Schedule 15 — Charge to income tax on benefits received by former owner of property

Clause 5 — Rates – in the House of Commons at 2:15 pm on 7th July 2004.

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Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary To the Treasury, Economic Affairs, Shadow Chief Secretary to the Treasury 2:15 pm, 7th July 2004

I beg to move amendment No. 1, in page 356, line 20, at beginning insert

'Subject to sub-paragraph (6) below,'.

Photo of Sylvia Heal Sylvia Heal Deputy Speaker

With this it will be convenient to discuss the following:

Amendment No. 2, in page 356, line 26, leave out '17th March 1986' and insert '19th June 2003'.

Amendment No. 45, in page 356, line 26, leave out '17th March 1986' and insert '9th December 2003'.

Amendment No. 3, in page 356, line 35, leave out '17th March 1986' and insert '19th June 2003'.

Amendment No. 46, in page 356, line 35, leave out '17th March 1986' and insert '9th December 2003'.

Amendment No. 4, in page 356, line 48, at end insert—

'(6) This paragraph will not apply where the chargeable person occupies the relevant land pursuant to a right or interest granted or acquired at least seven years before the earliest date on which the disposal condition or the contribution condition was met.'.

Amendment No. 5, in page 358, line 36, leave out '17th March 1986' and insert '19th June 2003'.

Amendment No. 47, in page 358, line 36, leave out '17th March 1986' and insert '9th December 2003'.

Amendment No. 6, in page 358, line 44, leave out '17th March 1986' and insert '19th June 2003'.

Amendment No. 48, in page 358, line 44, leave out '17th March 1986' and insert '9th December 2003'.

Amendment No. 7, in page 360, line 17, at beginning insert

'Subject to sub-paragraph (4) below,'.

Amendment No. 8, in page 360, line 30, leave out '17th March 1986' and insert '19th June 2003'.

Amendment No. 49, in page 360, line 30, leave out '17th March 1986' and insert '9th December 2003'.

Amendment No. 9, in page 360, line 34, at end insert—

'(4) This paragraph shall not apply where—

(a) the chargeable person has a reversionary interest in the settlement (as defined by section 47 Inheritance Tax Act 1984); or

(b) the chargeable person's interest in the settlement arises only on the termination of the settlement; or

(c) in the case of a settlement where there is no subsisting interest in possession, the chargeable person is not currently a member of the class of beneficiaries of the settlement; and

(d) where the chargeable person has no other interest in the settlement.'.

Amendment No. 225, in page 360, line 40, leave out

'of any income tax or capital gains tax' and insert

'on which any income tax or capital gains tax is'.

Amendment No. 10, in page 361, line 36, at end insert—

'(f) it is a sale of an interest in land or an undivided share of an interest in land for full consideration in money or money's worth.'.

Amendment No. 226, in page 361, line 48, leave out from 'and' to the end of line 2 on page 362 and insert

'the gift and the acquisition referred to in the said paragraphs were not associated operations as defined by section 268 of IHTA 1984,'.

Government amendment No. 91.

Amendment No. 227, in page 362, line 44, leave out 'and' and insert 'or'.

Government amendments Nos. 92 and 93.

Amendment No. 44, in page 363, line 45, leave out '£5,000' and insert '£50,000'.

Government amendments Nos. 94 to 108.

Amendment No. 11, in page 366, line 41, at end insert—

'24 (1) This paragraph applies where—

(a) the provisions of paragraph 3 (land), paragraph 6 (chattels) or paragraph 8 (intangible property) apply to a person during the year of assessment 2004–05 ("the current year") by reference to any property ("the relevant property"); and

(b) the relevant property is transferred absolutely to the chargeable person during the current year or during the year of assessment 2005–06 either directly or by "associated operations" (as defined by section 268 of the Inheritance Tax Act 1984).

(2) Where this paragraph applies, no operation by which the relevant property is so transferred shall—

(a) be a disposition or transfer of value for the purposes of the Inheritance Tax Act 1984,

(b) be subject to Inheritance Tax under section 65(1) of the Inheritance Tax Act 1984,

(c) be a disposal for the purposes of paragraphs 3 and 6 above,

(d) be subject to Stamp Duty Land Tax; and

(e) the receipt of the relevant property by the chargeable person shall not be subject to Income Tax.

(3) If any operation by which the property is so transferred constitutes a disposal for the purposes of the Taxation of Chargeable Gains Act 1992, the person making the disposal and the person acquiring the property shall be treated as if the asset was acquired from the person making the disposal for a consideration of such amount as would secure that on the disposal neither a gain nor a loss would accrue to the person making the disposal.'.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary To the Treasury, Economic Affairs, Shadow Chief Secretary to the Treasury

The Government's pre-owned assets measures, which are embodied in clause 84 and schedule 15, have elicited more complaint from constitutional lawyers and others than anything else in the Bill. I have been deluged with letters, e-mails and other communications from eminent lawyers, a group of whom are considering taking the matter to the European Court of Justice. Those complaints are made with good reason. What the Government saw as a clever manoeuvre raises major issues of principle in relation not only to the basis of taxation, but to the rule of law; and all sorts of unfairnesses were not fully remedied by the amendments that were passed in Committee. I accept that the Government have addressed some of the worst effects—unintended, I trust—of the measures, but there is still a lot to be considered.

One aspect of the provision that has given rise to objections is its application to individuals whom the Inland Revenue has previously accepted as being outside the gifts with reservation rules. Its alleged intent is to recoup the tax and punish people who had avoided the gifts with reservation rules. It also applies to some individuals who fall within statutory gifts with reservation exemptions, which were introduced by this Government.

However, the main objection to the provision is that it is retrospective in principle, even if cleverly designed to be retroactive in method. It undermines the traditions of British tax law because the legitimate and reasonable expectations of taxpayers have been denied. It is clearly a piece of inheritance tax legislation in substance, if not in form. The Government's previous policies on inheritance tax cannot be ignored, and must be examined in relation to these proposals.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West 2:30 pm, 7th July 2004

Will the hon. Gentleman explain how his intellectual proposition differs from what his party did in government when they tapered off, then completely abolished, mortgage interest relief? When we took out our mortgage in 1984, we got mortgage interest relief—that was the reasonable expectation, to use the hon. Gentleman's words. When that was done away with, I happened to support it, but one could have advanced the same argument about retrospectivity in that case.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary To the Treasury, Economic Affairs, Shadow Chief Secretary to the Treasury

I ask the hon. Gentleman, whose contributions I greatly respect, to be patient, as I was about to go on to explain just that point. As he is well aware, the issue was raised in Committee.

Amendments Nos. 2, 3, 5, 6 and 8 would restrict the starting date of the measure to 19 June 2003, as that was the date on which the Government last amended the gifts with reservation rules. They gave no indication that those changes should have retrospective effect. Correspondingly, and perfectly reasonably, any taxpayer who had undertaken planning under previous versions of the gifts with reservation rules would have been led to understand that their planning had achieved its objectives. Indeed, in summer 2000, Mr. Peter Twiddy of the Inland Revenue capital taxes office specifically confirmed to the Society of Trust and Estate Practitioners that that was the case. That differs greatly from what Governments do in relation to various tax reliefs, whether to mortgages or pension savings. Individuals who had completed their planning would have acted accordingly. Many took out life policies on a seven-year-term basis to cover the tax liability were they to die within seven years of their gift, but they could have reduced their whole of life cover. They would not have organised their financial affairs on the basis that they would need to pay a rent to live in their own homes.

If the Government had wished to introduce a new income tax in relation to occupation, it would not, much as one might have generally objected to it, have been seen as retrospective. The issue here is that the provision is concerned in substance with inheritance tax and that it is narrow and penal.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

As the hon. Gentleman knows, I served on the Standing Committee that considered the Bill. My recollection—he will correct me if I am wrong—is that under these provisions the taxpayer is put to an election as to whether they go into the new regime or, so to speak, have the house back and do not pay a rent or quasi-income tax on it. The taxpayer is not forced into one position or the other, but has a choice.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary To the Treasury, Economic Affairs, Shadow Chief Secretary to the Treasury

Again, the hon. Gentleman anticipates me, because one of my subsequent points deals with what would be a fair transitional relief. The whole principle underlying British law in this territory is that in such circumstances transitional relief is fair; for reasons that I will deal with later, in this case it is not fair.

