New Clause 1 — Application of section 18 IHTA 1984

Orders of the Day — Finance (No. 2) Bill – in the House of Commons at 3:30 pm on 2nd May 2006.

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'Notwithstanding any provision of this Act, section 18 of the Inheritance Tax Act 1984 (transfers between spouses) shall continue to apply to transfers of value between spouses to the extent to which they are exempt transfers under the provisions of that section.'.—[Mrs. Villiers.]

Brought up, and read the First time.

Photo of Alan Haselhurst Alan Haselhurst Deputy Speaker and Chairman of Ways and Means

With this it will be convenient to discuss the following: Amendment (c) to the new clause, in line 1, leave out from 'Act' to end of line 4 and insert—

'all transfers of value made on or after 22nd March 2006 which would have been exempt under section 18 of the Inheritance Tax Act 1984 (transfers between spouses) if made immediately prior to 22nd March 2006 shall continue to be exempt.'.

Amendment (a) to the new clause, in line 2, at end insert—

'written into trust by will, life assurance policy and lifetime gift'.

Amendment (b) to the new clause, in line 3, after 'spouses', insert 'and civil partners'.

New clause 2—Application of section IHTA 1984 (No. 2)—

'Notwithstanding any provision of this Act, section 18 of the Inheritance Tax Act 1984 (transfers between spouses) shall continue to apply to transfers of value written into trust by will, life assurance policy and lifetime gift to spouses and civil partners for two years until——

(a) a full consultation has been undertaken about the operation of that section;

(b) a Regulatory Impact Assessment of the operation of that section has been completed; and

(c) the impact of the Act on transfers of value written into trust through wills, lifetime gifts and life assurance policies has been calculated.'.

New clause 3—Application of section IHTA 1984 (No. 3)—

'Notwithstanding any provision of this Act, all transfers of value made on the death of a person on or after 22nd March 2006 but before 6th April 2008 which would have been exempt under section 18 of the Inheritance Tax Act 1984 (transfers between spouses) if made immediately prior to 22nd March 2006, shall continue to be exempt.'.

Photo of Theresa Villiers Theresa Villiers Shadow Chief Secretary to the Treasury 3:35 pm, 2nd May 2006

I beg to move, That the clause be read a Second time.

The aim of the new clause is to ensure that husbands and wives continue to be free of the burden of inheritance tax when they transfer property to each other;
to ensure that nothing in the Bill narrows the operation of the long-established spouse exemption from inheritance tax in section 18 of the Inheritance Tax Act 1984;
and to ensure that all transfers covered by section 18 before Budget day will continue to be covered, regardless of other provisions in the Bill, including schedule 20. I am not sure that the Government are minded to accept new clause 1, but if they do so, my hon. Friend Mr. Gauke will wish to move amendment (c). The Opposition are happy to support that amendment, and hope to press the matter to vote, as it has the same general goal as new clause 1, but has more watertight drafting. In the unlikely event that new clause 1 and amendment (c) are accepted there would still be a number of significant problems with schedule 20, to which the Opposition propose to return in Committee.

Photo of Chris Bryant Chris Bryant PPS (Rt Hon Lord Falconer of Thoroton, Secretary of State), Department for Constitutional Affairs

The hon. Lady said that her new clause applies to spouses. For the avoidance of doubt, will she accept amendment (b), which could improve it by including civil partners?

Photo of Theresa Villiers Theresa Villiers Shadow Chief Secretary to the Treasury

The hon. Gentleman makes a very good point, which I have already taken on board. In my view, section 103 of the Finance Act 2005 means that new clause 1 covers civil partners as well. Essentially, section 103 and the related delegated legislation give civil partners in this context the same rights as spouses. If we solve the problem for spouses, we automatically solve it for civil partners, too.

The Opposition believe that it is vital to save the spouse exemption for husbands, wives and civil partners for the reasons that it was introduced in its present form by the Callaghan Government in 1975—to reflect society's concern for the welfare of bereaved spouses, and to mitigate severe hardship when matrimonial homes had to be sold to pay the tax bill. There are two new modern reasons to reinforce the need to retain the exemption. The first has already been raised by Chris Bryant. It is important to preserve the spouse exemption for civil partners, to whom it has only just been granted. As I said, if we are successful today in protecting spouses, section 103 of the Finance Act 2005 will protect civil partners. Secondly, rising house prices, particularly in London and the south-east mean that many more middle-income families are caught by inheritance tax, and could therefore be hit by the changes in the Bill.

The Law Society recently conducted a survey asking its members which of their clients would be affected. I shall quote just a few of the answers. They were people from

"every walk of life—teachers/nurses/engineers/computer professionals/office workers/ bank staff/engineers/manual workers—anyone who lives in their own home in the South of England . . . police officers . . . Civil servants, local government officers, doctors . . . shopkeepers: retired people of moderate means who have been prudent . . . office managers . . . self-employed small business men and women (taxi drivers, carpenters, joiners, plumbers, builders, decorators). Ordinary families working hard to pass saved income to children. Second-marriage couples with an average-priced property wishing to make flexible arrangements for spouse and children. All types, not necessarily high earners but prudent savers and budgeters. Any couple with a 3 bed detached or 4 bed semi who have young children. Regular middle income earners. A whole range of ordinary people—people who have tried to work hard and save for their children's future."

Photo of Theresa Villiers Theresa Villiers Shadow Chief Secretary to the Treasury

We are not talking about the bands of inheritance tax—that is not the debate—but about new additional and penal inheritance tax charges that will apply to circumstances that are now altogether free of inheritance tax.

On Second Reading, the Paymaster General said that the measures on trust proposed in the Bill were aimed at preventing "wealthy individuals" from

"using trusts . . . to shelter their wealth from inheritance tax."—[Hansard, 24 April 2006; Vol. 445, c. 460.]

However, trusts seldom give rise to any tax advantages whatever; they are generally tax-neutral. As the impressive coalition of professionals campaigning against these measures has pointed out, the trusts penalised by the Bill are generally motivated by unobjectionable non-tax objectives: family and social objectives, which will become prohibitively expensive as a result of the proposed measures.

Since estate duty was introduced in 1894, trusts have received broadly the same tax treatment as outright gifts. For example, under current rules, a gift on a flexible trust to a spouse, with the remainder going to children at the age of 25, is taxed in the same way as an outright gift of the property to the spouse, which is then passed on to her children on her death. Thus, the tax exemption means that no tax is charged on the first death, but the capital is charged at the full rate when the surviving spouse dies and the property passes to the children.

Far from removing some sort of privileged status, as the Paymaster General claimed on Second Reading, the Government are effectively proposing to introduce additional new and penal tax charges on trusts, treating them more harshly than an outright gift. The Chancellor is actually tearing up a 100-year consensus, repeated only recently by the Revenue in its attempt to maintain a tax system for trusts that does not provide artificial incentives to set up a trust, but equally avoids artificial obstacles to using trusts where they would bring significant non-tax benefits.

Before Budget day, section 18 of the Inheritance Tax Act 1984 exempted gifts on trusts to spouses in exactly the same way as the system operated for outright gifts and transfers. Unless the Bill is amended, it will become almost impossible to set up a trust for a spouse without losing the exemption, as it will incur an immediate inheritance tax charge on the death of the first spouse. The spousal exemption will survive only in cases falling under the definition of an immediate post-death interest, complying with six very narrow and restrictive conditions set out in the new section 49A of the 1984 Act, as proposed in schedule 20.

No one has yet been able to say with certainty how the six opaquely drafted conditions will apply in practice. It seems clear that severe problems will be caused by conditions 1, 3 and 4. Condition 1 states that the gift must take effect by will or intestacy. That means that spouses will no longer be able to set up trusts for one another during their life time without incurring the new charges. A particular concern is that it is not clear that condition 1 will be satisfied where a trust has been established not under a will, but under a pension policy or death in service arrangements, leaving the threat of the new charges applying in those circumstances.

Condition 3 requires that the power to terminate the surviving spouse's life interest is exercised only by the spouse or with the spouse's permission. That sounds technically innocuous, but the net result is that a significant number of trusts created on divorce would fall outside the provisions of condition 3, with the risk of the new charges applying.

Condition 4 provides that the life interest for a surviving spouse will qualify for the exemption only if, following its termination, assets pass absolutely to the beneficiaries. With very limited exceptions, if the property remains in trust after the death of the live tenant, the spouse exemption will not apply. The net effect of those conditions is that, if there is any flexibility in the trust, the spousal exemption is lost and a bereaved spouse or civil partner will face an immediate inheritance tax bill.

Photo of Michael Fallon Michael Fallon Chair, Treasury Sub-Committee

Given that we are dealing either with divorce or the death of one spouse, which is more likely to be the man than the woman, is not the net effect of the restrictions effectively to penalise women rather than men?

Photo of Theresa Villiers Theresa Villiers Shadow Chief Secretary to the Treasury

My hon. Friend makes a powerful point. The measure will impact with disproportionate harshness on women.

Because of the rule against flexibility, the spouse exemption will be lost in virtually every case where a trust is set up. Until Budget day, a lawyer who drafted a trust without flexibility might easily find herself on the end of a negligence suit. Indeed, flexibility in trusts has been considered so important that Parliament specifically inserted flexibility into trusts via section 32 of the Trustee Act 1925. The Government's response is to say that if people want to keep their spouse exemption, they can change their wills or vary existing trusts and opt for outright gifts or the restrictive trusts that comply with the conditions that I have just outlined in the new section 49A, but this is not an adequate answer.

The proposals will have a disproportionate effect on many people who, for family reasons—not for tax reasons—do not wish to make outright gifts to their spouse. These people face the invidious choice between making arrangements that they believe are inappropriate for their family's welfare, or facing an unwelcome extra tax bill that could require the family home to be sold.

Photo of Helen Goodman Helen Goodman Labour, Bishop Auckland 3:45 pm, 2nd May 2006

Can the hon. Lady explain what sort of family reasons those would be?

Photo of Theresa Villiers Theresa Villiers Shadow Chief Secretary to the Treasury

Certainly. I will come to that in a moment.

Flexibility is built into modern trusts to help people deal with the complexity of family life in modern Britain and provide responsibly for the future of their families. The Law Society survey to which I referred earlier reported one of its members as saying:

"I prepare at least one will every week of my working life—the majority of my clients who have set up life interest trusts in their will do so to protect children from a first marriage whilst looking after the second spouse or as protection for the children of the same marriage—all this talk of tax evasion is nonsense. The traditional family set-up is no more—trusts have evolved in line with this—it is a shame that the Government has sought to undermine this."

Typical everyday instances where people set up flexible trusts include, as the quote suggests, the need to provide both for a spouse from a second marriage and for the children of a first marriage. A trust can be an invaluable aid in achieving the difficult task of mediating between the interests of step-parents and stepchildren. Trusts are also used to provide for children when a surviving spouse is young and likely to remarry and possibly have children from a subsequent marriage, or to enable trustees to continue to look after the interests of a spouse when old age may mean that mental capacity is affected, or when people are not confident enough that they can foretell all the family circumstances that will apply in a few years. One must remember that wills may be made well in advance of death and in the expectation that they will hold good and provide the right answer for many years to come.

Photo of Helen Goodman Helen Goodman Labour, Bishop Auckland

Can the hon. Lady explain why a person would want to set up a trust, rather than changing their will if, for example, they got married again or had more children? I do not see the need for a complicated trust device with special rules.

Photo of Theresa Villiers Theresa Villiers Shadow Chief Secretary to the Treasury

The trust allows the testator to split the property between his second spouse and his children in a way that he believes is sensible and balances their interests. The typical arrangement is for the second spouse to be given access to the income from the property and the right to live in a property, but for the capital to be preserved and passed on to the children on death.

