Clause 84 - Charge to income tax by reference to enjoyment of property previously owned
Finance Bill
11:00 am
Ms Dawn Primarolo (Paymaster General, HM Treasury; Bristol South, Labour)
Indeed. The right hon. Gentleman is, as always, using his experience as a most highly regarded Financial Secretary to anticipate the major points that I want to make in my brief opening remarks. I will deal with those points as I develop the argument.
As Committee members will be aware, avoidance on those lines has been a risk ever since inheritance tax was introduced in 1986. Successive Finance Acts have tried to keep inheritance tax avoidance under control by disapplying the normal rules in the case of gifts with reservations, and attempting to block loopholes revealed by attempts by tax planners to work around
the rules. This Government made the last effort on those lines as recently as the Report stage of what is now the Finance Act 2003. Despite those efforts, schemes to circumvent the ''gifts with reservations'' laws continued to multiply rapidly until December 2003. The schemes were increasingly contrived and were being marketed as packaged solutions that could be offered to people by their financial advisers.
We do not have a complete count of how many of those schemes have been executed. It is in the nature of things that the Inland Revenue gets to hear of such schemes—if ever—only when they become active, after the individual concerned dies and inheritance tax rules come into play. Since the pre-Budget report, however, it has been suggested that there are more than 30,000 clients for particular schemes that have had wide success most recently. Assuming that schemes involve assets of the order of £500,000 on average, which seems to be the consensus among their marketers, some tens of millions of pounds, or more, must be wrapped up in them. The Government are facing a substantial loss to the Exchequer.
Faced with such figures, the Committee will not be surprised to hear that the Government decided to take action. It is not enough to tackle new arrangements and future avoidance. The Government wanted to send a clear message that artificial avoidance of that kind is not acceptable. Those who devise and market such schemes, and the people who take advantage of them, need to understand that and not assume that avoidance is risk-free.
Such schemes have grown so rapidly because they have are regarded as a one-way bet. The essential point is that nothing really changes. For example, let us consider somebody who wants to ensure that the house that they live in is not part of their taxable estate, but they want to remain living there. They see their adviser, sign a series of papers and pay a substantial fee, even though there might be a relatively small amount of work in it. The client goes home, the paperwork is filed and the arrangements are designed to unscramble when the client dies and have no lasting effect. The only real effect is inheritance tax savings that can run into hundreds of thousands of pounds or more. Given that perception of risk and rewards, it is not surprising that people and advisers have found such schemes increasingly attractive. The clause gives notice that that is a false perception.
People who have used such schemes, or who contemplate others like them in future, are right to think that they will get any inheritance tax saving that their scheme is able to assure, but they are wrong to think that that protects them against any future tax charge. That is at the heart of the changes under schedule 15.