but that is not long-term unemployment. I agree that the money sitting in a child trust fund might be taken into account after years of unemployment. However, there is also a strong case for allowing an 18-year-old to find their feet in the job market and find a secure and stable job. In the process of trying to find the right job, they should not have their child trust fund, which has been built up for them by parents, relatives and the Government, snatched away. I think that that is a problem and I think that the Government have acknowledged that there is a problem.

The Chairman of the Treasury Committee hoped that the Government would be more forthcoming in this Committee, but they have not been, so although I shall withdraw amendment No. 181, I shall press amendment No. 62 to a vote. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendment proposed: No. 62, in

clause 15, page 8, line 12, after 'fund', insert—

'(ee) anyone responsible for the determination of matters specified in section [income disregard for purposes of income-related benefits, etc.](2),'.—[Mr. Osborne.]

Question put, That the amendment be made:—

The Committee divided: Ayes 2, Noes 9.