Photo of Mr John Burnett Mr John Burnett Shadow Minister, Home Affairs, Shadow Solicitor General, Law Officers (Constitutional Affairs)

Does the hon. Gentleman agree that the choice is not as simple as that, but is more like Hobson's choice in certain circumstances? For example, to avoid French inheritance tax laws, shares may be owned by a company that owns property in France. In those circumstances, the shares might attract relief but the property does not. That has most unfortunate consequences.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary To the Treasury, Economic Affairs, Shadow Chief Secretary to the Treasury

I thank the hon. Gentleman for his intervention; again, I will come to that in due course.

Amendments Nos. 9 and 7 would exclude from a pre-owned assets charge those interests in trusts that have never been treated as gifts with reservation, or may not be gifts with reservation depending on the facts. Where the settlor has settled property in a trust for a limited period after which the property reverts to him, the inheritance rules have always included a settlor's future right—his reversionary interest—as part of his estate, valuing it on an actuarial basis. That is, if the settlor recovers the property in a month's time, his interest is more valuable than if he recovers it in 25 years' time; that is perfectly rational. As a result, the gifts with reservation rules have never needed to apply.

Under the pre-owned asset rules, however, the settlor effectively gets a credit for the value of the reversionary interest, but is nevertheless subject to income tax on the property in the trust, notwithstanding that he cannot benefit for another 25 years. Surely that is perverse.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

I venture to the hon. Gentleman that he is confusing a gift with a reservation of benefit—a concept that was introduced by his Government in the late 1980s—with a reversionary interest of a settlor. Those are two separate things, but he is eliding them.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary To the Treasury, Economic Affairs, Shadow Chief Secretary to the Treasury

Gifts with reservation of whatever kind have all been subject to the existing rules. The application of inheritance tax in relation to all the different situations involving gifts with reservation is covered by one territory. The hon. Gentleman says that these provisions date from when the Conservatives were in power, but I do not see why that makes much difference.

Photo of Mr John Burnett Mr John Burnett Shadow Minister, Home Affairs, Shadow Solicitor General, Law Officers (Constitutional Affairs)

I fail to perceive the relevance of the previous intervention. My understanding is that gifts of reversionary interest do not attract inheritance tax.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary To the Treasury, Economic Affairs, Shadow Chief Secretary to the Treasury

That is precisely the point—we are considering something that previously did not attract inheritance tax. I look forward to an engaging debate between Mr. Burnett and Rob Marris on the subject.

When a settlement is badly drafted, the settlor frequently retains no interest in it while it subsists. However, if it comes to an end and there are no living beneficiaries, the settled assets revert to the settlor by operation of law, by way of what is known as a resulting trust. In all likelihood, the settlor will never benefit from the settled assets but the possibility of benefits means that section 660A of the Taxes Act 1988 applies. If it is accepted that such circumstances do not constitute gifts with reservation, the amendment would ensure that such arrangements escaped the pre-owned assets charge.

It could be argued that a person who is not a beneficiary of a discretionary settlement but can be added as a beneficiary does not reserve a benefit in the settled property for gifts with reservation purposes, notwithstanding that section 660A would apply. Again, the amendment would keep settlors who are not currently beneficiaries out of a pre-owned assets charge. Of course, they would be covered by the charge if and when they were added as beneficiaries.

Amendment No. 10 would tackle the most ridiculous aspect of the pre-owned assets rules: that sales of part interest in property for full consideration are caught by the rules. If a child moves in with a parent, who gives the child half a share in the property, there is currently no pre-owned assets charge. However, if the child pays full consideration for the half share, there is such a charge. The Paymaster General suggested that she was worried about opening the door to possible avoidance but it appears that she is far more concerned about the possibility of catching innocent parties. She has failed to identify the mischief that she claims she intends to counter.

As matters stand, the arrangements have a serious impact on equity release schemes, which are a growing source of revenue for the elderly in the light of the disastrous effect of the Government's policies on pensions saving. The Paymaster General promised to come back to me about that matter, which I raised in Committee, but the Government have tabled no amendment to paragraph 10(1)(a). That means that someone who has an equity release scheme either with a member of the family or a commercial provider will be caught by income tax. That is ridiculous. I have been told confidentially that the Government's view is that not many people have yet prepared equity release schemes and therefore the schemes do not matter. However, many more, in ignorance of the extraordinary tax trap, will take them up. Even if the numbers are not great, new laws should be fair and reasonable.

The problem is that the pre-owned assets legislation merely requires a disposal, not necessarily a gift, and occupation of the property. The paragraph 10 exemption lets people off pre-owned asset income tax only if there is a sale of their entire interest in the property, except for any right expressly reserved over it. That would not cover sales of, for example, a half share in the freehold, which is part of the typical equity release scheme contract.

The reference to non-exempt sales that was made in Committee does not deal with the problem because a sale of the entire interest in the land is required and we are referring to sales below value. The contrary aspect is that someone who had arranged to retain a lease and sell the freehold, subject to that lease, for full consideration, would not be affected by the pre-owned assets charge. The result would be essentially the same but via a different legal route. By contrast, selling half the unencumbered freehold in the property—a more typical transaction for the ordinary elderly citizen—is not covered.

In the past, the Financial Times has discussed equity release schemes and the pros and cons in some detail. The Government have supported measures to get equity release schemes satisfactorily regulated by the Financial Services Authority. They are a growing fact of life today. However, many people who have done equity release schemes will not realise that there is an income tax, pre-owned assets charge in those circumstances.

Amendment No. 11 deals with the transition that the hon. Member for Wolverhampton, South-West raised. It would allow arrangements for those who are caught by the pre-owned assets rules to be unwound without incurring any tax charges and with any potential capital gains in the assets intact. That means that there would be no capital gains tax disadvantage in the process and that the basis of unwinding would be fair.

The Government's current policy of expecting people who are caught by the new rules to elect into a gifts with reservation charge is penal because the property would be back in the estate for inheritance tax purposes but would continue to belong to the donee. There is therefore an element of double inheritance taxation. As I argued at great length in Committee, there would be no capital gains tax uplift for the asset on death. Historically, only the ignorant or badly advised got into gifts with reservation positions. The amendment would introduce fairness into the transitional arrangements by giving people a genuine opportunity to unwind the clock. The Paymaster General complained that only those who wanted to effect new planning would want to do that, but that is unreasonable. People who have to unwind their arrangements will be reluctant to embark on new planning, unless it is specifically endorsed as acceptable. Indeed, that is the Government's intention with the pre-owned assets charge penalty.

I come now to amendment No. 225. As drafted, the schedule charges tax on the notional annual value after deducting the tax already paid. Surely the deduction should be based on the value on which the tax is paid so that there is no double charge to tax. In other words, 40 per cent. of 100 per cent. net of tax already paid produces a tax charge of 64 per cent., not the intended 40 per cent.

Amendment No. 226 relates to paragraph 2(b) of schedule 6 of the Inheritance Tax Act 1984, which provides that the reserved gift-tracing provisions do not apply to a gift that is a sum of money in sterling or another currency. That provision follows the former estate duty tracing provisions in section 38 of the Finance Act 1957. The purchase of a property from a benefit may be reserved with a cash gift, which is chargeable only if the purchase and the gift can be regarded as associated operations.

The problem of tracing cash gifts was discussed in Committee but the pre-owned assets charge should not be used to rewrite schedule 20 of the Finance Act 1986. A gift of cash that is unconnected with a subsequent purchase by a donor from which the donee may benefit is not and never has been a gift with reservation.

I want to consider problems with the interpretation of section 102C(3) of the Finance Act 1986. It deals with disposals of land after March 1999 and states that there is no reservation of benefit when a donor reverts to occupation due to unforeseen hardship. Paragraph 6 to schedule 20 of the 1986 Act deals with all disposals since March 1986, and states that there is no reservation of benefit where the donor occupies land or chattels for full consideration or reoccupies land due to hardship.

Paragraph 11(3)(d) to schedule 15 states that the provisions

"would fall to be so treated but for section 102C(3) of, and paragraph 6 of Schedule 20 to, the 1986 Act".

The intention is to ensure that, in those circumstances, there is also no income tax charge, but there has been confusion about the use of the word "and" in the above sentence. The effect of the word "and", inserted by amendment No. 141, appears to require both the reliefs covered to apply together to avoid the income tax charge, which most legal specialists believe is not the Government's intention. Does this mean that the conditions of section 102C(3) and paragraph 6 have to be satisfied? If so, the relief from income tax is confusing because it would apply in extremely limited circumstances. Or does it mean that if either section 102C(3) or any of the paragraph 6 conditions are satisfied, there is no income tax charge? This is an important point, because people frequently make gifts of chattels or land, and pay a full market value for their use and occupation, and they need to know whether they are in the income tax charge or not.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West 2:45 pm, 7th July 2004

Will the hon. Gentleman remind me from whose brief he is reading?