The legislation ignores the realities of modern family life. Trusts provide an invaluable prop for those who are juggling the competing and sometimes conflicting interests of different family members—a prop that the Government wish to kick away. As Stephen Pallister of solicitors Charles Russell pointed out:

"Thinking of the numerous and obvious reasons why a spouse might leave their estate for the other on death—health, financial difficulties, unstable personality, second marriage and wanting to preserve the capital for the children of a first marriage, etc.—this is a gross mistake by the Government."

Even if people are prepared to sacrifice the flexibility that I have mentioned to avoid the new charges, there are further flaws in the Government's argument that there is no problem with their proposal because people can change their wills or trusts to prevent the new charges from applying. The first problem is that the power to vary the trust is exactly the type of flexibility that the Government seek to outlaw through the restrictive conditions on receiving the spousal exemption, so it seems odd that they are defending their actions by encouraging people to use the system that they propose effectively to outlaw.

Secondly, many variations can be carried out only by going to court—for example, where children are involved—which may not give people permission to vary the trust. The costs of a High Court hearing in the chancery division are prohibitive and will not be justifiable in most of the cases covered by the new rules. Furthermore, there must be a question mark over how well the courts will cope with the significant burden of hearing so many cases.

Frankly, it is not easy to see exactly what tax problem the Revenue is targeting with its proposals. It has indicated informally that its concern is a situation in which the surviving spouse gives up their life interest and distributes all assets to the trust for the next generation. If that is the Revenue's concern, then it is attacking the wrong target. It is not the flexibility in the trusts that allows people to reduce their tax bill in the situation that I have outlined, but the use of the potentially exempt transfer system, which exempts the transfer of the life interest from inheritance tax, if the spouse survives for seven years after they have given up the life interest.

Photo of Sharon Hodgson Sharon Hodgson Labour, Gateshead East and Washington West

Is it not the case that setting up trusts is just a way for a few wealthy individuals to avoid paying inheritance tax?

Photo of Theresa Villiers Theresa Villiers Shadow Chief Secretary to the Treasury

As I have said, setting up a trust does not provide inheritance tax advantages. People set up trusts in order to look after their families.

Rather than clobbering all flexible trusts, why not retain the current, long-established rules for trust taxation, which have worked well, but provide that if a spouse's life interest terminates during their lifetime and the assets pass to a continuing flexible trust, then it automatically gives rise to a chargeable transfer, in which case the potentially exempt transfer regime does not apply? That would achieve the result that the Revenue wants more effectively, and it would do so without inflicting the collateral damage of infringing on people's freedom to provide prudently for the future of their families in the way in which they want to and of requiring 1 million wills to be rewritten. We are prepared to work with the Government and expert groups to draft a targeted amendment along those lines.

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

The hon. Lady has acknowledged that any transfer to a spouse is exempt. Will she explain why somebody would set up a trust during their lifetime to transfer assets that are exempt from inheritance tax to their spouse?

Photo of Theresa Villiers Theresa Villiers Shadow Chief Secretary to the Treasury

The problem in relation to the creation of lifetime trusts is not nearly as serious as the problem in relation to the creation of trusts on death, because the creation of lifetime trusts is much more unusual. The significant problem concerns the limitations on someone's right to set up a trust on their death.

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

As the hon. Lady has acknowledged, there will be no change to the rules on the transfer to the spouse on death of all interest in all property. Those rules will not be changed at all by these arrangements, so what is the point that she is trying to make?

Photo of Theresa Villiers Theresa Villiers Shadow Chief Secretary to the Treasury

The Paymaster General is right that there is no change to the rules on making outright transfers to the spouse. The Government propose to change the rules where trusts are set up for spouses, which is a significant restriction of the spousal exemption. Section 18 of the Inheritance Tax Act 1984 explicitly refers to the ability to set up trusts, and the Paymaster General proposes to limit the ability of people to set up such trusts.

Photo of Ann Coffey Ann Coffey PPS (Rt Hon Alistair Darling, Secretary of State), Scotland Office, PPS (Rt Hon Alistair Darling, Secretary of State), Department for Transport

Will the hon. Lady explain to the Committee why she feels comfortable in supporting trusts that protect the wealthiest members of our society from paying inheritance tax?

Photo of Theresa Villiers Theresa Villiers Shadow Chief Secretary to the Treasury

Trusts protect a wide range of some of the most vulnerable people in our community. If Members do not believe me, they should think back to my quotations from the Law Society—from people who are working on the ground managing people's arrangements for their wills. It is probably in the interests of lawyers for the proposals to go through, because everyone will have to go to them to get their wills changed, yet they care so passionately about the ordinary, middle-income, hardworking, prudent people whom they represent that they are campaigning against the changes in order to enable them to continue to be able to set up the trusts they wish.

Photo of Philip Dunne Philip Dunne Conservative, Ludlow

I am sure that my hon. Friend is aware that for the past six or seven years every solicitor practising family law who has been asked to draw up a will has recommended to their clients that in the event that they have children or have been divorced, or both, it is in their interests that their will is written into a trust, irrespective of the value of assets in their estate. Moreover, given that average house prices are approaching the point whereby several years hence the majority of estates are likely to fall within the inheritance tax net, we are talking not about the rich but about householders.

Photo of Theresa Villiers Theresa Villiers Shadow Chief Secretary to the Treasury

I am grateful to my hon. Friend. For many years, it has been a standard part of more or less every will drafted for a family to include a trust because those arrangements make sense in balancing the different interests of different family members.

While I am broadly sympathetic to the objectives of the Liberal Democrat amendments, I prefer the approach taken in new clause 1 and amendment (c). I appreciate the importance of safeguarding the interests of civil partners, but new clause 1 and amendment (c) already cover that when read in conjunction with the existing legislation.

On new clause 2, I agree that postponement of the measures to give time for consultation and reflection would be very welcome. Amendment (a) and new clause 2 refer to life assurance. On Second Reading, the Chief Secretary said that life assurance policies are not affected by the Bill. If that is the Government's aim, I am not convinced that they have yet achieved it. Although reassurance on the point was rushed into the explanatory notes at the last minute, Kevin Martin, president of the Law Society, later disclosed:

"The Revenue has confirmed to us that the Finance Bill does indeed contain nothing on this. There is no specific exclusion for life policy trusts as has been widely claimed. Millions of wills and life policy trusts may be caught."

The Revenue's assurances on life policies seem to be based on the view that premium payments are not additions to the trust because they are made pursuant to the terms of the policy contract. That contested view of the legal position is scant comfort for the policyholders who could be hit with the new IHT charges. Skandia Life has said that as many as 4.5 million people could be affected. In any event, life policies settled on accumulation and maintenance trusts would still be affected. The problem has not been solved, and I hope that the Government will consider taking appropriate measures to tackle it in the Bill.

I urge the Government to accept new clause 1 and amendment (c) and reverse their decision to impose new inheritance tax charges on trusts for spouses and civil partners. I urge them to scrap all the penal new inheritance tax charges that they are proposing. First, no proper consultation has taken place on these new taxes. The Chancellor left them out of his Budget speech and the Revenue failed to mention them in the entirety of a detailed two-year consultation process that it carried out on the taxation of trusts. Secondly, these taxes are retrospective. They apply to existing wills and trusts, many of which will be expensive, difficult and in some cases impossible to amend. Thirdly, no effective assessment has been made of their impact. Upwards of 1 million wills of ordinary working people may need to be reviewed and rewritten, with all the huge costs that that would entail. Finally, they would amount to a tax on prudent families and impact harshly on thousands of ordinary, hardworking people whose only crime is to provide responsibly for their families and to plan for an uncertain future.

If these harsh new tax proposals are anything to go by, the future that middle England faces in Brown's Britain is more uncertain and grim than ever.

Photo of Chris Bryant Chris Bryant PPS (Rt Hon Lord Falconer of Thoroton, Secretary of State), Department for Constitutional Affairs 4:00 pm, 2nd May 2006

I intend to speak briefly because I want to make only two points.

First, although Mrs. Villiers sounded reasonable, she exaggerated the need for any changes to the Government's proposals. Indeed, Mr. Dunne, who perhaps owns property that far exceeds the expectations of any of my constituents, gave the game away when he said that half of all properties in Britain will soon—in a matter of a few years—go over the threshold. Not a single property in the Rhondda sells at £300,000. The idea that 50 per cent. of estates in the next few years will reach £325,000 is extraordinary. The hon. Gentleman's mathematics need to be better because between 94 and 96 per cent. of estates do not reach that threshold today and will not do so with the increases in the threshold that the Bill proposes.

Photo of Philip Dunne Philip Dunne Conservative, Ludlow

Clearly, I am not familiar with property values in the Rhondda, but I know those in my constituency of Ludlow, where the average property value exceeds £200,000. I understand that the average property value in the south-east of England exceeds £300,000.

Photo of Chris Bryant Chris Bryant PPS (Rt Hon Lord Falconer of Thoroton, Secretary of State), Department for Constitutional Affairs

The hon. Gentleman can speak for his constituency, but I dare to suggest that if he considers the whole country, his statement that 50 per cent. of estates will be valued at more than £325,000 in the next few years is a gross exaggeration.

When the hon. Member for Chipping Barnet gave her list of teachers, fire officers and others, she appeared to suggest that all of them—every teacher in the country—will suddenly have to put together a new will and a new trust. She clearly has not met teachers in my constituency, or in the majority of constituencies, who will not get anywhere near the £325,000 figure. Consequently, her comments constitute scaremongering, which is an inappropriate approach to the Bill.

Secondly, the reason for my opposition to new clause 1 and my wholehearted support for the Government's proposals is that there are two alternative directions of travel in which we can move on inheritance tax. One is to undermine inheritance tax—not necessarily by pledging to abolish it, but by suggesting that one disagrees with it and would like to abolish it even if one does not have the gumption to say so. On the other hand—I may be about to step into old-fashioned shoes—some of us believe in inheritance tax for the simple reason that the greatest source of inequality and inequity in British society is inherited wealth. If we do nothing, especially when the wealthiest in our society are doing extremely well, to undermine the progress towards greater inequality, we undermine the fabric of the society in which I want and choose to live.

The hon. Lady was wrong to table new clause 1. We need to do what the Government propose and try to ensure that there are not many different ways of exempting oneself from inheritance tax and that there are not ways that are especially available to the wealthiest in society, who can afford expensive consultants on tax and other matters.

Photo of John Thurso John Thurso Liberal Democrat, Caithness, Sutherland and Easter Ross

The hon. Gentleman is too kind. I quite understand the logic of his argument, but will he tell me whether he would like the Government to remove all exemptions to inheritance tax and to apply it to everyone across the board with no exceptions?

Photo of Chris Bryant Chris Bryant PPS (Rt Hon Lord Falconer of Thoroton, Secretary of State), Department for Constitutional Affairs

No. This is another area in which the hon. Member for Chipping Barnet exaggerated earlier. She seemed to suggest that spouses and civil partners were suddenly going to face a new problem in relation to inheritance tax. I do not believe that to be true; it is an exaggeration. However, the Paymaster General might want to clarify the one genuine point that the hon. Lady raised when she described the situation of someone who remarries and wants to ensure that some of their property goes to the children of their first marriage, and that the second wife is happy with that arrangement, as is often the case. Perhaps the Paymaster General could clarify precisely how that will still be possible.

To return to the question that John Thurso asked me, of course there should be exemptions, and the most important are those for spouses and civil partners.

S

That "one genuine point" IS the point! It is entirely reasonable to want to give a life interest in the family home to a second wife (because it is the home in which she lives - to evict her so the kids can have some cash would seem a little harsh) but then ensure that the home passes to your children on her death, and not, for example, to the children that your second wife might obtain througha subsequent marriage, If there is a justification for treating this in any way other than a tax-exempt transfer to the second wife followed by (on her death) a taxable transfer to the children, I am unable to see it. ...

