Frank Cook (Stockton North, Labour)

I remind the Committee that with this we are discussing the following amendments: No. 45, in schedule 4, page 133, line 44, at end insert—

‘2A (1) Section 18 (transfers between spouses) is amended as follows.

(2) After subsection (4) insert—

“(5) Subsection (2) shall cease to have effect from 6 April 2008.”’.

No. 46, in schedule 4, page 136, line 36, at end insert—

‘(6) Where the deceased person died before 13 March 1975, section 8A applies as if any property then left to the survivor was not charged to estate duty, whether or not it was.’.

Jane Kennedy (Financial Secretary, HM Treasury; Liverpool, Wavertree, Labour)

At the end of this morning’s sitting, I was responding to the debate on amendments Nos. 44, 45 and 46 and inviting those who are old enough and have served the House long enough to recall a similar amendment that was tabled in 1995. The Government of the day argued against that amendment in similar terms to those that I have been using

Amendment No. 46, however, is different in effect. It relates to the transfer of the nil-rate band from estates that were subject to the old estate duty regime. Under estate duty, a relief for transfers to a surviving spouse was available only from March 1972 onwards, so for deaths under estate duty, the balance of unused allowance from the deceased’s estate may be diminished. That outcome arises as a direct consequence of the legislation that was in place at that earlier time. The hon. Member for South-West Hertfordshire described a particular case in some detail, and I shall look into it. He referred also to a parliamentary question tabled by the hon. Member for Runnymede and Weybridge.

David Gauke (Shadow Minister, Treasury; South West Hertfordshire, Conservative)

I have had a chance to look at the matter again, and can clarify that my hon. Friend the Member for Runnymede and Weybridge tabled a parliamentary question to the Cabinet Office in respect of the national statistician, who made it clear that she did not have the figures for the number of widows or widowers who lost their spouse before 1972 and who are still alive today.

Jane Kennedy (Financial Secretary, HM Treasury; Liverpool, Wavertree, Labour)

That is what I understood to be the case, and I agree with the analysis set out by the hon. Gentleman.

Nevertheless, amendment No. 46 would apply the provisions under schedule 4 as if an unlimited spouse relief has been in place for deaths occurring under the estate duty regime. Our analysis suggests that it does not achieve that effect, because a construction based on treating the first death as if part of the first spouse’s estate was not charged to a state duty does not change the way in which schedule 4 determines how much unused allowance is available. In any event, the fundamental point is that the Bill takes a consistent approach for all cases, and whatever allowance was unused on the first death may be transferred for use on the second death.

In drawing up this measure, we deliberately opened up entitlement so that unused nil-rate band can be transferred regardless of when the first death occurred. However, in the interest of keeping the rules as straightforward as possible and recognising that the information available may be limited, we chose to stop  short of attempting to reassess deaths that occurred over 30 years ago as if a different set of rules applied at that time. The amount of time that has passed and the complexity of some families’ arrangements means that taking an alternative approach is difficult both to conceive and to operate. I appreciate that both the hon. Member for South-West Hertfordshire and the hon. Member for South-East Cornwall cited difficult cases, but it is hard to see how we could reopen old cases old in a way that would enable consistent and fair handling to be delivered. We therefore continue to believe that the approach taken in the Bill strikes a pragmatic balance between making an allowance for deaths that occurred before the measure was announced and keeping the rules simple and practicable. [Interruption.]

Frank Cook (Stockton North, Labour)

There is a Division in the Chamber: I could become deaf for 10 seconds if the Financial Secretary wishes to continue.

Jane Kennedy (Financial Secretary, HM Treasury; Liverpool, Wavertree, Labour)

Thank you, Mr. Cook. On the European Union point about non-domiciled spouses, the different treatment of domiciled and non-domiciled spouses can be justified on the grounds of the potential avoidance risk of extending the rate. It is therefore not contrary to the European Union rules, so I hope that the hon. Gentleman will not press his amendment.

David Gauke (Shadow Minister, Treasury; South West Hertfordshire, Conservative)

I shall take 10 seconds. I note the comments about the Government in 1995. The parallels between the Government of 1995 and this Government are not a matter that I need go into now. I accept the hon. Lady’s points on amendments Nos. 44 and 45, but I still think that amendment No. 46 raises an issue of grave concern for a small number of people and I shall press it to a vote. I beg to ask leave to withdraw the amendment.

David Gauke (Shadow Minister, Treasury; South West Hertfordshire, Conservative)

I beg to move amendment No. 64, in schedule 4, page 135, line 39, at end insert—

‘(3A) The amendment made by paragraph 6 has effect in relation to incorrect accounts, information or documents delivered on or after the day on which this Act is passed.’.