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary To the Treasury, Economic Affairs, Shadow Chief Secretary to the Treasury

The hon. Gentleman will pleased to know that it is from an eminent tax counsel.

The Inland Revenue has confirmed that section 102C(3) covers circumstances not covered by paragraph 6, and that the "and" should therefore be read disjunctively, so that it covers the two distinct cases. I would therefore ask the Paymaster General to confirm that what was previously paragraph 11(1)(d) and is now paragraph 11(3)(d), which states

"would fall to be so treated but for section 102C(3) of, and paragraph 6 of Schedule 20 to, the 1986 Act" refers to two distinct cases, with the effect that the "and" in the sentence should be read disjunctively?

There also seems to be an omission, because the provision does not cover gifts of land made post-1999, which might be caught only by section 102A or 102B, but where the donor pays full consideration for his occupation of gifts of a share in land. This point has been raised with the Revenue. I trust that the Paymaster General will be aware of these somewhat exotic legal points. More seriously, they illustrate the mistake of not thinking through all the implications of these provisions in such complicated tax areas.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

I would not describe them as exotic legal points. I would describe them as probing the limits of possible future ways of getting round the legislation.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary To the Treasury, Economic Affairs, Shadow Chief Secretary to the Treasury

I am afraid that the Paymaster General's slant on that is incorrect. The law needs to be clear, and many aspects of the Bill are not clear. It is the duty of the Paymaster General to ensure that the law is clear.

The reaction of the lawyers to Government amendment No. 91 is that it is another case of a lack of clarity. Is the intent that if a property falls within paragraph 11(3)(b), there will be no pre-owned assets charge to be adjusted under 11(3)(a), even though the amendment does not appear to affect amendment No. 227?

There are other more straightforward areas of the Bill that have yet to be sorted out fairly. I understand that the Revenue is talking to the Historic Houses Association about the issue of historic chattels that belong to a property, and that it now understands the issue and is considering addressing it in its continuing consultations. It seems simple to me that, when chattels are settled and on public view for the normal number of days required for them not to be exempt, and when there is a heritage connection with the building, it would be foolish not to exempt them. They would simply be stored in a barn where no one would be able to see them and they would come to no good, or they would be sold. There would be no benefit to anyone.

It is still not clear whether a full repairing lease at fair market rent would be acceptable—

Photo of Sylvia Heal Sylvia Heal Deputy Speaker

Order. Will the hon. Gentleman help the Chair and other Members by telling us to which amendment he is speaking?

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary To the Treasury, Economic Affairs, Shadow Chief Secretary to the Treasury

In truth, I do not think that I can. These points relate to all the amendments to schedule 15, which still await clarification. I am about to conclude, but I was giving examples of areas that still need to be tidied up. A lot of problems and unfairnesses need to be addressed. I understand that the Government and the Inland Revenue intend to address these and other issues that have not yet been resolved, either through guidance notes or, if necessary, through legislative changes to schedule 15, before the Bill passes into law.

This whole area is regarded too lightly by the Government on the ground that it apparently affects only a small number of people. Important issues of principle in relation to retrospection are involved, and important issues of practice in relation to fair transition arrangements and to other areas not intended to be caught by the changes being thus caught.

Photo of Mr John Burnett Mr John Burnett Shadow Minister, Home Affairs, Shadow Solicitor General, Law Officers (Constitutional Affairs)

I hope that the House will understand that this part of the Bill is causing widespread disquiet, and that, far from affecting only a few people, it could affect many millions of people in this country. I shall return to that point later. I hope that you will allow those of us who catch your eye, Madam Deputy Speaker, to range fairly widely on this matter. It is complex, and it is therefore difficult to be confined purely to the amendments before us.

We support the Conservative amendments and the comments that have been made about the retrospective element of these provisions, which we believe is grossly unfair. It does not enable people to change and modify their personal affairs in time to meet what are effectively very punitive arrangements, as Mr. Flight has said. He referred particularly to the element of taxation on net rather than gross figures.

It is a grave mistake to deal with actual as well as perceived inheritance tax defects by using income tax. The reason for that is pretty clear: it is ludicrous to have a nil rate band of inheritance tax of £250,000 and an income tax charge to overcome inheritance tax avoidance on pre-owned assets with a capital value of about £100,000. The Government increased the de minimis limit from £2,500 per annum to £5,000 per annum, but that is still too low. The Government seem to believe that a multiple of 20 is about the right amount, which would mean that we are talking about capital assets worth about £100,000 yielding £5,000.

I want to make a couple of mundane points that will nevertheless be important to practitioners. Will the Paymaster General confirm whether the £5,000 per annum de minimis limit operates with a slab effect, as with stamp duty? If the £5,000 per annum de minimis limit is exceeded, does the whole sum come into taxation? In addition, will she let the House know whether it is possible to add to that £5,000 per annum de minimis limit the annual exemption and any other exemption, such as the exemption on gifts to children on marriage?

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury) 3:00 pm, 7th July 2004

This is a complex area. With regard to the £5,000, the hon. Gentleman asked whether it had a slab effect. I would call it a cliff-edge effect: essentially, if the value is £5,001, taxation would be paid on the whole £5,001, not just on the £1 excess. On the issue of gifts for children, I will answer when I reply to all the amendments, as some amendments deal with that issue.

Photo of Mr John Burnett Mr John Burnett Shadow Minister, Home Affairs, Shadow Solicitor General, Law Officers (Constitutional Affairs)

I am grateful to the Paymaster General. I think that she is saying that it has the cliff-hanger effect—[Hon. Members: "Cliff edge."] I am grateful. We call it the slab effect with stamp duty, and it is the cliff-edge effect with inheritance tax.

What horrifies me about this tax is that it criminalises the innocent. I referred to that in Committee, and I cannot understand why the Government are not sympathetic. The prices of property in this country are high, and it is prosperous—

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

I understand that the hon. Gentleman feels strongly about this issue, but the proposed arrangements do not criminalise anyone. There are something like 32,000 IHT estates each year: five out of every 100 deaths. When people seek to avoid paying their tax, the arrangements make provision to bring it back in. While not wishing him to reduce the passion that he feels for this subject, I ask him not to mislead anyone: there is no criminality, and no criminal offence, in those proceedings.

Photo of Mr John Burnett Mr John Burnett Shadow Minister, Home Affairs, Shadow Solicitor General, Law Officers (Constitutional Affairs)

I acknowledge that what the Paymaster General says is right: it would be criminal only if the taxpayer, who was held to have to pay tax, refused to do so. That would present possible criminal liability. Perhaps the language that I have used is slightly exaggerated. What I am saying is that the proposals will bring into account for taxation a number of people who had absolutely no idea whatever that the arrangements that they had innocently made brought them to account for an income tax charge. That is not criminal.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

I must press the hon. Gentleman on this point, because anyone listening to this debate will be entirely misled. There is not a criminal offence under those proposals. Evasion is a criminal offence that can be prosecuted, but those offences under the tax law are dealt with as civil offences. What is being proposed, however, is that people are not allowed to avoid the tax in the first place, and all good, fair taxpayers comply with that anyway.

Photo of Mr John Burnett Mr John Burnett Shadow Minister, Home Affairs, Shadow Solicitor General, Law Officers (Constitutional Affairs)

I think that I made it quite clear that what the Paymaster General said in her first intervention on me was correct, and that perhaps I was using slightly exaggerated language. My point is that individuals will innocently be brought to account for income tax without the slightest inkling that the arrangements that they were making would involve any charge to taxation whatever. If she will allow me, I shall elaborate further on that point.

This is not criminal liability—it could be if the tax was not paid, if a court order to pay the tax was made, and if, thereafter, it was not paid. Conceivably, that could be criminal liability. I shall give the example of a mother and her carer daughter. The daughter forsakes the opportunity to get on the housing ladder and moves in with her mother, who says to her daughter, who might be married or unmarried, "This house will be yours when I die." The daughter spends a considerable amount of money improving the property, and I know from my constituency experience that there are many such families. I reckon that there are many such families throughout the country. There are hundreds of thousands or perhaps even millions of people in those circumstances.