Submitted by Sam Evans Continue reading

Photo of John Redwood John Redwood Conservative, Wokingham

Is the hon. Gentleman saying that prospects under Labour are so poor in his part of the world that no one there will ever reach the inheritance tax threshold?

Photo of Chris Bryant Chris Bryant PPS (Rt Hon Lord Falconer of Thoroton, Secretary of State), Department for Constitutional Affairs

No. The right hon. Gentleman misunderstands the economy of south Wales, just as he did when he was Secretary of State for Wales. I must point out to him that there are more people in paid employment with good prospects today because of the national minimum wage, which he opposed. However, if I continue in that vein, Sir Alan, you will tell me that I am straying somewhat from new clause 1, and I did promise to draw my remarks to a close fairly swiftly.

Inheritance tax is about paying a fair share, and the proposal by the hon. Member for Chipping Barnet tries to undermine the concept of a fair share. We are right to oppose new clause 1.

Photo of Julia Goldsworthy Julia Goldsworthy Shadow Chief Secretary To the Treasury, Treasury

As we have heard, there is a divergence of opinion on what the Bill means. The Red Book suggests that only £15 million would be raised by the changes to inheritance tax and trusts, and that the new regulations would affect only a small number of people. However, the evidence given to the Treasury Committee by John Whiting suggested that the changes would affect a lot of everyday arrangements and a huge number of individuals. The Times suggested that they would affect 100,000 families, and the Society of Trust and Estate Practitioners went further, estimating that at least 1 million wills would be affected. The society also estimated that the average cost of rewriting a will was £250. If we multiply that by 1 million, we see that the cost to individuals of rewriting their wills would stand at £250 million, while the benefit to the Treasury of the changes would be £15 million. It is easy to see the disparity between the number of people likely to be affected and the amount of money raised.

Skandia estimated that up to 4.5 million life insurance policies could be affected by the changes, because so many families have life insurance policies written into trusts. Given that the nil rate band does not stay in line with inflation, more and more families will be drawn into the lower end of the system. Therefore, it is not only those who presently fall into the inheritance tax band who will be going back to their solicitors to change their life insurance policies. This will also affect people who are unsure at what point in the future their estate might fall into the inheritance tax band.

Photo of Julia Goldsworthy Julia Goldsworthy Shadow Chief Secretary To the Treasury, Treasury

I am very pleased to tell the hon. Lady that we will shortly be announcing a fundamental review of the taxation system, in which all will be revealed. That review will look into making the taxation system fairer and more progressive.

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

When the hon. Lady announces the outcome of that review, will it contain the principle that the rules apply to everyone and that no one is allowed to get round them? If so, how would her party enforce them?

Photo of Julia Goldsworthy Julia Goldsworthy Shadow Chief Secretary To the Treasury, Treasury

As I said, the system will be fairer and simpler. The hon. Members for Rhondda (Chris Bryant) and for Chipping Barnet (Mrs. Villiers) do, in fact, agree on something. Fundamentally, the issue raised by new clause 1 is that of spouse exemption and whether that is changed by the Bill. There is a real lack of clarity, and all the new clauses and the amendments to them are intended to make the situation clearer. Even if the Paymaster General argues that it is already clear, members of the public and professionals have a different interpretation of what the regulations mean.

I can see the good intentions of new clause 1, but its argument is slightly circular—that anything exempt under the new Act will continue to be exempt—and does not make sense. The amendment tabled by Mr. Gauke improves his Front-Bench team's phrasing and overcomes that tautology. New clause 2, tabled by Liberal Democrat Members, extends that and calls for a further period of time to have elapsed so that the implications of the legislation can be made absolutely clear, not least for individuals who have died since the Budget either intestate or with their will written into trust. At the moment, the cases of those individuals are subject to considerable uncertainty. I am glad that the hon. Member for Rhondda approves of amendment (b), which, for the avoidance of any doubt whatever, makes it clear that civil partners will also fall under the spousal exemption.

New clause 2 seeks a delay in the implementation of the Act until its impact is fully assessed and understood. Debate in the House and outside shows continuing disagreement about the extent of that impact. Making it explicit that a full consultation will take place would be appreciated, as that did not happen before the proposals in the Bill were put forward. I understand that a partial regulatory impact assessment has been undertaken, but the new clause would ensure that there would be a full regulatory impact. Is the Paymaster General prepared to publish that partial regulatory impact assessment before the relevant clauses are considered in Committee? Will she also provide longer-term projections of the revenue that she estimates the measures will gather? The Red Book gives only a limited time scale and shows that, according to the Government's estimates, the amount of money will be small. Clearly, the professionals think that the opposite might be the case. All the measures in new clause 2 would help to inform the public and make clear what the impact and the revenue implications for the Treasury will be.

As I said, new clause 3 echoes the theme of the amendment tabled by the hon. Member for South-West Hertfordshire and extends it. As well as making it absolutely clear that there will be no retrospection for applied transfers of value written into trust made prior to 22 March, it makes provision for people who have died intestate with dependants since 22 March. Currently, their estates are in limbo, and it is not clear how the new regime will apply to them. Fundamentally, it preserves the existing rules of exemption for two years until the new system and its implications are fully established. It also sorts out what happens in relation to people who die in the intervening period.

Surely the fundamental anomaly is that, under the existing regulations, someone can still make a lifetime gift free of inheritance tax if they do not die within seven years. That has not been redressed by the Bill. The changes proposed by the Bill impact on people who are not cash-rich, cannot make cash gifts in kind and thereby avoid inheritance tax, and have houses that have increased greatly in value in the many years that they have lived in them. In my constituency, for example, average house prices are increasing so rapidly, and the gap between house prices and incomes is so great, that more and more households are falling into inheritance tax.

Can the Paymaster General be explicit about what mischief has been done that the Government are trying to overcome, and about their assessment of the impact of any avoidance under the existing trust regime? Will the Government respond to the Treasury Committee's request that they should provide detailed information about how they arrived at their estimate that the new rules on the tax treatment of certain trusts will affect only a "minority of a minority" of the 100,000 discretionary trusts? Will they do that before clause 57 and schedule 20 are considered in Committee?

If, as the Government claim, existing spouse exemptions and other reliefs from inheritance tax will continue to apply when a trust is set up in the case of an individual with dependants dying intestate, can they explain why the professionals beg to differ? Can they specify where that is explicit in the Bill, and can they clearly demonstrate why the new clauses and the amendments to new clause 1 are not necessary? Along with the professionals and many members of the public, I would welcome more clarity, certainty and evidence-based policy-making in this regard.

Photo of John Redwood John Redwood Conservative, Wokingham 4:15 pm, 2nd May 2006

My hon. Friend Mrs. Villiers has identified an extremely important problem, which the Government would be well advised to take seriously.

I do not expect to be a beneficiary of any trust of this kind. I have created no such family trusts in my own family. I no longer have a spouse, so I have no direct interest in that context, either. I sought and gained a clean-break divorce settlement, so the divorce did not trigger the establishment of any trust. I therefore believe that I have approached the matter with independent judgment.

Having exercised my independent judgment, I conclude that there are many people of modest means who, quite legitimately, have taken advice and set up trusts to look after their family interests. In many instances, that was done not on the advice of people who said that it was a tax-efficient way of doing things, but on the advice of those who said that it was the best way of protecting family interests against competing claims within the family—the best way of meeting the legitimate needs and requirements of the children, as against the legitimate needs and requirements of a new spouse or another relative. It might not always be a case of family breakdown; other relatives could be involved, such as grandparents, grandchildren, aunts or uncles. There are numerous combinations for which trusts make a great deal of sense.

One answer that we need to tease out of the Government involves the extent to which the legislation appears to be retrospective. We would all feel easier about it if the Government recognised that over the past nine years they have presided over a tax and legal regime that made it perfectly rational and sensible for families to organise their affairs through trusts. Now they seem to be blowing the whistle. I consider that the Government are legislating retrospectively, in practice if not technically, when they say that they do not like the arrangements that people have made to deal with future events and force them to change those arrangements—arrangements that were made on the basis of good advice and were legal and sensible under the law of the time, which happens to have been approved and supported by this Government over the past nine years.

C

I MUST AGREE WITH JOHN REDWOOD'S STATEMENT.

AS A PARENT OF THREE, EVEN THOUGH GOING THROUGH
SOME FINANCIAL PROBLEMS WHEN MY CHILDREN WERE
YOUNG AND SUBSEQUENT DIVORCE, THE ONE WAY I
BELIEVED I COULD PROTECT MY CHILDREN'S FUTURE
WAS THROUGH TRUSTS. PARTICULARLY IN RELATION
TO INSURANCE POLICIES, WHICH WERE A REASONABLY
ECONOMIC WAY OF PROVIDING FOR MY FAMILY, WHO
WERE UNLIKELY TO RECEIVE AN INHERITANCE. ALL
THE ADVICE OVER SETTING UP TRUSTS IS NOW IN
THE AIR, JUST HOW RETROSPECTIVE IS RETROSPECTIVE?
HOW CAN WE BE BEHAVING AS RESPONSIBLE PARENTS ONE
MOMENT, AND HAVE OUR HUMAN RIGHTS AS PARENTS
CHALLENGED AT THE NEXT MOMENT? IF LAWYERS GIVING
BEST LEGAL ADVICE ARE NOW SHOWN TO HAVE BEEN
WRONG THERE IS SOMETHING VERY FAR WRONG IN OUR
LEGISLATIVE SYSTEM. WILL THIS RETROSPECTION RESULT
IN LABOUR ACCESSING ESTATES OF DECEASED PERSONS?

A VERY WORRIED PARENT, WHO FEELS THAT THE RIGHT TO
DECIDE IF A CHILD AT 18 YRS IS TOO YOUNG TO INHERIT
THAT THIS IS A PARENTAL MATTER NOT A POLITICAL ONE.

Submitted by CLAIRE DOUGLAS

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

I understand what the right hon. Gentleman is saying. Did he support the Inheritance Tax Act 1984? As I recall, that Act changed the previous regime of capital transfer tax to the current inheritance tax regime and was open to the very criticisms that he is now making in regard to retrospectivity and people who plan for the future.

Photo of John Redwood John Redwood Conservative, Wokingham

I did not support it because I was not a Member of Parliament at the time. [Interruption.] I am telling the hon. Gentleman the truth. I did not support the legislation, and I dare say that if it contained an element of retrospection I would—as a well-known independent voice—have pointed it out.

Photo of Ivan Lewis Ivan Lewis The Economic Secretary to the Treasury

The right hon. Gentleman was a member of the Cabinet.

Photo of John Redwood John Redwood Conservative, Wokingham

The Minister may recall that I resigned from the Cabinet over matters of principle because I had reached a point at which I did not agree with that Government. The Minister has walked into a heffalump trap of his own making: I am not the person to tease over sticking to my principles.

Photo of Ivan Lewis Ivan Lewis The Economic Secretary to the Treasury

The right hon. Gentleman wanted to be leader.

Photo of John Redwood John Redwood Conservative, Wokingham

It was a long time ago, but if the Minister reads my resignation statement he will see that my resignation was not about that; it was about issues of disagreement between myself and the Government. I hope that he will withdraw his uncharitable remark about my wishes on that occasion.

I hope that the Paymaster General will deal with the issue of retrospection. In this and earlier debates, a number of Members have drawn attention to the high cost, for families of modest means, of going over ground that they thought had been resolved at the time of the original trust settlement—when the grandparents made their offer, when the divorce was agreed, or when something else triggered the arrangement.

The Labour party seems to want to stretch the debate to discover what are the general intentions in relation to inheritance tax. I know that you are very careful to maintain order, Sir Alan, but I will say this: of course I think that a much higher threshold for inheritance tax would be helpful generally and would deal with some of the problems that we seem to be encountering across the Floor today.

