New Clause 2 — Trusts relating to divorce, life protection policies and disabled persons

Finance (No. 2) Bill [Ways and Means] – in the House of Commons at 3:35 pm on 4th July 2006.

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'The provisions of Schedule 20 shall not operate so as to discourage, impede or prevent the use of trusts which are set up—

(a) as a result of relationship breakdown and create a "relationship breakdown settlement interest", as defined in section 59A of the Inheritance Tax Act 1984; or

(b) in relation to the proceeds of life protection policies, as defined in section 58(4) of the Inheritance Tax Act 1984; or

(c) by or in favour of disabled persons within the definition set out in section 89 of the Inheritance Tax Act 1984.'.— [Mrs. Villiers.]

Brought up, and read the First time.

Photo of Michael Martin Michael Martin Chair, Speaker's Committee on the Electoral Commission, Speaker of the House of Commons, Chair, Speaker's Committee on the Electoral Commission

With this it will be convenient to discuss the following:

Amendment No. 58, in schedule 20, page 377, line 21, after 'minor', insert '(whether by exercise of trustees' powers under such a will or otherwise).'.

Amendment No. 56, page 380, line 30, at end insert—

'(4A) Where—

(a) section 71 above applied to settled property immediately before 22nd March 2006,

(b) on or after that date a beneficiary (within the meaning of section 71 above) ("B") became entitled to an interest in possession in that settled property, and

(c) before that interest in possession had come to an end and while B was under the age of 25 and before [6th April 2008] that settled property became held for the benefit of B on trusts such as are mentioned in subsection (3)(b)(i) above, subsections (3) and (4) above shall apply as though the settled property had become held on the trusts referred to in paragraph (c) above immediately at the time B in fact became entitled to the interest in possession referred to in paragraph (b) above.'.

Government amendment No. 70.

Amendment No. 34, page 386, line 3, after 'interest', insert ', or

(d) a relationship breakdown settlement interest.'.

Government amendments Nos. 71 to 74.

Amendment No. 59, page 386, line 42, after 'but', insert '(unless B was the spouse or civil partner of the person entitled to the prior interest)'.

Government amendments Nos. 75 to 77.

Amendment No. 5, page 388, line 18, at beginning insert—

'6 (1) In section 89 (trusts for disabled persons)—

(a) in subsection (4)(a) at end insert—

"(aa) a person who lacked capacity within the meaning of section 272 below, or";

(b) in subsection (4)(c), leave out "or middle" and insert "middle or lower"; and

(c) after subsection (4)(c) at end insert—

"(d) a person who satisfies the Commissioners for Her Majesty's Revenue and Customs that he had a condition that it was at that time reasonable to expect would have such effects on him as to lead to him becoming a person—

(i) falling within subsection (4)(a) or (aa) above, or

(ii) in receipt of an attendance allowance mentioned in subsection (4)(b) above, or

(iii) in receipt of a disability living allowance mentioned in subsection (4)(c) above.".'.

Amendment No. 6, page 388, line 29, after '89(4)(a)', insert 'or (aa)'.

Amendment No. 7, page 388, line 34 , leave out 'or middle' and insert ', middle or lower'.

Government amendment No. 78.

Amendment No. 8, page 390, line 26, leave out 'or middle' and insert ', middle or lower'.

Amendment No. 9, page 390, line 46, leave out 'or middle' and insert ', middle or lower'.

Amendment No. 10, page 391, line 2, at end insert—

'(7) The reference in subsection (1) above to a disabled person includes, in relation to any settled property, a reference to a person who satisfied Her Majesty's Revenue and Customs that he would, when the property was transferred into settlement, have been entitled to an attendance allowance or disability living allowance, by virtue of entitlement to the care component at the highest, middle or lower rate, whether or not such an allowance was actually claimed.'.

Government amendment No. 79.

Amendment No. 35, page 393, line 9, at end insert ', and

(iv) not a relationship breakdown settlement interest."'.

Amendment No. 32, page 393, line 9, after 'interest', insert—

'10A (1) Section 10 of IHTA 1984 is amended as follows.

(2) In subsection (1)(b) after "with each other", insert ", or

(c) it is made in accordance with or pursuant to a court order in proceedings for the following types of provision—

(i) financial relief for the parties to a marriage and any children of the family in connection with proceedings for divorce, nullity of marriage or judicial separation including, but not limited to, property adjustment orders or variation of settlement orders under section 24 of the Matrimonial Causes Act 1973 or orders under section 8 of the Family Law (Scotland) Act 1985 and any successive legislation; or

(ii) financial relief for the parties of a civil partnership in connection with proceedings for dissolution of the civil partnership including, but not limited to, property adjustment orders or variation of settlement orders under Schedule 5 of the Civil Partnership Act 2004 and any successive legislation; or

(iii) where a marriage has been dissolved or annulled or the parties to a marriage have been legally separated, by means of judicial or other proceedings in an overseas country and the divorce, annulment or legal separation is entitled to be recognised as valid in England and Wales, in Scotland or in Northern Ireland, financial relief for the parties to the marriage and any children of the family including, but not limited to, property adjustment orders or variation of settlement orders under section 17 of the Matrimonial and Family Proceedings Act 1984 or orders under section 8 of the Family Law (Scotland) Act 1985 and any successive legislation; or

(iv) financial relief for the benefit of a child including, but not limited to, a transfer or settlement of property under paragraph 1 of Schedule 1 of the Children Act 1989 and any successive legislation.".'.

Government amendment No. 80.

Amendment No. 36, page 396, line 15, at end insert ', or

(c) a relationship breakdown settlement interest."'.

Amendment No. 37, page 396, line 30, at end insert ', or

(d) a relationship breakdown settlement interest."'.

Amendment No. 38, page 396, line 39, at end insert ', or

(d) a relationship breakdown settlement interest."'.

Amendment No. 39, page 397, line 24, at end insert ', or

(c) a relationship breakdown settlement interest."'.

Amendment No. 40, page 398, line 10, at end insert ', or

(c) a relationship breakdown settlement interest."'.

Amendment No. 41, page 398, line 28, at end insert ', or

(d) a relationship breakdown settlement interest."'.

Amendment No. 3, page 398, line 39, at end insert—

'(2A) After sub-paragraph 1(f) insert—

"(g) a life protection policy as defined in subsection 4 below;

(h) property representing directly or indirectly any sum paid under a life protection policy, within two years following the death of any person giving rise to that sum.".'.