The mother and daughter—or people in any other relationship—do not realise that at that stage, or as the money is spent, the daughter has acquired an equitable interest in the property. The daughter owns some of the property. [Interruption.] Before Rob Marris intervenes, I will tell him that the gifts with reservation provisions would not bite in those circumstances, because owners of equitable interests would be entitled to enjoy property equally, disregarding the shares that they had, and they would not be caught with a reservation of benefit charge.

As I said, the mother and daughter do not realise that the daughter has an equitable interest in the property. They have received no professional advice, because, of course, they did not know that there was any possible income tax charge that could have been accruing for years after those arrangements had been made. The mother dies, and this charge then falls into account. That is outrageous, and grossly unfair. The least that the Government could do, given the high prices of real estate and high rents, is to increase substantially the de minimis limit.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

We covered that point in Committee with regard to cases in which the carer moves into the home of the person receiving care, and in relation to the more unusual cases in which somebody moves into a house that they used to own to care for somebody, with the result that they end up with such an interest. He knows that that interest will not be enjoyed for no consideration, and that the schedule 15 charge is most unlikely to arise. We went through that in Committee, with examples, and I implore the hon. Gentleman, while he wishes to discuss this clause, not to raise issues that he knows are settled, and that will not arise under the arrangements provided for. He could be frightening people totally and utterly unnecessarily.

Photo of Mr John Burnett Mr John Burnett Shadow Minister, Home Affairs, Shadow Solicitor General, Law Officers (Constitutional Affairs)

I am grateful to the Paymaster General for saying that, but she chose her words carefully: she said that the charge is most unlikely to arise. It should not arise at all. I have been to meetings with professional bodies to discuss this matter, and I have asked the question that I have posed to the Paymaster General. At those meetings were some of the most eminent tax lawyers and tax accountants in the country. They could not give me a definitive ruling one way or another. It is absolutely wrong and outrageous that those people should be in any jeopardy whatever. It should be made entirely clear in the Bill that there is no jeopardy.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

I am grateful to the hon. Gentleman for giving way again, but I have given him this explanation and assurance both as a Minister and on the advice from the Inland Revenue. He seeks to counter-pose advice that he has from some tax experts. I say to him again: that may be their view, but it does not make it right. People listening to these proceedings would get the wrong impression, and many could be frightened by the suggestion that something is going to happen to them when it is not.

Photo of Mr John Burnett Mr John Burnett Shadow Minister, Home Affairs, Shadow Solicitor General, Law Officers (Constitutional Affairs)

I repeat the Paymaster General's words. She told the House a moment ago that the charge is most unlikely to arise. It should not arise, and that should be absolutely clear.

Photo of John Gummer John Gummer Conservative, Suffolk Coastal

Is not the hon. Gentleman right not only on the specific point that the Minister should be able to say that the charge will not arise, but on the more general point that people will be frightened because the legislation is too complicated to make it reasonable for ordinary people leading ordinary lives to deal with it? The complexity of the legislation frightens people.

Photo of Mr John Burnett Mr John Burnett Shadow Minister, Home Affairs, Shadow Solicitor General, Law Officers (Constitutional Affairs)

The right hon. Gentleman is exactly right and I entirely agree. The self-assessment aspect of this stuff is even more confounding and difficult. Goodness knows what the average person will think when confronted by their liabilities, and so on. It is difficult enough for specialist professional lawyers and accountants. The provisions are a sledgehammer to crack a nut. The matter should have been resolved not by the income tax route, but by the inheritance tax route. The legislation is an appalling mess.

I am grateful to you, Mr. Deputy Speaker, for allowing us to range fairly widely in this debate. I shall raise one or two other points. There is a mismatch between the gifts with reservation of benefit exemption and the pre-owned assets provision. I alluded to it in an intervention on the hon. Member for Arundel and South Downs. I gave the example of a private company—say, a French property company—owned by a father who give shares to his children but continues to live in the house owned by the company. He thus reserves the benefit of the assets—that is, the shares gifted—and those, quite properly, remain subject to inheritance tax in his estate. Paragraph 11(3)(a) of schedule 15 seeks to prevent a double charge by exempting from the pre-owned assets provisions property so subject to the gifts with reservation rules. However, the relevant property for the pre-owned assets provisions is not the shares, but the house. Will the Paymaster General correct that defect in the legislation?

On the complexity of the self-assessment regime and the de minimis provisions, I referred to the problem that could affect many thousands of people and I have not received a precise answer from the Minister on that point. The provisions in paragraph 15 will lead to incredible expense for a great many individuals, who will have to take professional advice. The gifts with reservation of benefit rules at least fell to be interpreted mainly by those who dealt with estate planning professionally or as executors.

In general, the provisions are a highly complex attempt to patch up deficiencies in one tax code by introducing a different code altogether or attempting to fit the two together. The pieces of the jigsaw do not fit. The provisions are unfair and over-complex, and the Government should think again.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

I shall try to clear up one point. There was a three-way debate on amendment No. 9 before you arrived, Mr. Deputy Speaker. There is a difference between a gift with a reservation of benefit, and a reversionary interest. A gift with a reservation of benefit means that one does not quite give it all away. A reversionary interest means that one gives it all away, but one might want some of it back later. There is a difference.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary To the Treasury, Economic Affairs, Shadow Chief Secretary to the Treasury

The House understands that. The issue is whether, how and when the latter falls within the gifts with reservation rules. That is what I was referring to.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West 3:15 pm, 7th July 2004

The House understands the difference. It seemed clear that the hon. Gentleman did not understand it when he was explaining the reasons behind amendment No. 9. I am glad we now have some clarity on the matter. Amendment No. 9 may not address all the issues that the hon. Gentleman wishes it to address because, I suspect, it may be technically deficient, leaving aside the question of whether the concept is desirable or not.

The debate on this group of amendments has been revealing. At heart Conservative Members do not like inheritance tax, but they will not say so. There is a flavour of that in the remarks of Mr. Burnett. Mr. Gummer speaks about ordinary people leading ordinary lives. Most people who die in the United Kingdom do not even leave a will, let alone get involved in estate planning, tax planning and so on. Those who get involved in the kind of schema that will be addressed by the proposals are people who have thought about estate planning, or death duties, to use the old phrase, and about capital transfer tax, as was, or inheritance tax, as now is. Unless they are professionals, they will almost invariably have sought professional advice.

Photo of Mr John Burnett Mr John Burnett Shadow Minister, Home Affairs, Shadow Solicitor General, Law Officers (Constitutional Affairs)

The hon. Gentleman made some fine contributions in Committee. From the thrust of my remarks, he will understand that not everyone will take professional advice in certain circumstances. What is his philosophy about this tax? Does he think the tax is fair, when the very richest people can escape it and middle income is caught by it? Is that not grossly unfair?

Photo of Michael Lord Michael Lord Deputy Speaker (Second Deputy Chairman of Ways and Means)

Order. We are in danger of getting into a wide-ranging debate on taxation generally. I should be grateful if Rob Marris avoided the temptation to respond to that intervention and stuck to the points that he was making.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

I am grateful to you for your guidance, Mr. Deputy Speaker. The comments that the hon. Member for Torridge and West Devon made in his speech, not in his interventions, reveal something about the concept with which some right hon. and hon. Members approach the amendments.

On two occasions the hon. Member for Torridge and West Devon referred to a French property company. While the House ought to be cognisant of the tax affairs of and possible inequities to all the citizens and taxpayers of the United Kingdom, the number who have French property companies to own their holiday home in France is minuscule. The reason they do that is almost invariably to try to get round French inheritance law.

Those are individuals who are wealthy. They can afford a property overseas. They have had professional advice, and that advice is, "Get a French property company in which you will own shares as a way to get round French inheritance laws", because French inheritance laws not only have tax consequences, but have a certain family succession built into them, such as we would have for death with intestacy. Under French inheritance law, on which I am not an expert, whatever the terms of the will of the deceased husband, for example, his wife must have a certain share in the estate and so do the children.

Photo of Mr John Burnett Mr John Burnett Shadow Minister, Home Affairs, Shadow Solicitor General, Law Officers (Constitutional Affairs)

I chose that as an example because hundreds of thousands of people in this country have properties abroad. They enter into corporate arrangements, as the hon. Gentleman acknowledged, not for tax avoidance or, for that matter, tax evasion, which is unacceptable, but as bona fide arrangements made to avoid, as he says, the French inheritance laws. That has nothing to do with taxation.

It would not matter if there were one or two people in that position, but there are hundreds of thousands of people who have such arrangements. Surely the law should recognise that if those are reciprocal arrangements to cancel out one tax disadvantage with a tax advantage—that is, gifts with reservation and this pre-owned assets provision—they should be complete and they should not sting in part people who make—

Photo of Michael Lord Michael Lord Deputy Speaker (Second Deputy Chairman of Ways and Means)

Order. That is an extremely long intervention and we are again straying away from the amendments. Will Rob Marris come back precisely to the amendments before the House?

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

I will endeavour to do so, Mr. Deputy Speaker. The point that I was making about the amendments, in relation to the French property issue, was to suggest—I cannot prove it—that the individuals to whom the hon. Member for Torridge and West Devon referred have almost invariably received professional advice. The hon. Gentleman will know that professional advice of that sort almost invariably involves not only the legal but also the taxation aspects. If a solicitor giving such advice does not feel comfortable about also giving some taxation advice, he or she should, and usually does if acting professionally, refer that individual to a professional tax adviser. The examples given by Opposition Members do relate not to individuals who have wandered into a UK minefield created by schedule 15 and the amendments to it but to individuals who have had professional advice.

Photo of Mr John Burnett Mr John Burnett Shadow Minister, Home Affairs, Shadow Solicitor General, Law Officers (Constitutional Affairs)

It is not a minefield. I am saying not that individuals in those circumstances do not know what they are doing, but that the legislation is wrong. If there is to be proper choice, they should be able to elect for one thing or the other—they should not be stung by both.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

I concede that I used the word "minefield" and that the hon. Gentleman did not. However, he took up the word complexity, which was introduced by the right hon. Member for Suffolk, Coastal, and I concede that I elided that into "minefield". That was the flavour I understood, but I apologise to the hon. Member for Torridge and West Devon if that was not his meaning; he was talking about complexity and the flavour picked up by me and, I think, by my right hon. and hon. Friends was that innocents abroad—in both senses of that word—would experience the horrible tax regime to be introduced by schedule 15, even with the wonderful amendments.

Photo of Greg Knight Greg Knight Shadow Minister (Environment, Food and Rural Affairs)

A few moments ago, the hon. Gentleman asked my hon. Friend Mr. Flight whose brief he was reading. May I ask the hon. Gentleman the same question, because it sounds rather as though he were reading the Government Whips Office narks' brief? When the hon. Gentleman moves on to amendment No. 10, can he tell us what possible objection there could be to the Government accepting it? Did not my hon. Friend make out an unanswerable case?

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

I have in front of me the amendment paper—not a narks' brief. There is a Whip sitting on the Treasury Bench, but I freely confess that I am not aware of whether there is a Government brief on this series of amendments. I have no idea, and I can assure the right hon. Gentleman that I am not reading from anything. Indeed, if he knew me a little better, my comments would ring all too true; I am not prone to reading out Government briefs in the House, nor are most of my hon. Friends. Of course, I do not know what Opposition Members do—perhaps they read out the Conservative narks' briefs.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

Just in case my hon. Friend thinks he might have missed out on something, I assure him that there is no Government brief for anybody in the Chamber—apart from the explanatory notes to which all Members have access.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

I am grateful to my right hon. Friend for that comment.

I should like to look at the amendments in their totality, starting with amendment No. 10, to which Mr. Knight referred. The hon. Member for Arundel and South Downs raised some points about equity release schemes and I hope that my right hon. Friend the Paymaster General can reassure us all about them. The hon. Gentleman put a good question and based on my experience of my right hon. Friend, I am sure that she will have an extremely thorough and satisfactory answer that will probably calm my fears and those of the hon. Gentleman.

Several of the amendments raise retrospective and retroactive points; some of them, including amendments Nos. 6 and 48, refer to dates in 1986 and to dates in June and December 2003. I am uneasy about provisions that go back to 1986 and I hope that my right hon. Friend can again calm my fears. To echo one of her points in the Standing Committee, it would be for the taxpayer concerned to elect whether they wanted to unbundle the inheritance tax avoidance scheme in which they were involved—in some cases, from 1986 onwards—or whether they wanted to pay the assessed income tax that would come in under the proposed regime. I must tell my right hon. Friend that 1986 seems a long time to go back. Coupled with that, can she give us some assurance about transitional arrangements? If there is to be a slab effect, or a cliff-edge effect, on tax changes such as these, it could be most unsettling for some people.

I do not think that these proposals will have a huge effect in the constituency that I currently have the honour to represent, because house prices in Wolverhampton are not high. I am not aware that any house in the entire city is worth more than £1 million. It was of considerable amazement to the hon. Member for Arundel and South Downs when I made that point in Committee, but I have checked and I still cannot find one. None the less, house prices are rising throughout the country—I do not need to rehearse that—and more and more people could be above the current threshold of £255,000 or £260,000, or whatever the figure is under the Bill.

Photo of Greg Knight Greg Knight Shadow Minister (Environment, Food and Rural Affairs)

The hon. Gentleman is raising some important issues. If he does not receive the assurances he seeks from the Paymaster General and if we push the amendments to a Division, will he vote with us? If he does so, I shall be happy to withdraw reference to the word "nark".

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

I am not troubled by references to "nark"—among some of my constituents they would probably go down quite well. As I said about three minutes ago, I have every confidence in my right hon. Friend the Paymaster General. As in the stock market, past performance does not always indicate future performance, but based on my right hon. Friend's past performance, I think she will be able to give me the assurances I seek in her usual lucid way. I am eager to hear those reassurances because there are concerns about transition, about the 1986 date and about equity release schemes. However, I am sure that, armed with her fantastic preparation, my right hon. Friend will be able to reassure me on those points and I await her response.

Photo of John Gummer John Gummer Conservative, Suffolk Coastal

I shall not detain the House too long, but I want to make two simple points relating to the apprehension of what we have been discussing.

Rob Marris accused me of intervening from a pre-stated position on the subject of inheritance tax. However, as we are discussing these particular amendments, it would be wholly improper for me to delight the House with my views on inheritance tax, which may be different from the expectations of the hon. Gentleman although probably in a more radical direction.

Having said that, I should add that I have some clear views on the Government's responsibility to produce legislation that is seen by ordinary people to be fair. I am not keen on the argument that, because the amendments will not affect many people, they are not important. The issue is the fairness—or, even more important, appreciation of the fairness—of the tax system to ordinary people. I do not quite follow the Paymaster General's argument that those who have sought to avoid tax must pay it, although I think it reasonable to say, "From now on, we will have a system whereby this, that or the other may not be done, but the tax will have to be paid."

Let me return to the retrospection issue, which some of the amendments try at least to ameliorate. The difficulty is that people have made decisions about their future in the context of the law as it was at a particular time, for all kinds of reasons. They may be esoteric reasons. People may, for instance, consider the Napoleonic code in France to be a peculiar concept. As an enthusiastic pro-European, I think it entirely reasonable for us to have a different view from the French. If I wish to make arrangements—which are legal in France—to ensure that some operation that seems to be peculiar can be protected, that strikes me as perfectly reasonable.

I agree with Mr. Burnett that there is something offensive in the Government's suggestion that people who have done that have done something wrong, although I realise that he was wrong to use the word "criminal". I have a lot of very decent constituents who do not wish to be judged in this way when the judgment is unfair. The Government are saying, "That which was perfectly all right we now judge not to be all right." Those who have done things that used to be perfectly all right will be brought before the tax system, and the Government seem to be suggesting that although they may not be criminals, they have done something slightly underhand. That is neither the law of England nor, in my view, the morality of England.

The fact that the Government are doing that has caused real concern among constituents of mine who, although they are not in the category that is being caught by this provision, feel—as is so often the case—that it is not fair. I warn the Paymaster General that the one thing that one must not do in Britain is to be seen to be unfair, and I hope that she will reconsider.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury) 3:30 pm, 7th July 2004

The right hon. Gentleman's view about fairness is central. The overwhelming majority of taxpayers pay their tax. Following repeated attempts by this Government and the last Government to stop inheritance tax avoidance schemes, we are giving the taxpayer two options. We are not backdating the provision. Under the Bill, either there will be a charge to income tax on people's new arrangements or they can revert to inheritance tax and pay what is due. That will start in 2005. As I have said, there is no retrospection. All Governments change laws in Budgets, and that is all that is being done in this case.

Photo of John Gummer John Gummer Conservative, Suffolk Coastal

I am sure that the Paymaster General has studied rhetoric. If we agree with the first of her statements, everything else becomes rhetorical truth. Her first statement, however, is not correct. That first statement was "We, in retrospect, have decided that something that was perfectly acceptable at the time is now unacceptable." To unbundle a past decision is not the same as not having made the decision at the time. If what the Paymaster General has said were true in the past, my constituents and others might well have made a series of different decisions.

Equity is not just about saying, "A lot of people think that a lot of other people are getting away with it, and we are going to stop a lot of people getting away with it." Equity is about clarity, and clarity is not something that can be introduced in retrospect. Clarity is about where we are now. The Government are saying that, because they would prefer that people do not do what they did back then, they insist that they undo it. But of course, such people are not in a position to make arrangements of the kind that they might have made in 1970. That is why the provision is retrospective; indeed, it would always have been regarded as such until this Government invented a new definition of retrospection that certainly has not been accepted by the law thus far.

Photo of Mr John Burnett Mr John Burnett Shadow Minister, Home Affairs, Shadow Solicitor General, Law Officers (Constitutional Affairs)

The right hon. Gentleman is making a perfectly valid point: that because of this provision, transactions entered into after 1986 that would have been free of tax will now be subject to tax, one way or another. If that is not retrospection, I do not know what is.

Photo of John Gummer John Gummer Conservative, Suffolk Coastal

The hon. Gentleman makes the point clearly and I hope that the Paymaster General will think this issue through. In terms of the moment, decent people made particular decisions that were legal. Now, many years later, they are being told that, one way or another, as a result of those decisions, they will be taxed, yet when they made them they would not have been taxed. Had they known at the time that that would happen, they might well have done all manner of things differently, but they cannot now do so because of a decision that was perfectly proper and legal when they made it. Whether the Paymaster General likes it or not, the provision is in that sense retrospective.

I am happy for the Paymaster General to say that she believes in retrospection and considers it perfectly reasonable, but she would be wrong. Such an argument is offensive, but what is more offensive is for her to argue that the provision is not retrospective and that we should therefore accept it. It is a great pity that she has taken that line.

Complexity is indeed the proper word to use in respect of this provision. It is difficult to accept the argument that the people affected are those who have access to advice and are familiar with such matters. Certain people do not fall into that category. There are those whom the Paymaster General suggested need not be worried about the provision, even though they have never had help from specialist advisers. I would be happy to accept the Paymaster General's argument if she were saying that in no circumstances would such people be charged. However, she said that they would not normally be charged—that it is "unlikely" that they would be charged.

There is no word in the English language more frightening to anyone who has been a Member of this House for more than two minutes than the word "unlikely". Let us remember the number of Ministers— both Labour and Conservative—who have told the House that a certain thing was "unlikely" to happen. I remind the Paymaster General of what was said about the European convention on human rights. I was not one of those who took an extreme view about it, but it must be said that a lot of "unlikely" things have become very likely—as in certain—as a result. Curiously enough, in the courts, people are not being given the assurances that they expected in that regard.

If the Paymaster General were to say that the charge will not happen, there would at least be some reason to suppose that she has taken proper advice. But she has used the word "unlikely", and I still wish to stand up for those who cannot rely on any advice other than hers. Such people deserve from her a statement that is without reservation.

The real reason why I find the whole Bill and the various amendments to it profoundly distressing is that, as a result of such legislation, it will be even more essential for people who own a house to obtain professional advice.

I will stray for a moment into the court of Rob Marris to say that I do have a prejudice about the profession of solicitors. I think that there are too many of them, that they make too much money and that their operations should be restricted by having laws that are clearly comprehensible—insofar as it is possible—to all of us.

There is another profession about which I have even greater doubts—the accountancy profession, which has been given more jobs under the present Government than under any previous Government ever. The opportunities for accountants to make money have been raised by the constant complications introduced by the Government, but I want those accountants to earn their money in useful ways.

I believe that what brought down the Roman empire was not, as we all know, sodomy but a very significant increase in bureaucracy and in the number of people who did not actually earn wealth. The Government are great organisers of people who do not earn wealth. I am not talking just about 600,000 more civil servants, but about all the others besides who make money without making wealth. That is why I want a simpler system and why I support the proposals.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

I am sure that you, Mr. Deputy Speaker, would not let us stray too far into the decline and fall of the Roman empire, but the undermining of the rule of law was what led to the decline, as evidenced by the sack of Rome by the Visigoths. I declare myself to be a solicitor—though a non-practising one because, unlike many Conservative Members, I do not believe in moonlighting—and solicitors are essential to the rule of law.

My point about realty was that almost all those who engage in transactions involving its sale or lease do so with legal advice, and that the right hon. Gentleman's Government tried to simplify it by getting the solicitors out and introducing what became known as registered conveyancers. I venture to suggest that it is still the case—though I cannot prove it without going to the Library—that well over 90 per cent. of the realty transactions in England and Wales, and probably in Scotland, are carried out with professional advisers, either solicitors or licensed conveyancers, in attendance.

Photo of John Gummer John Gummer Conservative, Suffolk Coastal

The hon. Gentleman makes my point. Those people have their professional advisers at a particular point in time. When there were such advisers, professional advice was given, which in large measure seems to have been true. The Government are changing the rules and professional advice may not be necessary at this point. Curiously enough, these people feel that everything is all right. They have had their professional advice and think that things are okay. They do not know that the Government have shoved into the legislation all these complicated matters that totally change their position retrospectively. If they get frightened, perhaps with no need, what do they have to do? They have to go again, perhaps 20 years later, to professional advisers to secure the latest deal.

Those people have never had to do that before in these circumstances. What happened in the past was that the information was necessary only if something was being done afresh. What is wrong is that the professional advice is necessary when something is not being done afresh. That is why the provision is manifestly retrospective. It does not need to be argued in the delicate way of the Paymaster General. The truth is there. Professional advice has to be got when someone is not doing anything. That is retrospective.

I have expressed my concern about the professions in a fairly jokey way, but I mean what I say about the weight that the Government place on them. The amendments are designed to help a little with the problem of the weight that the Government are placing on the productive economy.

I am one who believes that Members of Parliament are better off if they do something else outside this House because it makes them a bit more in touch. Otherwise they have only their memories and theories. I wish that the hon. Member for Wolverhampton, South-West were practising as a solicitor because he would then be able to tell us a little about the real world. It is about time that we fought on that basis. I feel very strongly about it, as do my constituents. It is all very well for the hon. Gentleman to say what he did, but the fact of the matter is that there are too many people who earn their living without adding to the wealth of this nation. A system that means that people need all sorts of help to get through their lives is going to be expensively top heavy.

The proposals in the Bill are complex, unfair and retrospective. They will impose additional costs and reduce the country's effectiveness by making life unnecessarily complicated for ordinary people. The Paymaster General cannot get away with that. She is part of a Government who cannot get houses built and whose policies in other areas have increased house prices significantly. It is her fault that nothing has been done about inheritance tax levels to deal with that.

That is a great pity, as Britain desperately needs to be competitive. The Government are not in the real world: their members have not had to live in the real world for a long time. They have not had to deal with ordinary people in a detailed way, and so do not realise how difficult the proposals will make their lives.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury) 3:45 pm, 7th July 2004

I absolutely disagree with Mr. Gummer. That is why he sits on that side of the House and why I sit on this side. The proposals go to the heart of the Government's views about fairness, taxation and the right of citizens to expect Governments of all political persuasions to act with an even hand. A Government must ensure that, wherever possible, all citizens enjoy a level playing field, so that everyone can have access to the rights conferred on them by Parliament through legislation. This Government do not believe that some citizens' ability to pay for expensive and creative advice should enable them to get more out of the system.

Many hon. Members contributed to the debate and I shall deal with the points that they made in the order of their contributions. First, the House will be aware—although at times I wondered whether some of its Members were—that the proposals in the Bill are needed to tackle a range of artificial avoidance schemes. The essence of those schemes is that wealthy persons appear to give their assets away so that they can take advantage of the inheritance tax exemption for lifetime gifts. The complex legal footwork that they undertake—which is not forced on them by the Government but for which they pay and knowingly enter into—means that the schemes allow former owners to carry on enjoying the use of the assets very much as before.

No Government, and especially not this one, ever intended the inheritance tax regime to be used in that way. This Government, and their predecessor, made successive attempts to block such avoidance by making specific changes to the inheritance tax rules. The most recent attempt was in last year's Finance Act 2003.