Photo of Helen Goodman Helen Goodman Labour, Bishop Auckland

If the right hon. Gentleman thinks that, can he also tell us whether agrees or disagrees with Mr. Letwin, who says that equality is a problem in this regard? How does Mr. Redwood reconcile those two ideas?

Photo of John Redwood John Redwood Conservative, Wokingham

I am a great believer in equality of opportunity, and the way to have a much richer and more prosperous society is to give greater freedom and to set lower taxes, so that more people can participate in such prosperity. That is exactly the point that I was trying to tease out of Chris Bryant. I hope that he is proud to represent his constituency and that he expects some of his constituents to use the opportunities provided under even a Labour Government to build businesses and buy properties, for example, in order to become more prosperous, thereby coming into the tax regime that this Government have so carefully designed to entrap them.

Photo of Chris Bryant Chris Bryant PPS (Rt Hon Lord Falconer of Thoroton, Secretary of State), Department for Constitutional Affairs

The trouble is that when inherited wealth is allowed to ride untrammelled across society, it is much more difficult to achieve equality of opportunity.

Photo of John Redwood John Redwood Conservative, Wokingham

I do not think that that is true; indeed, there are many examples to the contrary. I have not inherited any wealth up to this point and I do not have great prospects in that regard, but I do not begrudge those who come from much richer families than mine doing so. If that money trickles down through the generations, it very often does far more good than if it trickles into the sticky hands of the Chancellor of the Exchequer, which seems the only alternative on offer in today's debate.

It would be much better if the inheritance tax system recognised that a person is not very rich just because they have a flat or house that might now be worth a lot of money. There are a number of elderly residents in Kensington and Chelsea living in two or three-bedroom flats that are perhaps worth the best part of £1 million who might be on quite low incomes. Is the Labour party saying that those people must move to realise their asset and to show that they have some wealth? I want to live in a country where, if such people want to carry on living in their two-bedroom flats, they can do so. They should not be treated as rich because, even though they have low incomes and have no other assets to pay all the taxes that Labour now wants to impose on them, they happen to live in a part of the country that has rather high flat and house prices.

I hope that the Paymaster General will deal with the inequality of house prices nationwide, which is not always, as Labour seems to imply, good news for those in high house price areas. Such people could be worse off than those in low house price areas because they have to pay a disproportionately higher proportion of their assets and income in order to secure and maintain their property. In other words, the principle can work in the opposite direction.

The final issue is what should happen in future. If the Paymaster General can persuade us that there is no effective element of retrospection and that there is an injustice to tackle, we have then to test whether she has found a route to tackling the injustice and inequality that she sees, and whether she would do so in a way that would make Britain a more prosperous and equal society. I suspect that she will achieve the opposite of what she wishes to achieve.

I do not want to live in a country where only the super-rich can prosper by—thanks to their access to the really good lawyers—finding a way around the more complicated regulations that the Government have come up with. I do not want to live in a society that sends out the message that it is better to go offshore or live abroad. I know that offshore trusts have been popular with some Labour donors and Ministers, but they are not a particularly good thing to encourage. It is much better to have an honest, low-tax system that is the same for everybody, and which encourages more enterprise and success.

I hope that the Paymaster General will think twice, three times or however long it takes and understand that her proposals contain several objectionable parts. First, retrospection will disrupt family arrangements. Secondly, the suspicion that all trusts are evil tax dodges is clearly not true. Thirdly, on the Paymaster General's idea that such complexity will squeeze the rich and help the poor, I suspect that the rich will escape because they will have access to good lawyers and accountants and can always go offshore. In short, I urge the Government to drop this proposal.

Photo of David Gauke David Gauke Conservative, South West Hertfordshire

I had hoped that we might find a few areas of consensus on this issue. There is clearly a range of views on inheritance tax, but I disagree with Chris Bryant, who suggested that the new clause is an attack on the principle of IHT. Not all my colleagues will agree, but I think that there is a role for inheritance tax in our system. It may not apply to many people in the Rhondda, but it does to a lot of people in South-West Hertfordshire. The rate may also be open to question, but I do not disagree with the basic idea of inheritance tax.

In addition, the saloon bar wisdom is that wealthy people get around paying inheritance tax by using trusts. I see nothing wrong with trying to address genuine tax evasion; wealthy people should not be able to evade the tax when ordinary people in South-West Hertfordshire, Falmouth and Camborne or anywhere else are stuck with the liability.

As my hon. Friend Mrs. Villiers said, the Government have expressed the view that, essentially, trusts should be tax-neutral, and I support that. As she also noted, the Revenue's policy in reforming the income and capital tax treatment of trusts has been to create

"a tax system for trusts that does not provide artificial incentives to set up a trust but, equally, avoids artificial obstacles to using trusts where they would bring significant non-tax benefits."

I see nothing wrong with that. Since 1894, when estate duty was introduced, certain types of trust have been equated with outright ownership, and taxed accordingly.

Perhaps the Paymaster General will correct me if I am wrong, but I believe that there is a consensus about the value of the spousal exemption. As my hon. Friend the Member for Chipping Barnet said, it was introduced in its current form in 1975, but in some form or other it dates back to 1896. The need for the exemption is easy to understand; in most cases, an inheritance leads to a windfall, but a death usually results in a fall in income and an element of hardship for the surviving spouse.

In addition, there is usually a shared family home. Given the emotional concerns that follow a loss, it would be unduly harsh for a spouse to have to sell a house to pay an inheritance tax bill. Clearly, the particular circumstances of spouses need to be considered, and the Civil Partnership Act 2004 has extended the number of people in that category. We need to ask a couple of questions about the Bill. Does it continue to apply to tax trusts in the same way as to outright gifts, and does the spousal exemption continue to apply?

The Government might argue that the spousal exemption will apply in respect of immediate post-death interests, but the professional advice that I have seen maintains that that will not work because, in practice, it is almost impossible to meet the conditions. Moreover, it is held to be

"nigh on impossible for one spouse to leave their estate in trust for the other and obtain the spouse exemption."

As my hon. Friend the Member for Chipping Barnet pointed out, there are specific conditions in the draft proposals in respect of inheritance tax that make it very difficult for most trusts to work and still obtain the spousal exemption under the immediate post-death interest definition. Condition 3 requires that the surviving spouse interest can be ended only during her lifetime with her consent. Consequently, a will that states that the surviving spouse has a right to live in a house until remarriage, when the assets pass to the children—the experts say that that is fairly common—will breach that condition and will not be able to benefit from the spousal exemption.

Condition 4 states that, on termination of a surviving spouse's interest, a person will become entitled to the capital outright. However, if the trustees have the right to defer a child's absolute entitlement—again, that is fairly common—then that condition is breached and the spousal exemption is not available.

The immediate post-death interest conditions prohibit flexibility, the need for which was questioned earlier. Again, my hon. Friend the Member for Chipping Barnet dealt with that very well. Complex family arrangements are best dealt with through flexibility. We have heard about the case of a widowed second wife, where there are children from the first marriage, which even the hon. Member for Rhondda acknowledged was an issue. There also cases such as that of a young widow who is expected to remarry and have more children; a widow and children with special needs; a childless marriage where both spouses want their assets to go to their respective nephews and nieces; where a property is complex and may impose management demands best performed by trustees rather than the widow; or where a testator has less than full confidence about the distribution of the property.

Those are all legitimate, reasonable circumstances that a trust is able to address. The trust is a great intellectual achievement of English law and it seems a great pity to dismiss it as the Government seem to be doing. They seem to have a prejudice against trusts as a method of addressing those issues, which relate not to tax evasion or tax minimisation but to personal circumstances.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury) 4:30 pm, 2nd May 2006

If I were to tell the hon. Gentleman that the Government have made provision for precisely the situation he describes and that a straightforward trust set up for one beneficiary—an ex-spouse or civil partner—which goes to them before passing absolutely to another person on the death of the beneficiary, retains their existing inheritance tax treatment, including the spousal exemption, would all his problems be settled?

S

Ah, and now we have the catch. Dim Dawn approves of "straightforward" arrangements, but anyone with a less straightforward life (an increasing number of people these days) is likely to get caught out.

Submitted by Sam Evans Read 1 more annotation

Photo of David Gauke David Gauke Conservative, South West Hertfordshire

The right hon. Lady should not take my word; the advice provided by professional after professional is that what the Government are proposing simply will not work. In nearly every case, there is a degree of flexibility, for which the Government are not providing.

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

So the hon. Gentleman is saying that he does not believe me when I say that there is flexibility for a spouse or an ex-partner to receive an interest that is eventually passed wholly to a subsequent beneficiary. I am telling him that clearly, but he would rather believe people outside the Chamber than me and civil servants.

Photo of David Gauke David Gauke Conservative, South West Hertfordshire

I am inclined to believe specialists who work extensively in the field—[Interruption.] If the civil servants had consulted a little more widely—although that is another issue—we might not have found ourselves in these difficulties.

I think that the Government's great concern is that a widow could receive a life interest, terminate the trust and make a lifetime gift and, if she survived for seven years, benefit from provisions relating to potentially exempt transfers. I should be interested to hear from the Paymaster General about the particular difficulties that she considers exist and where the current spousal exemption is being abused. However, as my hon. Friend the Member for Chipping Barnet rightly pointed out, the Government's proposals are an ineffective way of addressing their concern. Better ways could be found by looking at the potentially exempt transfer route, which would address the matter much better than using such an over-sized sledge hammer to hit that particular nut.

I wait with anticipation to hear whether the Paymaster General will argue that one can always vary a trust on death, thereby resolving many of the problems or injustices. However, such a solution requires both that the trust is one that can be varied and a degree of flexibility, which is clearly not something that the Government want to encourage in trusts, although it would be useful in those circumstances. Variation could also be achieved with the consent of the beneficiaries, but that would not be possible if they were minors. In that case, it would be necessary to go to the court, with all the expense that would incur. If the Government chose to use that argument, it would not be persuasive.

The Government say that the provision will affect only a few people and several Labour Members have suggested that it would apply only to a tiny minority of the wealthy. However, over the past few days, I have been bombarded with documents produced by professionals pointing out that they regularly advise the inclusion of a trust in fairly normal wills, and that it is a common, run-of-the-mill device used to protect a family and to address particular family circumstances. As a matter of course, trusts are involved in wills, not for taxation reasons, but because they provide flexibility. The Government appear not to know that, which suggests a lack of consultation, which has marked the process throughout.

Why have the Government done this? Perhaps saloon bar wisdom and the lack of consultation means that they were not aware of the problems that they have caused, but I wonder whether another element is involved, so I want to offer one or two friendly words of warning to the Labour party. The whole approach smacks of a good old go at the toffs, and we have heard one or two comments along the lines this afternoon that just the wealthy and rich are affected, that the policy does not really matter and that it will play quite well perhaps back in the Rhondda.

The Labour party has been extremely successful in the past three elections, and one of the reasons is that the Prime Minister has managed to distance himself from the perception that the Labour party is a bunch of class warriors. Not for the first time, the Chancellor of the Exchequer has waded in and tried to play the class card, just as he did with Laura Spence and Oxford university, when he rushed in and got the facts wrong, did not understand the matter and rather embarrassed himself. I fear that the Government and the Chancellor have done exactly the same thing with this policy. They think that they have made an attack on the very wealthy and the privileged few, when the reality is that large numbers of ordinary people, not the wealthy, will be affected by this policy. The Government have made a misjudgment, and I suggest that they back off; they could start today by accepting the new clause.

Photo of Quentin Davies Quentin Davies Conservative, Grantham and Stamford

This has been a very interesting debate so far, and I want to make three points and to ask a question. Sir Alan, you have allowed the debate to range over the philosophy of inheritance tax—very judiciously, if I may say so—because it is important for the public that we have the opportunity to discuss such matters in the Chamber and this is the obvious opportunity to do so.

Perhaps I can start by saying that my personal view of inheritance tax—a view for which I argued, with no success whatsoever, when I was shadow Paymaster General in the shadow Administration in the 1997 Parliament—is that we should reduce the rate of inheritance tax to 10 per cent. That would put out of business the whole industry of providing ways to avoid inheritance tax by structuring and persuading people to give away their property, they hope, more than seven years before they die and would stop people leaving the country to shelter their assets from inheritance tax. Instead, we would make this country something of a haven for people with assets to shelter from inheritance tax or estate duty, or whatever may exist in their own countries. There would be a major Laffer curve effect, and we would reduce the marginal rate from 40 to 10 per cent. We certainly would not reduce the revenue by anything like that amount; the revenue might even increase. That is my own view of how to deal with the problem, but I have so far failed to persuade my hon. Friends, let alone anyone else, that that is the way forward. Perhaps, one day, we shall make progress along those lines.

Photo of Helen Goodman Helen Goodman Labour, Bishop Auckland

Can the hon. Gentleman explain how the Laffer curve could possibly affect the revenue from inheritance tax? One can understand how it could affect work incentives and the take from income tax, but how could it possibly affect the revenue from inheritance tax?

Photo of Quentin Davies Quentin Davies Conservative, Grantham and Stamford

I do not think that the hon. Lady was listening because I tried to explain how that would happen. First, to avoid inheritance tax quite honourably, sensibly and rationally, a considerable number of people try to give their money away to their children more than seven years before they expect that they might be in danger of dying. Clearly, that is a loss to the Revenue. Clearly, there is an element of gambling about it, but I do not think that people would do that if the rate were only 10 per cent., because of the considerable disadvantages and considerable risks; not least that their children may marry the wrong person, so half the money would go to someone else. There are all sorts of risk of that kind, so people would not go in for those schemes as much as they do currently.

Secondly, people are sometimes influenced in their choice of country of residence by the inheritance tax regime. If we have a 40 per cent. regime in this country, people will not come here with large assets and those with substantial assets will tend to move away. I am explaining this at some length because the hon. Lady obviously did not follow the argument when I presented it in slightly more summarised form a few minutes ago, but it is a serious argument and I suggest that she think about it.

The Laffer curve effect means that one reduces the rate of a tax and, as a result, induces behavioural changes. As a result of that, the revenue from the tax rises. That is what I was arguing—I think reasonably—we could achieve through reducing the rate of inheritance tax. I make that point today because I have tried to make it before in private conversation and got nowhere. Perhaps someone who is listening will pick the idea up and it will eventually get somewhere.

My second point is for Chris Bryant, who has unfortunately just left the Chamber. He used an extraordinarily bad argument and I am sorry that he is not present. I think that, if he thinks about it, he will confess that it was a bad argument. He said that very few people in his constituency—and, of course, a considerable minority in the country as a whole—have assets that approach the inheritance tax threshold or ever think of setting up a trust in the course of their lives. That is irrespective of the connection between the two things; there may be good arguments, which have nothing whatever to do with inheritance tax, for setting up trusts.

It is perfectly true that the great majority of our fellow citizens do not find themselves in danger of paying IHT or thinking about trusts. However, the hon. Gentleman then suggested that it did not matter if we were making a bad law, because it would affect only a minority of people. That is a bad principle for any legislature to operate on and I would be very sorry indeed if anybody in the British House of Commons thought, on reflection, that that was a sensible way for us to work in this legislature.

Any injustice or perversity is to be avoided and to be regretted if it happens. We must hope, in all our deliberations and decisions, to improve the rationality and fairness of the corpus of law in this country and not to detract from them. If there are problems with the Government's Bill and if it would increase unfairness and perversity, we should reject the proposals, and we should do that irrespective of the number of people who might be sufferers from that irrationality or unfairness. That is a general point of principle.

My third point is that the Government owe us some explanation of their agenda. We have not heard one so far in the debate. They clearly have an agenda—reflected in the Bill—to have a go at trusts. There was an interesting discussion between the Paymaster General and my hon. Friend Mr. Gauke about the extent to which the proposals in the Bill would remove the exemption from inheritance tax, which the right hon. Lady tells us the Government intend to maintain, in the case of inter-spouse transfers on death—that is to say, inheritance by one spouse from another—in the event that that transfer or inheritance takes places by means of a trust. I cannot see any rational reason at all for saying, "Well, we think that it is a good idea to have an exemption from inheritance tax for spouses, but not if the spouses, for whatever reason, have arranged their affairs so that transfer takes place on death by means of a trust or so that the assets pass into a trust on death." We need to know why the Government want to make such a change and if it is a change that they intend to make, as opposed to an effect that they did not anticipate when they drafted the Bill.

Irrespective of that point, which is a matter for debate between my hon. Friend the Member for Chipping Barnet and the Paymaster General, there are many other areas where the Bill indisputably, and without any apparent reason, attacks trusts in one way or another, or makes the result of people setting up a trust a damaging and perverse one, which it otherwise would not be. For example, the Bill would ensure that the beneficiaries of accumulation and maintenance trusts would have to come into full title of the assets, and could dispose of them without any restriction, when they were 18 years old. It is amazing to me that anybody in this Chamber, irrespective of their political party, thinks that it is a frightfully good idea to give a large amount of capital, in relation to that family's total assets, to a young person of 18 to dispose of quite freely. Is that sensible? The right hon. Lady may want to give her son such an amount at the age of 18, but I certainly would not want to do that to my children because it would be extremely dangerous. Why should the Government try to change the law so as to force that to happen?

Equally, the Government are changing the law to ensure that the only beneficiaries of accumulation and maintenance trusts can be either those who are benefiting from a criminal injuries order, or the beneficiaries of trusts set out by parents. However, let us consider trusts set up by grandparents, people who wish to set up a trust for the benefit of their own children and the children of a dead sister or brother who have been left in difficulty, or, indeed, people with no children who wish to leave money in a trust for the benefit of the children of their dead brother or sister. Why should we penalise such trusts as against trusts set up by parents? What is the Government's agenda?

I am mystified by why the Government have suddenly got it into their head to have a run at trusts. Was it, as has been suggested, a purely emotional and symbolic thing? Did the Paymaster General suddenly think that trusts are nasty because they are associated with richer people? I am sure that that is not the explanation because I know her too well to think that she would suddenly have such a rush of blood to the head and thus decide to draw up such legislation.

Was a rational calculation made of the amount of money that could be squeezed out of the public by changing the rules on trusts? Julia Goldsworthy, who speaks for the Liberal party—she has also left the Chamber—disposed of that one. She said that on the Government's figures, the provisions will result in a net increase in revenue of £15 million. She gave us an estimate of the cost of rewriting trusts and of taxpayers rearranging their affairs that ran to hundreds of millions.

However, even if the hon. Lady's substantial estimate was a little excessive, on the figures that she gave to the Committee, one can easily envisage that a modest estimate of the costs would be tens of millions. On the test of proportionality to which, I think, the Paymaster General and her Government are committed, the provisions thus fail because the incremental revenue bears no relation to the cost to taxpayers, which is basically a cost to the economy. Although the change might be a good thing for the accountancy and legal professions, it will mean that people will incur large costs that are gratuitously imposed by a piece of legislation with a motive that none of us really understands.

Before we go any further, it would be extremely helpful if the Paymaster General gave the Committee an explanation. Perhaps I have, naively, missed an obvious point, but, if so, I am reassured that no hon. Member on either side of the Chamber appears to have grasped it. What was the objective behind targeting trusts? Why have trusts been scheduled for punishment in such a way? What is the rationale behind the approach? We must have rational government in a sophisticated democracy. If the Government bring forward new measures and want to change the law, the burden must be on them to demonstrate that the change is beneficial and sensible. They must show that they have thought the change through from the point of view of the country's economic interests, fairness and justice to individuals and the proportionality of cost, because they are the classic principles on which good law, including good tax law, must always be based.

Photo of Brooks Newmark Brooks Newmark Conservative, Braintree 4:45 pm, 2nd May 2006

I am getting the sense that I am in a minority in the Committee as I do not have a legal string to my bow. However, my lack of legal training gives me a distinct advantage when it comes to new clause 1, and amendment (c) to it, because I can, at the very least, appreciate the value of clarity. The new clause is a simple appeal for certainty in a Bill that contains less of that quality than might be desired. The number of people who may be affected by the proposed changes to the taxation of trusts has given all hon. Members cause for concern.

Perhaps my closest brush with the law on wills and trusts comes from "Bleak House", which provides a useful parallel to the Government's proposals. The catalogue of potential beneficiaries at the heart of Jarndyce and Jarndyce, where inheritance is squandered, indolence is encouraged and legal proceedings are interminable, bears close comparison to the lists of those who stand to suffer, if the proposals that we are considering are carried into law—namely widows, minors and the vulnerable.

Indeed, Finance Bills as a whole have more than a passing similarity to Jarndyce as Finance Bills

"in course of time become so complicated that no man alive knows what it means" and nobody

"can talk about it for five minutes without coming to a total disagreement as to all the premises."

The Dickensian fog may have lifted from the Chancery courts but it still sits heavily on schedule 20 and particularly on proposed new section 49A of the Inheritance Tax Act 1984. The Government should be committed to the principle of proportionate rather than punitive taxation, and that commitment is not clear in these provisions.

New clause 1 has a modest aim: to ensure, setting aside all other confusions, that no inheritance tax will be payable on transfers of value between spouses, and not as Chris Bryant would have us believe, to avoid inheritance tax completely. The spousal exemption exists to prevent punitive double taxation of an estate. That is a sound proposition, founded on an inoffensive principle. It has, as my hon. Friend Mrs. Villiers said, been the subject of consensus since capital transfer tax was introduced by the Labour Government in 1975. The Chief Secretary echoed the need for just such a principle when he spoke on Second Reading about the need to ensure that people pay their fair share of tax. I know from my brief experience in consideration of the National Insurance Contributions Bill that that particular Labour mantra is very much in vogue. The Paymaster General used it four times in one speech. I am glad that she has taught it to colleagues on the Treasury Bench, but the mantra is as nebulous now as it was then.

The use of trusts as a vehicle for asset protection has made them the target of another Dawn raid because they are perceived as being unfair. The fact that trusts exist to protect assets from more than the taxman does not seem to concern the Government overmuch. It is true that the caveat for those suffering from a disability has been preserved, but only for a very limited class of beneficiaries in which no one can be thought of as vulnerable if they are not first found incapable under the Mental Health Act 1983 or are claiming disability benefits. That is a sop to fairness, but in reality it is deeply regressive and inflexible. It takes care of the mad, but not the bad or the sad. It also fails to draw the sting of schedule 20 because fairness has always been at the heart of trusts.

Most often the very reason why trusts exist is to allow for flexible and equitable distribution of assets in the face of changing and unforeseen circumstances. The Government have been keen to acknowledge that trusts have a positive role to play in assisting people to manage their tax affairs, and in particular in holding assets on behalf of vulnerable people. However, vulnerability is not linked, and never has been, exclusively to disability.

Members of the legal profession made a number of representations to me on the many beneficial effects that trusts may have in restraining a rake's progress or in keeping a fool and his gold well acquainted. Many sound arguments that relate to the age at which the interests of younger beneficiaries should vest regrettably go beyond the scope of new clause 1. No doubt, the issue will be revisited in Standing Committee. However, I regard beneficiaries under a trust as vulnerable if their interests would not be adequately protected without that trust.

That point becomes germane in the context of new clause 1 if we consider the number of trusts created at present to protect the interests of children in the event that a parent should remarry. That is a common situation, and it is merely one item on the exhaustive list given by my hon. Friend the Member for Chipping Barnet. As a result of the proposal, many older testators may begin to favour outright gifts to their surviving spouse, rather than risk settling assets on trust, which may fall foul of the spousal exemption and be liable to inheritance tax. Such outright gifts do not allow any measure of flexibility. Furthermore, they do not allow testators to be sure that their children will be provided for if the surviving spouse should decide to favour the other's interests over theirs. Children in that position are undoubtedly vulnerable, so we must ensure that they are protected as before.

Sadly, that state of affairs is not unforeseeable, and it is a nightmare scenario for anyone trying to provide responsibly for a family. Modern matrimonial arrangements are complex, but there should be no doubt about whether people with multiple families will continue to benefit from the existing spousal exemption. We would not want to be responsible for encouraging an epidemic of wicked stepmothers if the provisions encourage the use of outright gifts to the detriment of the prudent protection of children. New clause 1 clarifies interference with the taxation of trusts, which is invidious in principle and may prove unworkable in practice.

Trusts and their taxation are not a subject on which I profess expertise, yet I can readily understand the implication for the average prudent family of any interference with the spousal exemption. The objective of new clause 1 is to offer simple peace of mind to the many people who may be affected by the proposals. Even the legal profession is uncertain about the runaway scope of the changes, and I am more worried about the uncertainty than I am about mere outrage, although we have seen evidence of both. The Law Society, the Chartered Institute of Taxation, the Society of Trust and Estate Practitioners and many other professional bodies have pleaded for clarity. New clause 1 would achieve it by including in the Bill an assurance that surviving spouses will not be subject to inheritance tax if their affairs are structured to maintain flexibility and protection for others.

Photo of Stewart Hosie Stewart Hosie Shadow Spokesperson (Women), Shadow Spokesperson (Home Affairs), Shadow Spokesperson (Treasury)

I am not a tax accountant or a lawyer, and, given the nature of our debate, I am grateful for that. I am grateful, too, for the briefing that right hon. and hon. Members have received from the Law Society of Scotland. I shall ask the Paymaster General a number of questions at the end of my speech, as Members on both sides of the House are deeply concerned about the legislation's impact, intentional or unintentional. The Chartered Institute of Taxation said that

"all the professional bodies hope that HMRC and the government will listen to our representations and modify the proposals to ensure that spouses and civil partners remain exempt and that young and vulnerable people can continue to be protected through trusts without suffering a financial penalty."

Similarly, the Law Society president said:

"This measure will affect millions of ordinary people and not just the very wealthy that the Government claims to be targeting."

The briefing helpfully suggests that it is anomalous that wills involving trusts for the spouse should attract more tax than wills without trusts:

"If no trust is made, no inheritance tax is due until the death of both spouses in a marriage (or partners in a civil partnership). But under the new proposals, if a trust is made, inheritance tax could now be due . . . after the death of the first spouse and again after the death of the second."

Photo of Quentin Davies Quentin Davies Conservative, Grantham and Stamford

I am particularly grateful to the hon. Gentleman for giving way, as I am interrupting his speech to say that he just mentioned a briefing from the Chartered Institute of Taxation, although I have not seen it. It reminded me that I should have mentioned in my earlier intervention—I forgot, Sir Alan—that I am an adviser to the Chartered Institute of Taxation.

Photo of Stewart Hosie Stewart Hosie Shadow Spokesperson (Women), Shadow Spokesperson (Home Affairs), Shadow Spokesperson (Treasury) 5:00 pm, 2nd May 2006

I thank the hon. Gentleman, and I am sure that the Committee Chairman will be delighted to hear that.

It is interesting to note that the briefing is signed not just by the Chartered Institute of Taxation and the Law Society, but by a large number of other bodies. It discusses the key topic of inheritance tax on life assurance policy pay-outs, stating:

"It is usual for a life assurance policy pay-out to be written in trust for the spouse or children".

It identifies two problems that may result from the new legislation, and continues:

"The proceeds may now be liable to inheritance tax in two circumstances. First, if the life assured dies before the ten-year anniversary when the trust was originally taken out and the trust is not ended at the ten-year anniversary . . . Second, if the person taking out the life cover is in ill health at the ten-year anniversary of the trust."

We heard earlier today that the life insurance company, Skandia, believes that some 4.5 million policies may be affected as a result of the changes.

I have a few questions for the Paymaster General. How many people will be affected by the new regime? Estimates seem to range from almost none to many millions. Will spouses be affected by double taxation—a key point, on which absolute clarity would be particularly helpful? How many policies currently written into trusts may be affected, and have the Government considered that problem? How many wills will need to be changed? Finally, what consultation was carried out with the industry—the life insurance industry, the pensions industry and the legal profession? All relevant bodies seem to be saying that it was very little, and perhaps that explains why the Government are in such a pickle over this problem.

B

This is a terrible piece of legislation.

It has been brought out without consultation with Insurance companies and lawyers. The implications are huge and not thought through.

This legislation must be stopped

Submitted by Bryce Weir

Photo of Philip Dunne Philip Dunne Conservative, Ludlow

I remind the Committee of my entry in the Register of Members' Interests. I am a settlor of a trust, which I set up for my children with assets that I generated from my own endeavours—in other words, they were not inherited by me prior to my becoming a Member of the House.

I am also the beneficiary of a trust and should like to explain why it was set up. My father set it up in order to gift some assets to me, as a result of my asking a question to his adviser about whether I would be able to borrow against those assets for my other activities. So concerned was my father when he heard that he could be making me a gift that I might then seek to leverage on receipt that he put the assets into a trust, precisely in order to protect them. He was not prepared to allow me, even though I was over 25, to use those assets for a purpose other than he had intended.

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

Given that the hon. Gentleman does not have control, is the trust subject to inheritance tax?

Photo of Philip Dunne Philip Dunne Conservative, Ludlow

I am pleased to say that my father survived more than seven years after the gift was made, so it benefits from the potentially exempt transfer regime.

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

I am grateful to the hon. Gentleman, who makes my point that changes to trusts are covered either by the spousal exemption or the seven years provision.

Photo of Philip Dunne Philip Dunne Conservative, Ludlow

I should like now to deal with the deficiencies of the regime, which I am afraid that the Paymaster missed out of her speech. The first has been mentioned—the retrospective nature of the legislation. I intervened in that regard earlier but would like some definition of the numbers of people involved. It is difficult to secure accurate figures, but my understanding is that approximately 70 per cent. of people in this country die without making a will. Out of a population of 60 million, about 18 million make a will. The Law Society believes that about 15 million people have a will, so the legislation will affect all those who currently have an estate worth more than the inheritance tax threshold of £285,000. It will affect all who anticipate that, during the balance of their lifetime, their estate might fall within the inheritance tax net and all who set up a trust within their will. I pointed out earlier that that applies to virtually everyone who has made a will in the last six or seven years and who has children or a previous wife. It will also affect anybody who wishes to leave assets to their children or to grandchildren under the age of 25. Trusts would arise by virtue of the age of the potential beneficiaries.

The estimate by the Society of Trust and Estate Practitioners is of the order of 1 million people. I have examined the basis for that calculation. It arose from a survey STEP undertook of its members immediately after the Budget statement. Only 11 per cent. of members responded, and they indicated that about 830,000 trusts would be affected. Extrapolating that figure to all the solicitors' firms that are members of STEP would produce a figure of around 8 million.

Photo of Helen Goodman Helen Goodman Labour, Bishop Auckland

The hon. Gentleman is surely not suggesting that half the people who make a will have assets that are over the inheritance tax threshold. That would be ridiculous.

Photo of Philip Dunne Philip Dunne Conservative, Ludlow

I did not intend to suggest that. I am trying to demonstrate that there is an enormous disparity between the real figure and the figure quoted by the Paymaster General in a rather defensive letter to the newspapers shortly after the Budget, suggesting that the measure would affect tens of thousands of people. There is no doubt that the figure will be substantially larger.

I argue that millions—not 8 million, but some number of millions—of trusts and wills will need to be reviewed and arrangements altered over the transitional period in order that those assets will not fall within the inheritance tax net. That is the point that I was trying to make by citing the much larger number. Clearly, not all will have any prospect of falling within the net, but a very large proportion will.

There are approximately 150,000 divorces every year in Britain. Regrettable though that is, the partners to the divorce will, under present legislation, almost by definition have to enter into a trust when they set up a will in the event of their divorce.

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

I am advised that divorcing couples tend to make a clean break. Solicitors who are involved in divorce cases say that trusts are not widely used in those circumstances. Perhaps the hon. Gentleman could elaborate on the facts.

S

So because people "tend to" do something simple, anyone that does something a little less straightforward must be penalised?

Submitted by Sam Evans

Photo of Philip Dunne Philip Dunne Conservative, Ludlow

My understanding is that trusts are used by the courts for the settlement of assets in every divorce case that goes through the courts. I accept that that would not necessarily be the case in the event of clean breaks, but it would apply in other cases where significant assets were involved. Those generally go through the courts.

A further category that contributes to the numbers affected are couples who have recently entered into civil partnerships as a result of the legislation that came into effect earlier this year. Many of the new partnerships that have been registered will have taken the trouble to enter into a will, and, where assets are involved, those wills will need to be changed over the transitional period.

Collectively, we are discussing large numbers of people. That undermines the Paymaster General's argument that the measure will affect a small number of people and generate a small amount of revenue.

On the revenue front, I suggest to the Paymaster General, and I should like her to deal with this in her closing remarks, that she has misled the House. She indicated that the revenue gain from the proposal would be about £15 million in the first year. Let me suggest to her why that figure is so woefully wrong. Given the number of trusts and wills that will need to be reviewed and the cost of so doing with professional advice, there will be a significant VAT gain to the Exchequer from the measure. A big-four accountancy practice is currently writing to all its clients, where it is aware that trusts or wills exist, quoting a fee of £295 plus VAT—in total, £347—for the mere exercise of reviewing those people's current trust or will. It also suggests that a further fee will be incurred if people decide to make changes after the Finance Bill has been enacted.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

The hon. Gentleman might suggest to people that rather than going with the big four, they should join a trade union and get a free will.

S

Anyone can write a will for free. Put it on a bit of paper, sign it, have signature...

Submitted by Sam Evans Continue reading

Photo of Philip Dunne Philip Dunne Conservative, Ludlow

Unfortunately, I cannot do so, because, as a result of data protection legislation, I do not have the names and addresses of the people to whom the practice has been writing. I am sure that other organisations are willing to offer a cheaper service, but the review charge calculated by the Society of Trust and Estate Practitioners is £341 rather than £347, so anyone who wants to take professional advice must incur a significant fee, which, because it is subject to VAT, will generate substantial revenue to the Chancellor. Some 1 million to 1.5 million such arrangements may need reviewing, which would generate roughly three times the revenue for the Treasury that the Paymaster General has indicated.

The retrospective nature of the legislation raises a more fundamental issue, which is the credibility of the UK as an appropriate place for people with assets to invest or to seek to conduct their business. For many years, it has been an important tenet of tax legislation that retrospective legislation is not encouraged. Because this provision has been introduced with no consultation whatsoever with the industry, it fundamentally undermines this country's long-established reputation for fairness in its taxation dealings. I urge the Paymaster General to consider whether it is worth putting at risk this country's reputation among the wealthy and, in particular, the wealthy from overseas who might want to live here and do business here, by leading such people to think that long-established provisions on tax can be changed without consultation at the drop of a hat on a retrospective basis.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

The measure is not retrospective, although it may change people's expectations. When people of our generation took out mortgages in 1984, we got mortgage interest relief at source, which was later phased out. Our expectation as purchasers was that we would get MIRAS for the 25-year life of the mortgage, but there was no contract with the Government to that effect. The Government changed the position, but the change was not retrospective, although it changed our expectations, and the same is true of this legislation.