Amendment No. 42, page 399, line 11, at end insert ', and

(iv) not a relationship breakdown settlement interest.'.

Amendment No. 4, page 399, line 25, at end insert—

'(4) After section 58(3) insert—

"58(4) In subsections 1(g) and 1(h) above a "life protection policy" is a policy of insurance where the sum payable on the death or disability of any person is at all times no less than a number of equal to ten multiplied by the highest total sum of premiums paid in any period of twelve months.".'.

Amendment No. 43, page 399, line 37, after first 'interest', insert ', or a relationship breakdown settlement interest'.

Government amendment No. 81.

Amendment No. 33, page 400, line 6, at end insert—

'20A In IHTA 1984 after section 59 IHTA 1984 insert—

"59A Relationship breakdown settlement interest

(1) Where a person ("L") is beneficially entitled to an interest in possession in settled property, for the purposes of this Chapter that interest is a "relationship breakdown settlement interest" only if the following conditions are satisfied.

(2) Condition 1 is that the settlement was effected, or if there was a prior settlement it was confirmed or varied, by a court order, in proceedings of the type mentioned in section 10(1)(c).

(3) Condition 2 is that L became beneficially entitled to the interest in possession on or before the date on which the court order came into effect.'.

Government amendment No. 82.

Amendment No. 57, page 400, line 44, at end insert 'or a disabled person's interest'.

Government amendment No. 83.

Amendment No. 44, page 401, line 21 , after 'interest', insert ', or

(iii) a relationship breakdown settlement interest.'.

Government amendment No. 84.

Amendment No. 45, page 401, line 27, after second 'interest', insert 'or a relationship breakdown settlement interest'.

Government amendment No. 85.

Amendment No. 46, page 401, line 30 , after 'interest', insert 'or a relationship breakdown settlement interest'.

Government amendment No. 86.

Amendment No. 47, page 401, line 37 , leave out 'neither' and insert 'not'.

Government amendment No. 87.

Amendment No. 48, page 401, line 37, leave out 'nor' and insert 'or'.

Amendment No. 49, page 401, line 38 , after 'interest', insert 'or a relationship breakdown settlement interest.'.

Amendment No. 50, page 402, line 2, at end insert ', or

(d) a relationship breakdown settlement interest."'.

Amendment No. 54, page 403, leave out line 1.

Amendment No. 55, page 403, line 2 , leave out 'the' and insert 'a'.

Government amendments Nos. 88 and 89.

Amendment No. 11, page 403, line 26, at end insert—

'"lacked capacity" means lacked capacity, within the meaning of the Mental Capacity Act 2005, in relation to any financial matter;'.

Amendment No. 51, page 403, line 26, at end insert—

'"relationship breakdown settlement interest" means a relationship breakdown settlement interest for the purposes of Chapter 3 of Part 3 (see section 59A above);"'.

Government amendments Nos. 90 to 92.

Amendment No. 12, page 404, line 6, at end insert—

'(iii) a disabled person's interest, within the meaning given by section 89B of that Act; or'.

Amendment No. 52, page 404, line 6, at end insert—

'(iii) a relationship breakdown settlement interest within the meaning given by section 59A of that Act, or'.

Government amendments Nos. 93 to 96.

Amendment No. 53, page 405, line 5, after 'interest', insert 'or

(iii) a relationship breakdown settlement interest.'.

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

From the day the Chancellor slipped out these proposals contained in schedule 20 of the Finance Bill in Budget note 25 on 22 March this year, they were greeted with dismay and viewed as a matter of grave concern. Protests came from thousands of professionals across the country who were deeply worried that the Government had failed to carry out any consultation on the proposals and that those proposals would have a retrospective impact on thousands of trusts. Above all, Richard Platt, of Brewin Dolphin Securities, spoke for many of similar mind when he said that the proposals would

"hit Britain's hard-working families at a time when the Government is encouraging families to safeguard their long-term financial security."

The Society of Trust and Estate Practitioners, which has campaigned hard on the issue, estimated that at least 1 million wills would have to be reviewed or rewritten. The VAT on the £250 million or so of professional fees incurred in reviewing all those wills would have outstripped the mere £15 million that the Government expected to raise from what must have been one of the least cost-effective tax proposals ever made.

The Paymaster General dismissed the measured concerns that I expressed about these matters on the Floor of the House by saying that I did not know what I was talking about. Despite that robust defence, in Committee the Government then proceeded to table no fewer than 33 amendments to schedule 20 in an attempt to mitigate the serious problems about which I and so many others had protested.

The key changes were to reduce the new tax penalty imposed on trusts where property does not vest until the age of 25, and to restore the spouse exemption for trusts set up in wills. The Chancellor's retreat continues today, with another 27 Government amendments to schedule 20. I welcome Government amendment No. 75 in particular, which more or less completes the Government's U-turn on the spouse exemption and covers the point made in our amendment No. 59. The Government dismissed my arguments on the point in Committee, but they seem now to have conceded that successive life interest for spouses should not always fall under the new regime set out in schedule 20.

Photo of John Bercow John Bercow Conservative, Buckingham

I am very grateful to my hon. Friend, and I look forward to supporting the amendments and new clauses that she and my other hon. Friends on the Front Bench have rightly tabled. At the outset of her remarks, she said that the Chancellor had "slipped out" these proposals. It may be that the right hon. Gentleman expatiated eloquently and at length on these matters in his Budget speech, but I do not recall him doing so. Will my hon. Friend refresh my memory as to the correct chronology of events?

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

My hon. Friend is correct. The Chancellor did not choose to refer in his Budget speech to these radical proposals, which have been called the most significant changes to inheritance tax for a generation.

I also welcome Government amendment No. 89, which effectively puts into effect our amendments Nos. 54 and 55 and removes serious technical obstacles that would have prevented trustees from making appointments under trusts set up in discretionary wills. I am grateful for the sympathetic approach to the matter adopted by the Paymaster General in Committee, which has been confirmed in the Government amendment. However, some very serious problems in respect of schedule 20, and the Chancellor's proposed new inheritance tax charges on trusts, remain unsolved.

New clause 2 and the other Opposition amendments in the group focus on four main areas: technical issues relating to trusts for young people; disability; life insurance, and trusts arising from relationship breakdown.