I agree with the right hon. Gentleman in one respect, however: previous attempts in this direction led to increasingly complex legislation. Parliament was forced to follow, and mirror, the complexities of avoidance schemes to try to close them off. Parliament has tried before to impose its will by making clear what the inheritance tax regime was intended to achieve and what could be considered legitimate under the law. Despite that, the response of some taxpayers—although not all—has been to develop increasingly contrived schemes that get around the new rules. Such schemes have been marketed as packages and offered by financial advisers to a wide range of clients. As I said in earlier debates, reports suggest that as many as 30,000 such schemes have been sold since—I emphasise the word "since"—the Government declared that they intended to do something about them. That represents a potential tax loss of billions of pounds for the Exchequer.

Faced with avoidance on such a scale, the Government clearly needed to take action—I disagree with Mr. Flight about that. Schedule 15 addresses the common feature of all the schemes, which is that the former owner continues to enjoy the property that they say they have given away. It is a generic solution to a serious problem, although it has been carefully targeted. The Government have taken on board many of the points made by hon. Members, including the need for choice, the need not to have to unscramble previous arrangements and the need to consider what might happen in the future. The Government have not gone back over the past, despite the fact that the avoidance should not have happened, and any consideration of the debates in the House would prove that.

The amendments that the Government have tabled are minor in nature but complete some of the improvements that were discussed in Committee. Amendments Nos. 91 to 93 refine the exclusions in paragraph 11 of schedule 15 and deal with the point that Mr. Burnett made about overseas property. Paragraph 11 deals with cases in which the property originally disposed of and still enjoyed by the taxpayer is still reflected, directly or indirectly, in the value of the estate for inheritance tax purposes. We have no quarrel with that and have made no change.

Whatever our differences about the broad approach of this legislation, I hope that we are agreed that the charge should not apply to structures that clearly cannot involve inheritance tax avoidance. We have done everything that we can to ensure that.

Until now, we have not covered arrangements that are unusually complex. For example, property might be owned by a company and the taxpayer is made a gift, with reservations, of shares in the company. The value of the shares reflects the value of the underlying property. The right hon. Member for Suffolk, Coastal can see, therefore, that such schemes are not simple arrangements that people wander into. The shares are, therefore, treated as part of the taxpayer's estate under existing rules. The case for exempting such schemes is essentially the same as we discussed in Committee and the amendments complete the process that was started in Committee. I hope that they satisfy the points that the hon. Members for Torridge and West Devon and for Arundel and South Downs made.

Amendment No. 94 corrects an incorrect cross-reference in paragraph 13(3)(c) and does nothing else. Amendments Nos. 95 to 108 refine and improve the election provided for in paragraphs 21 to 23 of the schedule, which allow taxpayers to choose to have the property in question treated as part of their estate for inheritance tax purposes. The election allows people to reverse the tax effects of those avoidance schemes without having to unscramble all the legal machinery that they used to achieve them in the first place.

It is obviously important that the detailed machinery should work smoothly across the full range of cases to which it applies. In particular, it is important that the election should bring back into inheritance tax only values that are commensurate with what the taxpayer originally sought to shelter from tax. In some cases, the taxpayer will have less than a 100 per cent. stake in the caught property. The charge under schedule 15 is rightly scaled down in such cases to reflect the extent of the taxpayer's interest, and it is right that the same should apply to the value brought back into IHT if the taxpayer makes the election. The Government amendments will ensure that, when an election is made, only the appropriate proportion of the property's value is brought back into the person's taxable estate. They also provide the opportunity to clarify the detailed operation of such elections in other respects—for example, what the election applies to if the subject matter changes after the election has been made.

Before I move on to the Opposition amendments, I wish to say that, as hon. Members know, current provisions in the IHT rules will not be disturbed by these rules in the extreme case where a parent moves back owing to ill health, there is a carer and an arrangement is made. None of that will be disturbed with further exemptions. I was chastised for using certain words, but the value of the property would have to exceed twice the allowance to make any difference. So, frankly, we can dispose of that point as well.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

No, I should be grateful to the hon. Gentleman if he would allow me to make a little progress on the Opposition amendments. I might be able to help with some of those points. If not, of course, I will give way to him.

I now turn to the Opposition amendments. Amendment Nos. 1 and 4 suggest that the charge under schedule 15 should not apply where the potential taxpayer owned the caught property for at least seven years before getting rid of it. Why? If that is the intention, it is difficult to understand what the point is, apart from a desire to wreck the charge. That may be the intention, but why should we set an arbitrary limit? I am not attracted to those amendments.

Amendments Nos. 2, 3, 5, 6 and 8 would disapply the charge under schedule 15 from any arrangement made on or before 19 June 2003, which is the effective date for the anti-avoidance legislation in the Finance Act 2003 and directed at the so-called Eversden schemes. Those amendments represent an attempt to reopen something that the House settled last year in the Finance Act 2003. The Government absolutely reject the thinking behind those amendments. I simply do not understand why the Opposition think that the Eversden case gave a permanent seal of approval throughout the tax system to the future consequences of such schemes. I certainly do not accept that suggestion.

Amendments Nos. 7 and 9 are intended, I imagine, to cover cases where a settlor's continuing interest in the property that he or she once owned is regarded as too remote to justify the charge for one reason or another, but that could be readily exploited to let through cases that we would very much want to be caught by the schedule. Any problem in a case that can be fairly regarded as half innocent will be resolved easily enough using the other means provided in these arrangements. That part of the schedule is directed at very real mischief in the form of artificial—that is, not real—trust arrangements that allow people to put wealth outside their inheritance tax estate, while retaining effective access to those assets. Designers of those schemes have been more than willing to create artificial trust arrangements to exploit loopholes, so we can be quite sure that they would do so again if we were knowingly to leave loopholes in schedule 15, which the amendments would do.

We cannot accept amendment No. 10, which also touches on equity release. We drafted the proposal in schedule 15 against the background of the widespread and growing use of avoidance schemes by people trying to protect their wealth against inheritance tax. The amendment would allow the great majority of those schemes, and any such future schemes, to escape any charge under the schedule.

I accept that the amendment also addresses the sale of shares of interests in land. We considered applying the schedule to the sales of part-interests when we discussed the matter in Committee. I agreed that a point deserved thought, so I promised to consider it further, but said that I could not promise to deal with that before Report—I have not been able to do so. However, we accept that an owner could sell a part-interest as an element of an arm's length equity transaction while retaining the right to occupy the property. We are ready to explore that issue further with firms that undertake such transactions to determine whether action is needed and, if so, to establish exactly what needs to be done. Amendment No. 10 demonstrates why we would be wrong to rush into the process, but I am glad to repeat to my hon. Friend Rob Marris and the hon. Member for Arundel and South Downs the commitment that I made in Committee to examine part-sales further. If we find that there is a real problem, we will address it either through regulations or a future Bill, and we will cover the time periods that would be relevant.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West 4:00 pm, 7th July 2004

I am reassured by what my right hon. Friend says and thank her for it.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

I am relived to hear that. Although I do not wish to embarrass my hon. Friend, he has displayed an acute understanding of the issues in the Bill. He has explained things clearly and sometimes challenged Ministers, which is always unexpected from one's own side, but to be welcomed.

Amendment No. 11 is an attempt to provide a window of opportunity in tax years 2004–05 and 2005–06 for transactions that would otherwise be caught by the charge in schedule 15 to be unscrambled. It would achieve that by undoing the tax consequences that would normally arise—for income tax, capital gains tax, stamp duty land tax and inheritance tax—from any steps taken to get a property back into the hands of a former owner. I must tell the hon. Member for Arundel and South Downs that I would have had sympathy with the thinking behind the amendment if we had not already recognised his underlying concerns and addressed them in a different manner.

We raised the issue of unscrambling in the consultative document that the Inland Revenue published following last year's autumn statement. We asked for representations on how we might best cater for the transitional issues—my hon. Friend the Member for Wolverhampton, South-West raised that point, too. The responses made it clear that unscrambling would not be practicable for most individuals affected, and that guided our approach on the Bill. We concluded that the election provision in paragraphs 21 to 23 of the schedule represented the best way of allowing former owners effectively to take back the value of their properties into their estates for IHT purposes. My hon. Friend will remember that we said in Committee that the election was allowed to roll forward to the point where the income tax charge would arise. It does not necessarily have to be made in 2005—that is, if there were no charge in 2005. I believe that we have provided for the transition as well.

Amendment No. 44 would increase the de minimis limit in schedule 15 for a benefit of £5,000 a year to one of £50,000, assuming that taxable benefits might typically reflect a yield of 5 per cent. on the capital value of the assets involved. That would allow wealthy owners to get rid of assets worth up to £1 million and retain the use of them without attracting a charge under schedule 15.

The existing de minimis threshold is already set at a generous level and corresponds to capital values of about £100,000. Increasing the level would allow people who have a great deal of money to continue to have an unfair tax advantage compared with everyone else.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

Perhaps the hon. Gentleman will allow me to finish responding to the amendments. It has been a long debate, but of course I will give way to him. I am nearly at the end of my response.

Amendments Nos. 45 to 49 would disapply the charge under schedule 15 from any arrangements made before the date of the pre-Budget report. I referred earlier to the fact that between that report and publication of the Finance Bill, at least 30,000 schemes were marketed to try to get round the legislation, which the House has not yet finished considering. That reflects the view that schedule 15 is retrospective in its effect. However much I may offend Conservative Members, I do not accept that view. People with structures affected by schedule 15 have made arrangements that they fully intended to make for future effects. That is the whole point of the exercise. Anyone doing that must face the possibility that future tax changes will affect the future tax consequences of what they have done. I would be amazed if their financial and legal advisers did not have that little caveat at the bottom of the agreement, pointing out that this is not a guarantee for all time because tax consequences can change.

If schedule 15 brings home the message that avoidance is not a one-way bet—by that, I mean that people do not just get away with it and then do not have to do anything about it—it will be a useful addition to the direction of the benefit in the schedule. We are saying that it is better if people do not attempt change in the first place. The law of the land is that people pay this tax, and we expect them to do that. We as parliamentarians, not as any one political party—

Photo of John Gummer John Gummer Conservative, Suffolk Coastal

I can accept what the right hon. Lady says if she will admit the simple fact that this is retrospective legislation. It means that somebody who made a change believing that the law would treat them fairly—believing that what they did was legal then and, therefore, was not attacked, as the right hon. Lady is doing—did so on the understanding that the effect of that would start when the change took place. For example, they might have given away their house and not enjoyed it at all. They might have decided that that was a reasonable choice to make. That cannot take place retrospectively. Therefore, the right hon. Lady's actions are retrospective. Will she admit that the provision is retrospective?

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

No, I will not. I cannot admit to that because it is not correct. To be retrospective would be to give ourselves legislation and go back over the years during which we are saying that this process should not have been undertaken. We have said all along that this tax planning should not have been undertaken, but it has. We have set a date in the future—April 2005. Assuming that this part of the Bill passes through Parliament, the provision will become the law of the land and it will have to be complied with. If someone has given their property away and receives no benefit from it—inheritance tax allows for that possibility—they are not affected by the schedule, which is aimed at people who say that they have given away their property, but have not. The provision is not retrospective, but as the law of the land is changing, we have established transitional arrangements and have spelt out a long list of exemptions. I am sure that people will continue to argue that retrospection—the previous Government did, in fact, engage in such practices—should apply so that a change in the law can affect the past. The past is left alone, but people can elect to pay inheritance tax when liable—in such cases, there is no income tax charge—or maintain their existing arrangements. If they benefit from an asset that they allegedly gave away, they will be subject to a de minimis charge of £5,000. I therefore disagree with the right hon. Member for Suffolk, Coastal about retrospection.

Photo of Mr John Burnett Mr John Burnett Shadow Minister, Home Affairs, Shadow Solicitor General, Law Officers (Constitutional Affairs)

I shall not tackle the right hon. Lady about retrospection, but the position could be ameliorated. We talked about rhetoric, but what about logic? A major problem with the provision is that income tax is being used to deal with a perceived or actual inheritance tax problem. As I said at the start of my speech, assets or gifts in excess of £100,000 will be caught, because the de minimis level is £5,000. Would it not be logical to have a de minimis level of £12,500, to reflect one twentieth of the current inheritance tax exemption?

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

We are using a charge for benefit in kind. If someone has the benefit of something that they claim they no longer own, such as a house or a painting that for centuries has hung in a room and has not left it, the market says that someone else does, so there must be a charge to the former owner for that benefit. The de minimis levels are perfectly reasonable, and I repeat that about 32,000 estates a year are subject to inheritance tax.

We discussed the issues underlying amendment No. 225 in Committee. People use what schedule 15 calls "settlements" for many good non-tax reasons. Unfortunately, however, others use them for avoiding tax such as income tax and capital gains tax, and there are existing provisions to counter that. They are also used to avoid inheritance tax, and schedule 15 introduces a new income tax charge to make that less attractive. Trusts may sometimes fall foul of one or more of the existing anti-avoidance provisions, as well as the new charge under schedule 15. When that occurs, schedule 15 allows a deduction for income tax or capital gains tax already due against the benefit otherwise chargeable under schedule 15. That is generous—arguably, over-generous—but we are content to err on the side of generosity.

The Opposition want to go further and allow a tax credit against tax, so if one paid enough tax under the existing provision, nothing would be paid under schedule 15. That would encourage the artificial arrangements that schedule 15 is designed to discourage and, indeed, the growth of the inheritance tax industry, which the right hon. Member for Suffolk, Coastal wants to prevent.

Amendment No. 226 is surprising and, perhaps, revealing. It would delete an existing simple relief on straightforward family transactions by people of moderate wealth, and would replace it with a provision that is much less certain in its effects, but much more attractive to wealthy prospective avoiders. It would withdraw relief from many of the innocent cases that Conservative Members purport to want to protect, and is therefore unacceptable.

Amendment No. 227 makes a point about how inheritance tax stands after the Bill was amended in Standing Committee. The provision in question exempts cases that would normally amount to gifts with reservations for inheritance tax purposes. It was pointed out to us that the Bill, as first published, covered only one of the two instances in the current inheritance tax legislation to which the exemption applies, so we amended it in Standing Committee to extend the relief to both possible instances. We all agree that that amendment was necessary; the only question is whether the text, as amended, achieves the required result. I am told that the schedule achieves that objective, so I am happy to assure the hon. Member for Arundel and South Downs that the Revenue understands the matter in that sense and will apply the legislation accordingly.

In conclusion, I apologise to the House for the length of my reply, but the issue is hotly contested. I have dealt with the points raised by the amendments and resisted the wider debate about inheritance tax and fairness. I commend the Government amendments to the House and hope that the Opposition amendments are withdrawn, because they are wrong in principle. If the Opposition amendments are pressed to a vote, however, I ask my hon. Friends to oppose them.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary To the Treasury, Economic Affairs, Shadow Chief Secretary to the Treasury 4:15 pm, 7th July 2004

The exemption to the gifts with reservations rules to which amendments Nos. 1 and 4 relate was introduced by the Labour Government in 1999 and specifically applies to gifts of farm land, where the donor continues to enjoy the land as a partner under the terms of a partnership that had been in place for at least seven years prior to the gift. That is the simple reason for the reference to seven years, and the amendment is designed to continue an exemption that the Government introduced.

On the bigger issue, amendment No. 11 is not perfectly worded, but the Paymaster General knows that the Government have refused to address the problem with their unscrambling formula. If one unscrambles, one does not end up in the same position as if one had never made the arrangements in the first place, because the property in question ends up with a base cost for capital gains tax, which goes forward to the next generation and is almost certainly hugely below what it would be if one had never made the arrangements in the first place. The unscrambling arrangements are an extremely damaging form of transitional arrangement.

Without rehearsing all the arguments, my hon. Friends and I remain of the view that the legislation is retrospective. It applies substantial taxation to transactions entered into as far back as 18 years ago, when they were perfectly legal and, indeed, when the Inland Revenue said that they were perfectly legal. If that is not retrospective, I do not know what is.

We do not wish to put amendment No. 1 to the vote, because the issue is very clear, so long as the Government understand what it is. However, we wish to press to a vote amendment No. 2, which relates to the fundamental issue of retrospection.

I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendment proposed: No. 2, in page 356, line 26, leave out "17th March 1986" and insert "19th June 2003".—[Mr. Flight.]

Question put, That the amendment be made:—

The House divided: Ayes 153, Noes 265.

Division number 219 Clause 5 — Rates — Schedule 15 — Charge to income tax on benefits received by former owner of property

Aye: 153 MPs

No: 265 MPs

Ayes: A-Z by last name

Tellers

Nos: A-Z by last name

Tellers

Question accordingly negatived.