Photo of Philip Dunne Philip Dunne Conservative, Ludlow

I accept that this legislation includes a transitional period over the next two years, but I still argue that many trusts that have existed for decades—centuries in some cases—will be significantly penalised. [Interruption.] Chris Bryant is laughing at the notion that trusts have existed for centuries. I have received representations from the Historic Houses Association—I am sure that other hon. Members have received such representations, too—pointing out that one of the reasons why this country has such a strong built cultural heritage, unlike many continental countries where different forms of taxation have existed and trusts, in particular, have not been involved in tax planning, is that trusts have been able to protect assets from one generation to another. That is not, as the hon. Member for Rhondda may think, a tax avoidance measure, but a measure to preserve assets as a whole, so that they continue to be viable, economically efficient assets rather than being split up among a family.

That takes me to my next point: what is the purpose of such trusts? There is a perception among Members on the Government Benches that they are set up purely to evade tax. As I illustrated with my own case, trusts are usually set up to protect assets from individuals who cannot be trusted, or for valid planning reasons, particularly in relation to the increasingly acute problems arising from multiple families as society, sadly, evolves into individuals having more and more multiple families during their lifetime. If the Bill goes through, it will fetter the choices of spouses who are in a position to do so to allocate assets to provide maintenance for children, especially in the case of a second family where there are also children from the first family. I do not think that that is Government's intention. I assume that they have not thought this through, and I urge them to do so.

I should like to draw attention to one or two deficiencies in the Bill's drafting. I am sure that we will cover them in greater detail in Committee. The argument was made rather hastily following the Budget—by the Paymaster General, I believe, although it may have been by one of her ministerial colleagues—that a specific carve-out for life policies will be written into trust, but nothing in the Bill does that. Will the Paymaster General to put me right on that, either now or when she winds up?

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury) 5:15 pm, 2nd May 2006

If the hon. Gentleman will forgive me, we are not discussing the Bill and the clause—I only wish we were—but his party's new clause. I will of course reply to his point at the appropriate time in Committee, and I look forward to doing so.

Photo of Philip Dunne Philip Dunne Conservative, Ludlow

I look forward to that, too. Given that we are digressing for a moment or two, with your indulgence, Sir Michael

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

Order. The hon. Gentleman should not pray in aid my indulgence. As has been said, he must address his remarks precisely to the new clause that we are discussing.

Photo of Philip Dunne Philip Dunne Conservative, Ludlow

I am grateful, Sir Michael.

Several people, including spouses who are elderly or incapacitated by mental infirmity, will not be in a position to vary their trust arrangements or wills over the transitional period, and their estates will therefore suffer inheritance tax unnecessarily. I urge the Paymaster General to address that point specifically.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

As I understand it, new clause 2 suggests that everything be put on hold for two years. We may all be in some difficulty here, Sir Michael, because although this is not technically a stand part debate, the nature of the amendments means that in a sense it is. Will my right hon. Friend the Paymaster General say succinctly what the position was before 22 March and what it will be if her proposals are accepted by the Committee? For my part, and I suspect that of other right hon. and hon. Members, there is some confusion as to what the law was before 22 March and what it will be if the Government's proposals go through unamended.

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

I beg your pardon, Sir Michael, and thank the hon. Gentleman very much. Would he like to come and sit on this side of the Committee?

Mr. Dunne accused me of misleading the Committee, as the record will show. He may disagree with me—I certainly disagree with him—but I would not be as direct as to suggest that he may be motivated by personal interest in this Chamber, nor do I expect him to accuse me of misleading the Committee when I have not. I hope that he will withdraw that remark. I appreciate that he holds views that are deeply opposed to mine, but I have presented information to the Committee and I shall continue to do that. To suggest that a Minister or any hon. Member actively seeks to mislead is utterly wrong. I hope that he will now withdraw that suggestion.

Photo of Philip Dunne Philip Dunne Conservative, Ludlow

I am delighted to clarify my remarks to the Paymaster General. I intended not to suggest that she had actively and deliberately misled the Committee but to point out that she had inadvertently misled the Committee because she had not understood the Bill's full implications.

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

That is probably as close as I shall get to receiving an apology but, when the hon. Gentleman reads Hansard, he will see exactly what he said.

I shall begin with some of the other points that the hon. Gentleman raised. He asked why no consultation had taken place and said that there was nothing wrong with the sort of trust that we are considering. I shall revert in a moment to the general point about trusts that Mr. Davies made. Let me refer to a couple of quotes. On 12 April, the Daily Mail, that well-known Labour paper, reported:

"A trust allows you to pass money to your heirs while protecting it from tax and keeping control over how the money is used . . . Why set up one? First and foremost, to ensure your heirs receive the maximum amount of money free from inheritance tax."

If that is not sufficient, let us consider The Sunday Telegraph of 16 April.

Photo of Theresa Villiers Theresa Villiers Shadow Chief Secretary to the Treasury

Does the Paymaster General prefer the view of the Daily Mail or that of the Law Society, the Chartered Institute of Taxation, the Society of Trust and Estate Practitioners, the Low Incomes Tax Reform Group, the Law Society of Scotland, the Institute of Chartered Accountants of Scotland, the Association of Chartered Certified Accountants and the Association of Private Client Investment Managers and Stockbrokers, which say that the trusts under attack from the proposals have nothing to do with tax and everything to do with providing responsibly for one's family?

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

I find it best to answer one question at a time, and I shall come to those organisations and the hon. Lady's opening remarks shortly. To suggest that the way in which the Government prevent the trusts from being misused somehow damages women's rights is breathtaking, and I shall deal with that shortly.

The hon. Member for Ludlow need only read The Sunday Telegraph of 16 April or The Sunday Times of 23 April, which make it clear that those trusts were being used to avoid inheritance tax by retaining control. Mrs. Villiers mentioned transfer to the spouse. What could be more damaging to a spouse than to be told that a trust had been created that transferred the interest to her, only for her to find that she had no access to the capital and that, in three months, her interest was terminated and had passed on to somebody else, when she had been used as the shield to establish the trust, with the very purpose of avoiding inheritance tax? Even to suggest that using spouse relief in that way strikes a blow for women's independence is rather odd.

Photo of Julia Goldsworthy Julia Goldsworthy Shadow Chief Secretary To the Treasury, Treasury

I would be interested to know what evidence the Treasury had gathered of inheritance tax avoidance through the trust schemes. It is interesting to know the advice of the Daily Mail and The Daily Telegraph, but what is the evidence?

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

Of course, I shall come to that. I took part in a debate with one of the hon. Lady's colleagues earlier today and I find the Liberal Democrat position inconsistent and daft. This morning, her colleague argued that the Liberal Democrats want to narrow income inequality, yet this afternoon, she argues that she is happy for it to be perpetuated for the few who hang on to their money through the sort of wills that we are considering.

The hon. Member for Grantham and Stamford rightly asked whether the Government were against trusts. He made an important point, and I would like to take this opportunity to clarify the situation. Of course the Government have not suddenly taken against trusts. He knows full well that we are talking about two particular types of trust. We believe that trusts have an important role to play in helping people to manage their affairs—of course they do—but we also believe that a person's choice whether to use a trust structure should not be tax-driven. That should not come as a huge surprise to the hon. Gentleman in the light of the changes that this Government have already made to trusts in previous Finance Bills.

I hope that the hon. Gentleman would agree that it is unfair that some people exploit the trust rules in order to avoid inheritance tax. Mr. Redwood made a similar point earlier. The Government are not labelling respectable people as tax avoiders. We are saying that a system has emerged in which two types of trust—accumulation and maintenance trusts, and interest in possession trusts—can, in certain circumstances, be configured to provide an unfair tax advantage at the expense of other taxpayers. That is what we are seeking to put right.

Several hon. Members:

rose—

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

I shall just make this point, then I will give way.

The hon. Member for Chipping Barnet said earlier—I am paraphrasing slightly—that if there was nothing in the Bill that affected spouse exemption, the Conservatives would be happy. I would like to say that there is nothing in the Bill that affects spouse exemptions under the normal inheritance tax rules. We will come to the question of children and civil partners—all are protected. I have a feeling, however, that I shall not be allowed to stop there, so I will go into the detail of the relevant clause in order to address the points that hon. Members have raised. First, however, I shall give way to the hon. Member for Grantham and Stamford, then to the right hon. Member for Wokingham.

Photo of Quentin Davies Quentin Davies Conservative, Grantham and Stamford

I am grateful to the right hon. Lady for giving way, and for addressing the points that we have raised this afternoon. She says that the Government have no agenda against trusts, and that she accepts that trust law can help people and families to organise their affairs in a rational way. She went on to say that she was worried only about tax avoidance and tax evasion. But what is the tax point involved in saying that the beneficiaries of maintenance trusts—I gave an example earlier—must have full disposal of their assets at the age of 18? Surely she can see the danger of a young person being given money in that way, and that it could be undesirable for individuals and families to have to act in that way. What is the tax point involved?

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

I answered that question on Second Reading. The point is that 18 is the age of majority. People can get married or serve their country at that age; they can do all the things that adults can do. People might want to write trusts in which the beneficiaries do not get control of the assets until they are 25, 35, 45 or even 52—that seems a good age today—but this is not about when the individuals get control of the assets, it is about when they come into tax. That is the point that is being made. The hon. Gentleman also knows that, with certain trusts, the beneficiary never materialises. The trusts go on in perpetuity. This relates to situations in which a spouse has the use of a property, for example, and on their death, the property transfers to the children of the first marriage. We need to discuss that matter further. We are not talking about when trusts end but when they never end, control remains and the beneficiary does not have access. That is the problem with which we are trying to deal.

Photo of John Redwood John Redwood Conservative, Wokingham

What does the Paymaster General think would be the revenue cost over a five-year period were the Committee to pass the Opposition amendment as opposed to her proposal? I want to get a feel for how big the problem is over a five-year period, as such things take time to work through.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury) 5:30 pm, 2nd May 2006

The Opposition new clauses would completely negate the Government's legislation, so everything scored in the Red Book would be lost. The right hon. Member for Wokingham understands—I was going to say "needs to appreciate", but that would be totally unfair, as I know that he does—that tax law is about making sure that a situation holds now and does not continue, as well as making sure that no other person is encouraged, and that large numbers of people are not encouraged, to use tax avoidance in that way. Surely, if inheritance tax is raised under certain circumstances with those exemptions—whether a gift and the seven-year rule or the spouse exemption on transfer—the Committee should expect the regime to operate in such a way. There is always a consequence, and if a tax regime is used in a way that it should not be and left unchallenged, the problem will get greater and greater—a point that hon. Members often make to me, saying, "Why are you acting now? Why didn't you act last year? How do you work the balance?" That is the clear answer to the right hon. Gentleman's point.

The right hon. Gentleman also spoke about retrospection, but I completely reject the idea that there is any retrospection. The Government have provided for a two-year transition. If the provision is not enforced until 2008, how can there be retrospection? Everyone will have the opportunity to make the necessary changes.

The hon. Member for Chipping Barnet then adopted the "Let's make it up, because it must be true if we say it," approach. She said that pension and death-in-service payments will be caught by the Bill. That is absolutely not the case. Let us have some rational debate, and hear what the Opposition say about why their new clauses are better. When we discuss that in Standing Committee—the Opposition chose to discuss it in Committee and not on the Floor of the House—we can go through all those issues. It is utterly ridiculous, however, to table a new clause and then say, "Because I say so, it must be true."

Photo of Theresa Villiers Theresa Villiers Shadow Chief Secretary to the Treasury

The point about retrospectivity is that many trusts cannot be varied. One would have to go to court and spend a large amount of money on it, and even if a court hearing were to take place, not all courts will allow the trust to be varied. Therefore, the provisions are retrospective, because not everyone will be able to adapt the existing arrangements to comply with the new rules.

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

The hon. Lady does not know what she is talking about. Legally qualified Conservative Members pointed out on Second Reading that the legal advice is always to review one's will regularly—at least every two years. If I decide that I want to vary my will, I do not have to go to the High Court to do it; I vary my will. The regulations in place for a variation of a will after death or in the circumstances of incapacity—as raised on Second Reading—are clear. Opposition Members are trying to isolate the measure completely from the interaction of all the inheritance tax and trust rules, and they are simply wrong.

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

I will give way first to Mr. Newmark and then to John Bercow, and then I would appreciate it if I could make some progress on the new clause.

Photo of Brooks Newmark Brooks Newmark Conservative, Braintree

My hon. Friend Mrs. Villiers was spot on in referring to the retrospective nature of the Bill. Retrospectivity in this context means that individuals will have to change trusts that are already in place. Non-retrospective legislation would say "From this point on"—or, in the case of this Bill, in two years' time—"these will be the rules." The Bill is retrospective because it will force people to change existing wills and existing trusts.

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

I know that the hon. Gentleman is new to the House, but pretending that the world began only when he entered it is utterly ridiculous. Did the Conservative Government agree that when they reduced mortgage interest relief at source—MIRAS—they were doing something retrospective? No, they did not. When they reduced the married couples allowance, were they taking retrospective action because of the expectation that existed? Of course they were not. When they reduced advance corporation tax relief, was that a retrospective measure because all the companies said that they had expected to receive it in perpetuity? Of course it was not. That is such a ridiculous point that I am surprised that the hon. Gentleman wanted to make it.

Photo of John Bercow John Bercow Conservative, Buckingham

I am a bit suspicious. I have a high regard for the Paymaster General, but she treated a serious and thoughtful inquiry from my hon. Friend Mrs. Villiers as an opportunity to launch into a stream of rather unnecessary invective. May I ask the Paymaster General a simple question? Is she seriously saying that it is ordinarily possible for someone to alter the terms of an existing trust as quickly, simply or inexpensively as that person could alter his or her will? That was the gravamen of the question that my hon. Friend asked, and it deserved a more serious response.

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

The hon. Gentleman and I have known each other for quite a long time. He knows very well that I have not even started on the invective yet.

The point is that the wills set up the trusts, either in the lifetime of an individual or on death. The will is the trigger, and those who want to change their wills can do so. The trusts make it possible to plan for a tax that has not yet been triggered, to retain control of assets whose control will be determined after death. They control the assets beyond death to determine who will get them and who will not. I do not think it unreasonable for us to say that if a trust specifies a certain beneficiary after a certain event, that beneficiary should receive the product.

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

I will, but it will be the last time.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

I am grateful to the Paymaster General for her generosity.

I am becoming a little confused by some of the comments made by Opposition Members. Perhaps I have misunderstood the Government's proposals. I thought that the proposals did not affect trusts that had been set up, say, a year ago—trusts that already exist. If that is the case, Mrs. Villiers is wrong; if not, could the Paymaster General explain why?

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

People have two years in which to ensure that there is a proper end to a trust. In that sense, such trusts are affected; otherwise, it would be a bit like our saying, "Just because you have already successfully planned a tax avoidance, we will leave it in place."

It may help the Committee if I explain the purpose of the measure and what it does before dealing with the new clauses. As I have said, the purpose is to stop inheritance tax avoidance through the use of certain types of trust—not all trusts. Before the Budget, it became clear that some wealthy individuals were using trusts in that way. The avoidance worked in different ways, and was often highly technical, but the end result was the same: substantial assets passed from generation to generation with no inheritance tax ever being paid.

I have made it clear that the Government consider it unfair that a small number of wealthy people should be able to exploit trusts in that way by combining rules. The new rules prevent such unfair avoidance, while protecting straightforward and sensible arrangements made by honourable people.

This measure brings accumulation and maintenance trusts and interest in possession trusts into the mainstream tax rules for discretionary trusts. It does not, therefore, create a new regime; it merely brings such trusts into the regime that applies to all the others. The money put into a trust during a person's lifetime—

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

If I can explain what the provision does, it might help in dealing with the misunderstandings. In respect of money put in trust during a person's lifetime, charges apply on assets over the IHT threshold—currently £285,000—at 20 per cent. on entry. So assets over the value of the threshold get charged at 20 per cent. on entry, and at 6 per cent. every 10 years after that. The only exemption for trusts created during life is that applying to trusts for disabled people, an issue to which we will return.

Where money is put into trust on a person's death, the IHT is due on the estate, as is normal, unless spouse relief or some other exemption applies. If a trust is then set up, it is exempt from charges if it is for a disabled person; if it is an accumulation and maintenance trust set up by a partner for their bereaved child, who will take the assets outright at the age of 18; or if it is an interest in possession trust for the benefit of one person with outright ownership of the assets, passing to another person when the trust ends. That is a very straightforward arrangement and it is in line with existing trust arrangements.

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

Perhaps the hon. Gentleman will allow me to make at least some headway on the reasons why the new clauses and amendments, including his own, are unacceptable. Having done so, I will of course give way to him.

All the new clauses and amendments before us are unnecessary, because what is asserted will happen will not, in fact. Ever since Budget day, when the Government announced that we planned to change the IHT rules for trusts, there has been enormous misunderstanding, which has continued today. Bearing that in mind, let me remind the Committee what spouse relief is about and what impact our proposals in clause 157 and schedule 20 will have on such relief.

Spouse relief is an inheritance tax exemption on transfers from one spouse to another. So if property starts in the ownership of one spouse and ends up in the ownership—I stress, ownership—of the other, the situation is straightforward: the transfer is exempt from IHT. That means that the bequest rules apply if a gift from one spouse to another is made when both spouses are still living, so let us be clear: our proposals in clause 157 and schedule 20 have no relevance at all to such cases. For the vast majority of people with straightforward affairs, all that they need to know about the IHT proposals is that spouse relief exists and that a transfer can be made to their spouse. The potential overlap between spouse relief and our proposals only arises, therefore, in cases where partners want to use trusts on or after Budget day to make a less than straightforward gift or bequest.

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

No; please let me make some progress on these points.

Transferring assets into trusts is very different from making an outright gift; some people have tried to argue that they amount to the same thing, but they do not. The recipient of an outright gift can do with it as they please, with or without the consent of the person who made the gift—they are the absolute owner. However, if a person places money in a trust, it must be used by the trustees in accordance with that person's wishes. It is the fact that control can continue long after the settlor's death that makes the difference.

Inheritance tax rules for interest in possession trusts have conferred the same exemptions that would apply if putting assets into trusts were identical to making an outright gift. The result has been that interest in possession trusts can be—and regularly is—used as a highly flexible money box and a long-term shelter from inheritance tax liabilities. That usually requires the settlor to get rid of assets in his lifetime but, where the spouse relief is available, it is possible for the settlor to hold on to his assets until death and completely wipe out any inheritance tax liability, in both the present and the future—all without giving the surviving spouse or civil partner any influence whatsoever over the assets in their name.

Of course, some cases are not avoidance-driven, and a number of exemptions provide appropriate protection for the people involved. First, spouse relief will continue where an interest in possession trust is set up in a person's will to give a life interest to a bereaved spouse or civil partner provided that, when such interest ends, the assets are taken outright by someone else. No further flexible power is necessary in the trust, because it has delivered its objective.

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

I want to make three points. Opposition Members continually claim that various eventualities will not be covered or that different outcomes will arise. When I tell them that they are wrong, they want to ask other questions. Let us deal first with what is on the table.

Secondly, spouse relief will continue if a person dies without a will and their assets are passed to a bereaved spouse or civil partner, whether or not a trust is created under the intestacy rules. Thirdly, the rules will continue to provide for post-death changes where people die with an out-of-date will. If that will provides for a trust that would not qualify for spouse relief under our new rules, the interested parties will have the opportunity that they have always had to put things right. That is another answer to the question about retrospection.

Photo of David Gauke David Gauke Conservative, South West Hertfordshire

I have two questions. First, will not the possibility of variation allow people to get around the tax avoidance that the Paymaster General mentioned earlier, and so make these provisions ineffective? Secondly, the right hon. Lady described the conditions under which an immediate post-death interest will apply and inheritance tax is not payable. Does she accept that, in the vast majority of cases, trusts contained in wills will not meet those conditions?

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

I accept that people who transfer assets under the spouse exemption provisions do not need a trust to safeguard that exemption. I also accept that the gift provisions do not require a trust to be imposed between donor and recipient, and that assets should be transferred to a recipient when that is the donor's clear intention. Assets should not be held in a halfway house that means that the recipient does not get control and that the state does not get the inheritance tax to which it is entitled. Ending that possibility is precisely what the proposed changes are designed to achieve.

The new clause and the other amendments would once again make it possible for the wealthy few to use inheritance tax exemptions and rules to get reliefs beyond their entitlement. By the targeted use of changes to the particular types of trust being used in such cases, the Government propose to preserve the rules and make sure that they are used as they were always intended. For that reason, if the hon. Member for Chipping Barnet and her hon. Friends push the new clause to a vote, I shall ask my hon. Friends to oppose it and I look forward to debating the provision in detail in the Standing Committee.

Photo of Theresa Villiers Theresa Villiers Shadow Chief Secretary to the Treasury

I shall review briefly some of the comments that have been made. We began with Chris Bryant who expressed with passion his support for inheritance tax and his criticism of the exemptions.

We then heard from Julia Goldsworthy who drew on a theme mentioned by many Opposition Members. She pointed out that the proposed changes could affect as many as a million wills and referred to the 4.5 million people who would probably have to review their life assurance policies. She also mentioned the problems in relation to people who have died since the Budget.

My right hon. Friend Mr. Redwood referred to the fact that many people of modest means will be affected by the proposed changes. He pointed out that they are retrospective. I agree with him wholeheartedly, especially because it may not be possible to vary existing trusts. They are affected by the provisions and the courts may refuse variations. It may also be difficult to vary wills, especially when the person who made the will has lost capacity. There will be retrospective effects.

My hon. Friend Mr. Gauke said that the current rules generally deem trusts to be tax-neutral, so they are treated similarly to outright gifts. He pointed out that the Government's proposals would impose penalties on trusts that do not apply to outright gifts. He referred to the long history of the spouse exemption and to the practical difficulties of meeting the six exacting conditions of the draft proposals. Most tellingly, he drew attention to the suspicion that prejudice must be motivating the Government's approach to trusts and argued for a more targeted solution, rather than taking a sledgehammer to crack a nut.

My hon. Friend Mr. Davies said that it was important to improve the rationality of the proposals. He, too, pointed out that the Bill seems to attack trusts for no good reason. My hon. Friend Mr. Newmark noted that the provisions would hit the vulnerable. He sought clarity and emphasised the importance of retaining the spousal exemption to prevent double taxation of the single estate of a husband and wife.

Stewart Hosie talked about the impact of the proposals in Scotland, where thousands of people could be affected. He made the good point that the Government have not held proper consultations. My hon. Friend Mr. Dunne emphasised the point about retrospectivity and said that the proposed changes would affect a wide range of people, giving instances of their impact on divorce.

The proposals on spousal exemption will have a significant impact on a wide range of ordinary, hard-working people. If the Paymaster General is not prepared to take our word for that, she should take the word of the professional organisations to which I referred earlier. They say:

"The Government's proposed changes to inheritance tax on trusts amount to a tax on prudent families. They will affect millions of ordinary families and not, as the Government has suggested, only the super-rich."

Unless the proposals are amended, in line with our new clause and the many more amendments that we shall table in the Standing Committee, they could leave a million people having to redraft their wills, facing a legal bill of about £275 million. The measure will hit the vulnerable, the young and the bereaved, so I intend to press the new clause to a Division.

Question put, That the clause be read a Second time:—

The Committee divided: Ayes 193, Noes 285.

Division number 220 Orders of the Day — Finance (No. 2) Bill — New Clause 1 — Application of section 18 IHTA 1984

Aye: 193 MPs

No: 285 MPs

Ayes: A-Z by last name

Tellers

Nos: A-Z by last name

Tellers

Question accordingly negatived.