First, amendment No. 56 would correct an anomaly in proposed new section 71D, which was introduced in Committee and which reduces the harsh impact of schedule 20 in relation to existing accumulation and maintenance trusts. The proposed new section introduces a new taxation scheme allowing trustees to opt into a regime under which inheritance tax at 4.2 per cent. is paid if a vesting age of 25 is retained. However, if a beneficiary under such a trust has obtained an interest in possession since Budget day, it seems that the new taxation rating cannot apply because the trust entered the relevant property regime before steps could be taken to comply with proposed new section 71D. Thus, there is no opportunity to convert into a form of trust that would satisfy the new rules.

If the Paymaster General will not accept our amendments, I hope that she will at least clarify the matter. In Committee, she maintained that proposed new section 71D had been tabled merely to clarify what had always been the Government's intention. If that is so, it seems very unfair to penalise people who are victims of the Government's admitted failure to make their intentions clear on publication of the Bill.

Amendment No. 58 is also technical in nature, but would make an important change to provisions in respect of the bereaved minor trust. That is an important part of the Government's new framework, and the amendment deals with the circumstances that arise when a will leaves property on trust to a spouse for life, with the remainder going to children on trust, vesting when they reach 25. That arrangement will attract the full force of the new schedule 20 charges, unless it can be varied to comply with the requirements of proposed new sections 71A and 71D. Trustees may wish to do that, but proposed new section 71A(2)(a) means that a change made by trustees will not enable them to opt into the bereaved minor trust regime. That is because such trusts apparently can arise only under a will and, in the circumstances that I have outlined, the trusts arise as a result of the exercise of the trustees' powers—that is, not directly under the will.

Amendment No. 58 would ensure that a change by trustees in that situation will suffice to bring the trust under the proposed new section 71A regime. If it is not adopted, many thousands of wills, perhaps more, will still need to be reviewed. I hope that, at the very least, the Paymaster General will give the House clarification on that point.

Turning to the more substantive issues, rather than the technical one, our amendments would broaden the definition of disability in section 89 of the Inheritance Tax Act 1984. Section 89 has received little attention up to now, because plenty of more useful and more flexible trusts could be set up for vulnerable people outside the scope of section 89. Now that the majority of such trusts will be hit by the new inheritance tax charges under schedule 20, the section 89 carve-out has suddenly grown significantly in importance.

Some problems in respect of trusts for disabled people have been solved by amendments tabled by the Government in Committee and the retreat continues with their amendment No. 92, which will be considered this afternoon and is to all intents and purposes identical to Opposition amendment No. 12. As drafted, the Bill would impose a double tax hit on the death of a disabled beneficiary under an interest in possession trust. Both inheritance tax and capital gains tax would be payable, which would leave disabled beneficiaries facing a higher tax bill than they would have done before Budget day. I am relieved that the Government have had second thoughts about imposing that extra tax hit on vulnerable people, despite the Paymaster General's rejection of my amendment on that matter in Committee.

Similarly, I welcome the Government's acceptance of the point made in Opposition amendment No. 52—that it would be unacceptable to leave a disabled beneficiary struggling with the administrative problems caused by the related settlement regime of IHTA section 80 when others are exempted. Unless the Bill is amended on that point, people setting up trusts for a disabled spouse will be in a more disadvantaged position than those leaving a life-interest trust in their will to a non-disabled spouse.

Even with the solution of those problems, however, significant difficulties will still arise in relation to the impact of schedule 20 on trusts for vulnerable and disabled people—some of the most disadvantaged communities in our society. Robin Williamson of the Low Incomes Tax Reform Group put it more articulately than I possibly could. He said:

"On Budget day...this year...the Government proposed—without prior consultation—the most far-reaching changes to inheritance tax in a generation. Their intention seems to be to exclude trusts for disabled people from the scope of the new tax charges to be levied on most other types of trust. But the definition of disabled person used for this purpose, substantially unaltered for more than 20 years, is so narrowly framed as to leave many disabled beneficiaries of trusts out in the cold.

While the rest of government forges ahead in its understanding of disability issues, with the Disability Discrimination Acts 1995 and 2005 ushering in a new age of inclusion, the tax system clings obstinately to ancient precedents. The final opportunity to put these matters right comes when the Finance Bill receives its third reading on Tuesday and Wednesday 4 and 5 July. We urge the Government to reconsider, otherwise this once-in-a-generation opportunity to bring the tax definition of disabled person up-to-date and into line with the rest of Government thinking on disability will have been missed."

Photo of John Bercow John Bercow Conservative, Buckingham

So that the issue is fully intelligible to those of us who were not privileged to sit on the Standing Committee, and to others outside this place who are very interested in this point, will my hon. Friend explain precisely what is the rather narrow definition that the Government have hitherto insisted on using?

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

Yes, I shall explore that point in a moment.

In a joint statement, the organisations Mind, the Society of Trust and Estate Practitioners, the Parkinson's Disease Society, the Chartered Institute of Taxation, the Institute of Chartered Accountants, the Law Society, the Low Incomes Tax Reform Group and the National Autistic Society said:

"We are not seeking favoured treatment, but to prevent vulnerable trust beneficiaries from incurring a tax penalty that they would not have incurred before Budget day. There are so many inconsistencies in the definition in section 89 that we firmly take the view that the legislation cannot go forward as currently drafted without causing severe prejudice to the interests of vulnerable trust beneficiaries, and discrimination between different classes of beneficiary, some of whom may qualify as a "disabled person" under the definition and some of whom will not."

Turning to the point made by my hon. Friend John Bercow, the current section 89 definition covers two groups: people who, by reason of mental disorder within the meaning of the Mental Health Act 1983, are incapable of administering their property or managing their own affairs and people who are claiming attendance allowance or the highest or middle rate care component of disability living allowance.

The Opposition seek to broaden both categories of the definition. In accordance with the representations made by Mind and other concerned groups, we propose to add a reference to the Mental Capacity Act 2005, so that it is sufficient if the beneficiary falls within the definition of incapacity contained in the Mental Health Act 1983 or the 2005 Act.

The problem that we seek to address with the new clause and these amendments was highlighted by James Kessler, QC, when he said:

"The definition of disabled is extremely narrow...the large majority of mentally vulnerable people will not be included. No relief is given for those with partial mental capacity... No relief is available to those who are aged or infirm or incapacitated whose disability is less than the grievous state required for relief."

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield 4:00 pm, 4th July 2006

I seek to broaden the debate very slightly. I fully agree with the argument being advanced by my hon. Friend from the shadow Treasury team, but is it not utterly wrong that there should be prejudice in the Government against the cascading down of wealth from one generation to the next, particularly against those who are seeking to hand on by way of a trust to those who are disabled, either physically or mentally, or to those who have looked after their elderly parents, thus sacrificing their own career? Their future is prejudiced because of the measure that the Government want to introduce—that is, it is unfair. Does my hon. Friend agree?

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

It is certainly enormously important that parents who wish to provide for a disabled child for the rest of their child's life are not prevented or inhibited from or penalised for setting up a trust for that purpose. It seems to be the most worthwhile thing in the world for people to want to provide security for their disabled children. That is what the Opposition seek to do in our new clause and amendments this afternoon.

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

Perhaps the hon. Lady would explain to Sir Nicholas Winterton that the Government carried out a consultation exercise on this very issue two years ago and that, overwhelmingly, all the organisations consulted said that they want to stick with the provisions of the Mental Health Act 1983. Would she also explain to the hon. Gentleman that we are talking about inheritance tax avoidance, not about planning for disabled children?

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

On the second point, the Paymaster General and the Government repeatedly say that schedule 20 is all about preventing the super-rich from sheltering their wealth from inheritance tax, but they adduce no evidence that trusts are used in that way. It is almost impossible to see how trusts can be used in that way, because they are taxed in the same way as an outright gift. The reality is that schedule 20 will hit a vast number of arrangements that have nothing at all to do with taxation. The fact that someone might wish to save their money and put it into a trust to provide after their death for their disabled child seems to have nothing whatsoever to do with inheritance tax.

I am glad that the Paymaster General referred to the consultation that the Government carried out, but she failed to mention that the consultation on the definition is two years old.

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

I am sorry—a slight omission—but certainly no mention was made of the fact that the consultation was carried out in the context of an income tax provision, which did not have nearly the same significance as section 89. Furthermore, again, I quote the QC to whom I referred earlier:

"Until now the tax reliefs for disabled persons have been almost entirely irrelevant because the value and importance of the reliefs have been trivial. The reliefs have not been significantly used because they are more trouble than they are worth. Thus it does not matter that the definition of disabled has been drawn extremely narrowly."

Even more importantly, the Mental Capacity Act 2005 had not been finalised when the consultation was carried out, so it would have been difficult for the organisations to refer to such matters directly. Although a significant number of charitable organisations were involved in the consultation, only six responded on that issue during the two consultation exercises that were carried out.

A number of influential organisations protested that the definition was too narrow. On this point, the Treasury summary of the responses states:

"There was concern that the definition of vulnerable set out in the discussion papers—which covered disabled people and orphaned children—was too narrow."

In Committee, the Paymaster General referred to the Disability Alliance as supporting the current section 89 definition. I would therefore like to quote from its response on the consultation, which it publishes on its website. Under the heading "Defining categories of disabled people", it states:

"The proposals to restrict eligibility to those mentioned in paragraph 2 above appears to be far too restrictive and would exclude many disabled people who are currently defined under social security legislation. In this regard it would not appear to fit in with the government's proposal of fairness."

I was only too happy to take up the Minister's invitation to refer to the consultation.

Photo of Philip Dunne Philip Dunne Conservative, Ludlow

The Paymaster General quite rightly points out that the consultation began more than two years ago, but she has failed to acknowledge that no mention was made during that consultation of the main issue before us in relation to the changes in schedule 20—the reduction in age from 25 to 18 for accumulation and maintenance trusts. That was not referred to in the consultation at all. Nor was any evidence given by the Paymaster General in Committee of any systematic abuse. The consultation exercise failed to reveal the issues that the Government are now trying to introduce.

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

I agree that it was deeply unfortunate that the Government carried out the two-year consultation and never once mentioned the proposals on inheritance tax that they were seeking to put forward.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

Will the hon. Lady indicate whether her amendments are aimed at dealing with trusts for people with disabilities set up inter vivos or on death? Those things are very different in terms of whether one is making provision for a child with a disability. Amendment No. 7 seeks to include the lower rate of disability living allowance as a kind of qualifying gateway. What level of disability is encompassed by the lower rate of DLA definition? Will she give some examples?

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

I will come to the second point later. On the first point, the amendments are most important in relation to inter vivos trusts, because at least there are other options open in relation to trusts set up on death. After the Government's amendments in Committee, it will now be possible to set up life-interest trusts under a will without suffering the tax penalties. The primary advantage to be gained by the Opposition's amendments is in relation to the establishment of inter vivos trusts, which would obviously otherwise incur the charges.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

I am grateful for that clarification. Perhaps I have misunderstood the hon. Lady, and she can clarify things if I have, but the reply that the Opposition amendments are related to inter vivos trusts suggests that we are talking about a tax dodge, rather than the laudable aim of a parent of a child with a disability—who will have that disability for life and who is likely to outlive their parents—who wants to make provision for that child after the parent is gone. I can see the situation with trusts on death, but the hon. Lady is talking about amendments relating to inter vivos trusts. I hope that she will realise why there appears—certainly prima facie—to be a tax dodge in that scenario.

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

I know that the hon. Gentleman is keen to crack down on tax avoidance, but it is harsh to accuse parents who set up trusts to provide for their disabled children of doing that for motives of tax dodging. Let us take, for example, a situation in which the parents of a disabled child are becoming elderly. They may find it difficult to continue to manage the financial affairs as their own capacity starts to diminish. It is an entirely understandable wish on the part of a parent to get things sorted out, set up and finalised well before they die. There is a real social need to sort out and secure the future of one's children, even before one's death.

The definition in the 2005 Act is much broader than in the 1983 Act and will more easily cover the people with partial, variable and fluctuating levels of capacity to which I referred earlier in the quote from James Kessler, QC.

Moreover, the definition in the 2005 Act is more up to date—many of the relevant provisions of the 1983 Act are soon to be repealed. That Act is geared towards determining whether compulsory treatment is required. The background to its operation is the question whether someone is a risk to themselves or others—that is, whether they should be sectioned. In contrast, the 2005 Act focuses on whether someone has the capacity to manage their own affairs and considers their ability to make decisions about their own lives. It is much more empowering. It focuses more closely on the situation that we are considering, whereby a disabled person may wish to use a trust to assist them in managing their property. Our amendment is focused specifically on capacity in relation to financial matters.

The key problem is that many people who need trusts to help them to tackle the serious difficulty that they may have in managing their finances fall short of the degree of mental illness required to bring them within in the definition in the 1983 Act. For example, many people who have a diagnosis of manic depression or schizophrenia will not be ill enough to fall within that definition, yet they may be the very people who need trusts most of all. As the charity, Rethink, points out on its website, people with manic conditions often believe that they are richer than they are and go on irrational spending sprees. One family wrote to me about the trust that it had set up for their daughter, whose bipolar disorder, more commonly known as manic depression, leads to such irrational spending. They said:

"We are not wealthy and we imagine our assets are probably about average or less for families that live in this part"— of the country.

"We know that other parents in Scotland of modest means whose children suffer manic depression or problems such as drug addiction, alcoholism etc. have also set up IIP trusts. We need flexibility from limited funds to care for the surviving spouse as well as for a mentally sick (but not disabled) offspring. We write to ask you to seek to influence the legislation. We are concerned that trusts that have no tax avoidance intention or action will suffer unfairly large taxation...Our sole intention is to provide trustees to regulate my daughter's income so that she does not make herself destitute by claiming her legal share of assets if they are not protected by an existing IIP trust."

I hardly think that people in that position can be accused of engaging in a tax dodge, as Rob Marris suggested. Unless amended, the Bill will impose a 20 per cent. tax charge on capital plus a 6 per cent. tax charge every 10 years on a trust of this nature set up for a vulnerable person. The definition in the 2005 Act was subject to 12 years of consultation. It has a wide range of support among groups working with people with mental health difficulties, and I appeal to the Government to accept its incorporation into the Bill.

Turning to the second limb of the section 89 definition, the Low Incomes Tax Reform Group and its influential coalition point out that the benefits-related test is a very blunt instrument. In many cases, people with serious disabilities will not qualify for the middle or highest rate care components of disability living allowance as required by section 89. To qualify even for the middle rate—here I respond to the intervention by the hon. Member for Wolverhampton, South-West—someone must be so severely disabled that they require frequent attention or continual supervision throughout the day or night. In particular, the provision excludes beneficiaries under trusts set up for personal injury damages or to cover money from disaster funds, who may have a high mobility component and a lower care component of DLA—in other words, they may need an hour's care a day or more but not frequent or continuous care. Surely such cases, where for example personal injury damages have been obtained, are exactly the type of situation in which a trust can be most useful, in that a large cash sum is received that has to be managed carefully to provide for the rest of the beneficiary's life. Again, the Government want to slap a 20 per cent. up-front charge on those damages and a 6 per cent. charge on capital every 10 years. As the Society of Trust and Estate Practitioners points out, such people can ill afford to pay those new charges since the quantum of damages awarded to them has been carefully assessed to meet their needs for the rest of their life.

We should remember that the sums involved in such damages settlements and court cases are likely to be very significant. As they are intended to cover the rest of the claimant's life, with the high cost of living with disability factored in, they may well exceed the inheritance tax thresholds. The Opposition have tabled cautious amendments to extend the scope of section 89 as regards those who can claim the lower rate of the care component. That would embrace many more disabled people. We urge the Government to accept those amendments in order to seize this last opportunity to prevent schedule 20 from penalising some of the most vulnerable and disadvantaged people in our community.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West 4:15 pm, 4th July 2006

I declare an interest, in that I used to work for Thompson's personal injury solicitors, who give money to my constituency Labour party. I point out to the hon. Lady that under her amendments some personal injury victims would get a windfall. When their awards were calculated the then tax regime would have been taken into account, and if she then ameliorated the tax regime, those individuals would get a windfall. Secondly, the Government are, rightly, encouraging PI victims with large settlements to take them as a series of staged payments, to put it in the vernacular, rather than in one large lump sum.

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

The point is that the courts have not taken the new tax regime into account. The changes will impact on existing trusts, so, far from a windfall, there will be a tax penalty. Even if the courts had been sharp enough to say, "We will look at what is in the Finance Bill and start tailoring compensation awards accordingly," how are they supposed to know how the legislation will turn out? Only two days ago, the Government were still tabling amendments. They have tabled 50 amendments to schedule 20. It is completely impossible for any court in a PI case to have tailored its settlement to take into account the current tax regime because, quite frankly, no one knows what it is. The hon. Gentleman may shake his head, but he knows that that is a valid point. [Interruption.] Indeed, the Government have been making it up as they go along.

That brings me neatly to insurance, and a prime example of how the Government have been making it up as they go along. It has been a problem for them ever since they slipped out Budget note 25. They simply did not think through the impact of schedule 20 on millions of people who hold life insurance policies in trust. Writing insurance policies into trust has been considered best practice for many years because it means that money can be paid out to the family swiftly in the event of tragedy, without lengthy delays waiting for a grant of probate. It also means that it is simple and easy to change the beneficiaries under a policy to take account of changing family circumstances.

Data from the Association of British Insurers suggest that there are 22.5 million single premium and regular premium life policies in force, and anecdotal evidence indicates that about 20 per cent. are written in trust. The ABI estimated that about 4.5 million policies may have to be reviewed as a result of schedule 20. The families affected would be faced, at worst, with the threat of a punitive new tax bill, and at best with the need to review and amend their policies. Prudential and Standard Life both suspended the sale of life policies under trust because of the uncertainty surrounding the Finance Bill.

Initially, the Government's reaction was denial. They denied that there was a problem. They issued a guidance note and dismissed the furore as scaremongering. However, following the Bill's publication, it was clear that there was no specific exclusion for life policies. Kevin Martin, the Law Society president, confirmed that millions of life policies would still be caught. Julie Hutchinson of Standard Life expressed the concerns of many when she said:

"We're extremely disappointed that the clear statements in the guidance note are not carried into effect in the bill itself and will be making further representations via the ABI on this retrospective effect issue".

The concerns that I set out on Second Reading were brushed aside, then a few weeks later, in Committee, the Government suddenly tabled a set of deeply obscure and complex amendments. Although I welcome the Government's change of heart on that, as on so many other aspects of schedule 20, a number of serious problems remain. As Colin Jelly of Skandia Life pointed out, the Government's amendments in Committee were only a small, albeit a welcome, step in the right direction. He said:

"A significant number of people are still likely to be affected by the changes and the government is doing nothing more than tinkering at the edges of the proposed legislation."

The carve-out introduced by the Government in Committee does not cover all pre-Budget day policies. It therefore contravenes the Treasury's guidance note of 7 April and the statement made to the House by the then Chief Secretary on Second Reading that

"no one who wrote a life insurance policy in trust before Budget day will have to pay a new inheritance tax charge as a result of these changes."—[ Hansard, 24 April 2006; Vol. 445, c. 369.]

This statement is still not true. The new charges will still apply to pre-Budget day policies where there is a change of beneficiaries, except where that change results from death. If, for example, a new baby is added to a policy, that will amount to a new settlement and will trigger the new penal schedule 20 regime. Furthermore, where an interest in possession is removed from someone who remains a beneficiary, the new reservation of benefit rules in paragraph 33 of the schedule mean that the trust could be liable for a 40 per cent. inheritance tax charge on the death of the former life tenant.

Because of those gaps in the protection provided by the Government amendments that were made in Committee, substantial numbers of people—perhaps millions—will have to review their policies. Even more worryingly, the Government's climbdown in Committee does nothing to assist life insurance policies written into trust after Budget day, all of which will be subject to the new regime and charges. Having originally thought that no policies would be affected at all, the Government appear to be happy that some policies will be caught by the new charges from now on. Almost by accident, they have proposed to introduce significant new taxes on life insurance policies that will operate in an arbitrary way when the 6 per cent. charge is levied on the 10-year anniversary of the trust.

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield

Why does my hon. Friend think that the Government are against saving, which is for the benefit not only of an individual family but of the country? The measures appear to accuse people of avoiding inheritance tax—I personally believe that inheritance tax is a pernicious second tax, which I would abolish altogether—but why is it wrong to save for insurance policies related to a trust?

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

To be fair to the Paymaster General and the Government, I do not think that they are actively against saving, and I do not believe that their motivation in schedule 20 is to try to discourage saving. However, the reality is that the new charges are a tax on thrift, prudence and responsible behaviour, which is why the Opposition oppose the new inheritance tax charges.

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

But does the hon. Lady agree with her hon. Friend Sir Nicholas Winterton that inheritance tax should be abolished—yes or no?

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

We have made it clear that we are not making promises to cut taxes at present. We accept the long-term importance of reductions in taxes, but—

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

I will give way to the right hon. Lady in a moment.

We have promised to share the proceeds of growth between real increases in public spending and reduced borrowing and taxes over the economic cycle.

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

If the hon. Lady is not making any commitments at all, bearing in mind what her hon. Friend the Member for Macclesfield said about abolishing inheritance tax, will she give him an undertaking that she will consider the matter and inform him and the House in due course?

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

Our tax reform commission is looking at all those issues, and it will report very soon.

We are not discussing the current inheritance tax regime, however, but penal new inheritance tax for people who use trusts to provide responsibly for their future and for the future of their family. The new taxes will operate in an arbitrary way, because the value of the life insurance policy —[ Interruption. ]

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield

I am not seeking a commitment from my hon. Friend that we should abolish inheritance tax. I was expressing a view as an independent Conservative—the tax is pernicious, and we should consider abolishing it in due course—but I was not asking her to give a commitment.

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

I am grateful to my hon. Friend.

Returning to the subject of the debate, the arbitrary operation of schedule 20 in relation to life insurance policies arises because those policies depend on the health of the person insured. They have virtually no market value unless the insured person is very ill or terminally ill. If the 10-year anniversary occurs when they are fit and healthy, the value of the policy is minimal, and inheritance tax is not payable, because its value is likely to be below the nil rate band.

If, however, the insured person becomes seriously or terminally ill just before that 10-year anniversary occurs, that could push the value of the policy above the threshold and the IHT charge will apply. At this point there is no property in the trust to pay the tax, and the insured person faces an unwelcome extra tax bill at a time when their possibly terminal illness presumably means they are too ill to work. Remember, the proceeds generated by such policies must be very considerable to give bereaved families a sufficient income on which to live, so it is entirely possible that a tax charge will be triggered in this situation. Not only is schedule 20 a tax on prudence, but in this instance it is a tax on terminal illness as well.

Opposition amendments Nos. 3 and 4 would take policies such as term insurance, whole life insurance and critical illness cover out of the scope of the new charges. The amendments are drafted to take out policies that insure against a specific risk or tragic event, such as early death or critical illness hitting the family's principal breadwinner. They are designed to leave other insurance policies, which are essentially savings-based, within the new schedule 20 framework. The ABI expressed support for similar amendments tabled in Committee, stating:

"We are particularly concerned about the impact"— of schedule 20—

"on individuals buying life insurance to protect dependants from financial hardship following death or serious illness...It is important that people should be encouraged to take financially responsible steps to protect their dependants from hardship in the event of a tragedy. The tax system should not create disincentives for prudence by introducing unnecessary tax charges. Life insurance offers valuable financial protection for individuals and their family in the event of an early death or serious ill-health, which can have dramatic adverse consequences particularly if the life insured is the main or only income provider. It provides the means for those even on modest incomes to be self-reliant and not dependent on the state for hand-outs."

Photo of John Bercow John Bercow Conservative, Buckingham

Naturally, we await the Paymaster General's response with eager anticipation, bated breath and beads of sweat upon our brows, but as I hear my hon. Friend develop the argument against the measures that the Government are proposing, it beggars belief that Ministers can propose a manifestly callous and mean-spirited provision. Was it dreamed up by some parsimonious official or is it the preferred position of members of Her Majesty's Government?

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

No doubt the Paymaster General can respond for herself, but I fear the Government did not think through their proposals or did not understand their consequences.

Most people in Britain are hopelessly underinsured. Those who insure are far less likely to fall back on benefits and state support than those who do not. Slapping arbitrary punitive new taxes on those who seek to make provision for death or serious illness to the main breadwinner makes no sense. It penalises thrift and prudent behaviour, and we hope the Government will support our amendments.

The last set of Opposition amendments would remove the threat that an increased tax bill could be added by schedule 20 to all the other unhappiness that occurs in divorce cases. I refer to Mr. Ian Buckley of Rathbone solicitors, who explains the problem as follows:

"The current trend of family breakdown and multiple marriages has resulted in the increased use of trusts. They provide a fair and workable solution in the division of assets in circumstances of both death and divorce. They are widely used in the divorce courts and the inflexible arrangements in the new rules outline will be a poor substitute."

Following the raft of Government amendments moved in Committee, the Chartered Institute of Taxation states:

"Overall we give the changes one and a half cheers—there are still things to be done. We now need the Government to show they have listened to all of our arguments about the defects in these proposals, and to make similar changes" where schedule 20 impacts on divorce.

In this context, trusts are used to give the spouse with the main child care responsibilities the right to live in the family home until the children finish their education. At this point the home is sold and the proceeds divided between the former spouses. Such arrangements will be protected from the 20 per cent. entry charge of schedule 20 by section 10 of the Inheritance Tax Act 1984, but not from the 6 per cent. periodic charge.

The Treasury seems to assume that everyone can have a clean-break settlement. If they are able to do so, most people will indeed prefer a clean-break settlement for various reasons, emotional as well as financial. However, not everyone can afford a clean-break settlement. Trusts are an invaluable aid in making the assets of one household stretch to cover two. The people who will be penalised in this context, as in all the other contexts where schedule 20 applies, are those who have sufficient assets for them to come within the inheritance tax net, but not enough for them to have sufficient capital to spare for outright transfers and a clean-break settlement—the sort of people of modest means who have been hit all too often by the Chancellor's stealth taxes.

Remember that we are referring to homes here, and in many cases, particularly in London and the south-east, the value of those homes will exceed the inheritance tax threshold.

Photo of John Redwood John Redwood Conservative, Wokingham

My hon. Friend makes a good case for there being a number of great difficulties that vulnerable people will face as a result of this legislation. Would it not be easier for the Government just to drop all these proposals on trusts and go back to where we started?

Photo of Theresa Villiers Theresa Villiers Shadow Chief Secretary to the Treasury 4:30 pm, 4th July 2006

That would indeed be a highly desirable result and the Government still have the opportunity to do that if they so wish. I certainly hope that they do. This is the Minister's last chance to save divorcing couples and people in a civil partnership facing relationship breakdown from an unwelcome new tax charge, and I hope that she will seize that opportunity.

The Government went badly wrong with schedule 20. Their preconceptions about trusts and the people who use them were fraught with misunderstanding and, frankly, with prejudice. The Star Group of solicitors, expert in the field of trusts, points out the simple truth that has somehow eluded the Government, that

"trusts are very often set up for reasons that are nothing whatever to do with tax...they are widely used to prevent families' assets from being squandered...to protect individuals from themselves or others" and to maintain family harmony.

The Government have failed to produce any empirical evidence of the widespread use of trusts for avoidance purposes, apart from bare assertions and a couple of theoretical examples. Nor have they responded to the direct request of the Treasury Committee to provide evidence for their assertion that only a minority of a minority of 100,000 discretionary trusts would be affected by schedule 20.

The Government may have U-turned on a number of hugely important points, but schedule 20 still imposes new taxes on thrift, prudence and responsible behaviour, on the sick and the dying, on divorce, and on the mentally ill and disabled.

I close by quoting an e-mail that I received just a few days ago that illustrates the high human cost of this whole debacle. It reads:

"My father was seriously ill earlier this year. His will is in favour of his 6 grandchildren and contains a trust with the age set at 25...Because of the Finance Bill, I had to arrange for his solicitor and both executors"— to see him—

"so he could say whether he wanted them to maintain 25 or pay the penalty or revert to 18. So there he was lying in bed coughing up a lung, 88 years old...terrified of dying, and I had to explain all this. He cried for a couple of days after from distress. How many others I wonder have had to do"— the same?

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

The Government have been at great pains throughout the Committee stage to point out that there are some areas where there is abuse of the trust system in relation to inheritance tax, and their proposals would close those loopholes. In their efforts to do so, where we have felt that there is a case to be made, we have supported them. However, the initial publication of the Bill raised huge concerns about the number of people who would be affected by the changes. In particular, concerns were raised about the treatment of spouse exemption, and fundamental concerns were raised about how the assumptions behind the spouse exemption had changed—instead of spouse exemption from IHT being automatic, it initially appeared that it would apply only if certain criteria were fulfilled.

Government amendments at Committee stage dealt with the issue explicitly and the fears of many people were allayed. However, had the Government taken the time before the Bill's publication to consult, they might have avoided so many people fearing that their arrangements would have to be changed and that they would be affected by the Government's new proposals, when in fact that was not the case. However, as Mrs. Villiers has pointed out, there are still areas of considerable uncertainty, where trusts are used not to avoid IHT, but to make satisfactory family arrangements, particularly in difficult family circumstances.

It is those issues that many of the latest Government and Opposition amendments seek to address. One need only look at the amendment paper to see how many amendments have been tabled, not only in Committee but at this very late Report stage—60 Government amendments and many more Opposition amendments—and still there is a great deal of uncertainty in many areas. Some of the broad issues have been outlined in new clause 2.

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

There are not 60 Government amendments in this group, although I do not think that that was what the hon. Lady meant to say. Secondly, in every Finance Bill Ministers say in Committee that they will go away and look at something, and if they think that there is a case, they may table amendments. In fact, we have tabled an amendment on a matter that the hon. Lady raised—is she suggesting that I should not have done so?

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

Of course I am not suggesting that those amendments should not have been tabled. However, it is unprecedented that we have this many amendments, which would significantly alter the sense of the measure. Great uncertainty has been expressed by many professional bodies.

Government amendment No. 70 deals with an issue that I raised in Committee on the part of schedule 20 that deals with trusts for bereaved minors. In Committee, I raised concerns about the Bill as it then stood, which allowed favourable treatment in respect of inheritance tax for bereaved minors, but only if the trusts in question were set up by a parent. Government amendments made in Committee resulted in the measure being extended to include step-parents. However, minors whose legal guardians were not their parents or step-parents would have been very vulnerable because they would not be provided for under the measures. The amendment deals with that problem. It extends the provisions to all those who have parental responsibility under the Children Act 1989 for England and Wales, the Children (Scotland) Act 1995 for Scotland, and the Children (Northern Ireland) Order 1995 for Northern Ireland. Although the conclusion on this has probably not been reached in the most efficient manner, the result is a vast improvement on the original proposal, so we will support it.

I now come to Opposition amendments relating to bereaved minors. My understanding of amendment No. 58 is that it would create a situation in which the trustees of the will of a parent of a bereaved minor could set up a trust for the benefit of the minor. I support the amendment, as it offers further safeguards for those very vulnerable young people.

There are several Government and official Opposition amendments that address questions that remained following debates in Committee on transitional serial interest, but fundamentally the Government amendments do the job. Government amendments Nos. 74 and 75 set out that serial interest can be extended beyond 2008, but only when the spouse succeeds upon death. That was the only real area in which spouse exemption remained in some doubt. There would be some existing pre-22 March 2006 life interest trusts for one spouse to provide for the other spouse to take a successive life interest after their death. If the schedule were left as originally drafted, it would have overwritten that spouse exemption if the life interest was passed on after 2008.

I want to raise a question with the Paymaster General about the difference between the Government and Opposition amendments. Opposition amendment No. 59 would extend the scope laid out by the Government amendment to outside death by also applying to situations in life. Why did the Government decide to make the provision applicable only on death, but not in life?

Concerns have continued to be raised about how narrowly drawn are the restrictions surrounding the eligibility to fall within the proposals for disabled trusts. Although Government amendments Nos. 80 to 85 ensure that disabled life interest trusts will not be affected by the changes made to the inheritance tax treatment of other life interest trusts, concerns remain about how narrowly drawn are the definitions of "disabled". Liberal Democrat Members have supported a series of Opposition amendments that have tried to draw definitions in more modern terms that reflect more recent legislation on this issue.

As things currently stand, the definitions of disability are out of date, so many people who today are classified as disabled will be excluded under the Bill. Organisations such as Mind have been working with the Low Incomes Tax Reform Group to help to overcome these problems. I understand that the LITRG helped to draft amendments Nos. 5 to 12. The amendments would help to address those concerns, so I will support them. Among such organisations' primary concerns are individuals with fluctuating conditions, such as manic depression and schizophrenia, and also people with some physical disabilities, such as multiple sclerosis. They were keen to impress that all disabled persons should not be exempt, but that the proposals in their current form would mean that those who could not cope with a large inheritance or gift could still fall outside the regime. They therefore strongly believed—I support them on this—that reference to the Mental Capacity Act 2005 would be better able to capture the issue regarding capacity, because it is able to capture partial capacity. There could be someone with a physical disability. That person may have no problem in managing their financial affairs or vice versa. That is why amendment No. 11 points to a definition of capacity in terms of lacking capacity

"within the meaning of the Mental Capacity Act 2005, in relation to any financial matter".

The terms of the Act are flexible enough to include definitions of partial capacity.

The amendments allow for greater flexibility in the creation of trusts. At present, only the affected individual can self-settle if they have a condition that they expect will lead to disability. If they are already ill, someone can create a settlement for them. Those who expect to become unwell or have a fluctuating condition have to self-settle. Amendment No. 5 allows for others to set up similar self-settlement trusts. The wider amendments bring in the 2005 Act for a lower level of severity and then will enable someone who expects to be unwell to have a settlement created for them.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

For how long should these trusts last? Given the sort of disability to which the hon. Lady refers, some people will have a disability and then recover. Should the trust then be wound up? What would she say should be the tax situation then?

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

We do not want vulnerable people who may have a partial lack of capacity in financial matters finding themselves falling out of a regime that was designed, in theory, to help to support such people.

In Committee, the mainstay of the Government's strong position towards these proposals was based on the results of consultation that was carried out two years ago. The Paymaster General has already referred to that consultation. The consultation took place on a different subject in relation to income tax and capital gains tax. It preceded any of the deliberations on the changes that have been set out in the Bill, and pre-dated the 2005 Act.

The organisations that contacted me were at pains to point out that the consultation barely referred to definitions of disability and involved only a few disability organisations, of which none was a mental health organisation. In some areas the consultation has been superseded by the amendments that have been put forward by the Government.

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

It would help me enormously if the hon. Lady would list the organisations that approached her. I would then be able to list those that agreed with the definition.

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

I understand that there were representations from Mind. I was provided with further information about the details of the consultation. The representatives were concerned that no mental health organisations were included in the consultation. Will the Government undertake proper consultation on these matters, given that the Bill has created a new situation that was not covered by prior consultation?

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

I will put a proposition to the hon. Lady, and I would be grateful if she were to respond to it. The Government consulted two years ago with many organisations, which I shall list. Those organisations agreed with the definition that is currently being used. The hon. Lady has quoted one organisation, and another representative, as saying that they do not agree with the definition. She then asserts that we should provide a definition in a Bill that is not yet law. Why should there be consultation on that basis when we have already undertaken consultation?

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

The 2005 Act is on the statute book. Even if it has not yet been implemented, definitions are clearly stated and are on the statute book. Perhaps the Minister will refer to which mental health organisations took part in the consultation process. If she did so, I would be grateful.

Another key area is that of trusts that are commonly used to sort out family arrangements. That is not as a means of avoiding inheritance tax, but of relationship breakdowns settlements. There is a series of official Opposition amendments on that. Trusts are commonly in use as a means of settling assets in the context of a financial settlement. A primary reason is to ensure that, for example, children have a roof over their head or are able to remain in a family home. Some of those trusts are established by a court order. What is the basis of withdrawing some of those options for the family? Was there any evidence of inheritance tax avoidance in such cases? What alternatives would the Government propose for families facing these circumstances? Although other measures such as clean break orders, legal charges and other devices are available, what is the rationale for targeting trusts in that area in particular?

The Law Society has raised the concern that not all the alternative devices will be appropriate for all families:

"For example, the use of clean break orders is only feasible where a couple have sufficient assets to enable an outright division of assets between so as to provide both with a home. For many families, where the only significant asset is the matrimonial home (and whose value is over the inheritance tax threshold, currently £285,000) this is not a realistic option since the sale of the house may not raise sufficient funds to provide a home for both parties.

Where assets are transferred from one spouse to another, the spouse exemption does not apply if the transfers take place after decree absolute. