Clause 29 - Special rates of tax applicable to trusts
Finance Bill
10:15 am
Mr Howard Flight (Shadow Chief Secretary To the Treasury, Economic Affairs; Arundel and South Downs, Conservative)
I thank you, Mr. McWilliam, for the comments that you have just made, because the territory is very much interrelated. In the course of my remarks, I want to make a point about amendment No. 31, which, for technical reasons, has not been selected, but is a central part of the point here.
Both clause 29 and schedule 4 increase the income tax rates for non-interest in possession trusts—discretionary and accumulation trusts—from 25 per cent. to 32.5 per cent. and for UK company dividend income from 34 per cent. to 40 per cent. That opens up what we perceive as an unfair imbalance in the treatment of UK company dividends. Whereas higher-rate taxpayers are taxed at 25 per cent., the income received by the beneficiary in a non-interest in possession trust will be taxed at 40 per cent. I think that that will also apply to pension-saving arrangements that fall under the funded unapproved retirement benefit scheme, or FURBS.
Next year, the Government are proposing sensible measures for streaming that I describe as automatic look-through. At the least, I ask why the tax is being put up a year ahead of that, which will result in a year of unfairness, and why it would not be more sensible to combine the two in the same tax year and to delay the tax increase for another year.
I had an extraordinary constituency case, where a little girl's father died at 35, leaving her £10,000. Her grandfather put that into a discretionary trust. He was going up the wall because he was already having tax estopped on it and could not get it back from the Revenue. He said, ''I hear that the rate is now going up to 40 per cent. What sort of justice is that? The amount involved is tiny.'' I said to him, ''As I understand it, in another year you would be alright because it would be a straightforward look-through situation, but I am afraid that this year, for some half-baked reason, you will have to pay even more tax, unless we can persuade the Government to coincide the two measures.''
New clause 1 would abolish section 677. We see no need for schedule 4, which introduces consequential amendments arising from the increases to the schedule F trusts rate and the rate applicable to trusts. Moreover, it complicates an already over-complex situation. The essence of the point is that, if we deal with the whole lot together, once we move to stream the higher tax rates, we do not need section 677 or schedule 4.
Certain capital sums paid to a settlor are taxed as income by section 677 when there is undistributed income in the trust. Schedule 4 introduces yet more complex first-in and first-out matching rules to relate the tax credit received by the settlor to the tax paid by the trustees. We would welcome an explanation of the provision, which appears to be a little capricious. Already the problems with sections 677 and 678 are made worse by schedule 4. The explanatory notes have turned up in the past day or two but, when I and others focused on this area, we did not have the explanatory notes to sort out some of the problems.
Section 677 could be repealed given that UK trust income is increasing to the new 40 per cent. rate. The key point is that, once the tax rate has been increased, you do not need all the clutter that section 677 and schedule 4 bring. There will be virtually no accompanying tax revenues once the rate has been upped to 40 per cent. The amount of tax at stake will diminish over the years as the amount of undistributed income that has suffered tax at rates of less than 40 per cent. reduces over that time. The related rules of section 678—capital sums paid by a body connected with the settlement—will become similarly redundant over time.
To sum up, it seems extraordinary that the Government are not dealing with the new tax rate and streaming at the same time. If both were dealt with at the same time, you could simplify an area of taxation that is ludicrously complex, and made more complex by the provisions of schedule 4, for little or no loss of revenue.