I shall briefly explain the purpose of amendment No. 64 by setting out a scenario to which it is relevant. A personal representative makes a mis-statement before 9 October 2007. In circumstances in which the first spouse has died and left the estate entirely to the surviving spouse, the spousal exemption will apply and no inheritance tax will be paid. The personal representative may not have undertaken all the checks that he should have done to ascertain that no potentially exempt transfers have been made—no potentially exempt transfers that failed in the previous seven years. If a gift had been made beforehand, it could be liable to inheritance tax.

Given that no IHT would be triggered on the estate as a consequence of the death, because of the spousal exemption, no tax was at stake when the mis-statement  was made. However, tax is now at stake as a consequence of the announcement in the pre-Budget report on 9 October 2007 of the transferable nil-rate band and of the provisions in schedule 4, particularly paragraph 6. An element of the nil-rate band, which would be otherwise unused, will have been used. Therefore, on the death of the surviving spouse, we would not see a doubling of the nil-rate band for assessing inheritance tax payable on the death of the second spouse—a percentage would be reduced because of the potentially exempt transfer. Suddenly, those potentially exempt transfers come into play. That does not excuse the mis-statement, but what penalty would be in place at the time that mis-statement was made? Under the current way of looking at such matters, given that no tax was at stake, the penalty would be zero. At other times, there would be a fine. In 1989, for example, the fine would have been £1,500. As a consequence of the provisions contained within schedule 4, in particular paragraph 6, the personal representative could be liable for that mis-statement up to the level of tax that should have been paid. In those circumstances, there is an element of retrospectivity.

Clive Efford (Eltham, Labour)

Will the hon. Gentleman give way?

David Gauke (Shadow Minister, Treasury; South West Hertfordshire, Conservative)

Certainly, in the circumstances.

Clive Efford (Eltham, Labour)

I wonder if you will allow me, Mr. Cook, to make this intervention, as I believe that we are not going to have a stand part debate as part of our deliberations on the schedule? The hon. Gentleman mentioned the inheritance tax threshold. Will he clarify, as I have heard nothing in any of the debates about inheritance tax, exactly what the Conservative party’s position is? What threshold does he envisage a future Conservative Government, should there ever be such a thing, setting out?

Frank Cook (Stockton North, Labour)

Order. That inquiry is not within the remit of the amendment. While the inquiry may be interesting to all of us eventually, the hon. Gentleman must wait until we reach that point.

David Gauke (Shadow Minister, Treasury; South West Hertfordshire, Conservative)

Thank you, Mr. Cook, I shall refrain from using this as an opportunity to publicise our policy of increasing the inheritance tax threshold to £1 million. The amendment is about the nature of the retrospective element of the penalties that may apply to a personal representative, because of the circumstances that I have outlined. The Law Society raised that concern, and it is a reasonable point. As I stressed, the provision does not seek to condone a mis-statement in any way, but because of events, whether in Blackpool or in the House of Commons, a personal representative may suddenly find himself in a different position from that which applied when he made the mis-statement. The amendment would ensure that the change in any penalties for which he is liable would come into effect only when the Bill became law. It would not be backdated to some point in the past at which the personal representative would not have been aware of what was to happen in the future.

Jane Kennedy (Financial Secretary, HM Treasury; Liverpool, Wavertree, Labour)

Amendment No. 64 relates to the penalty provisions that apply where someone has provided incorrect information to HMRC. I hope that I can deal with this point quickly. Schedule 4 makes a change to the current provisions, to take account of the new possibility that the overstatement of unused nil-rate band on a first spouse’s death, could result in an underpayment of tax on the second spouse’s death.

Amendment No. 64 makes explicit provision for that change to have effect only in respect of incorrect information or documents delivered after Royal Assent. Making the change proposed in the amendment is unnecessary. There is no specific commencement provision in the Bill for the changes to the penalty provision, so by default, the new rules will take effect from Royal Assent. I appreciate that the amendment is the result of concern expressed by the Law Society, based on what the hon. Member for South-West Hertfordshire said, so I will reiterate what I have said. Hon. Members will be happy to hear that inheritance tax penalties are not charged on deceased persons. If they are charged, it is the personal representatives—those who administer the deceased’s estate—who are liable. If incorrect information or documents are submitted to HMRC by a personal representative, that may lead to a penalty.

As I have said, the new penalty rules under schedule 4 apply only to incorrect information delivered after the Bill receives Royal Assent. They are not there to trip up innocent individuals, such as the hon. Member for Cities of London and Westminster, who described the work that he did on his father’s estate. If there was an error, but the personal representative could show that it was not due to negligence on their part, there would be no penalty. I appreciate the concerns, expressed by the hon. Member for South-West Hertfordshire and raised initially by the Law Society. I hope that I have been able to allay those fears and that as a consequence the amendment, while useful in its way, will not be pressed to a vote.

David Gauke (Shadow Minister, Treasury; South West Hertfordshire, Conservative)

I am grateful to the right hon. Lady for that clarification. She has addressed the issue that I raised so I beg to ask leave to withdraw the amendment.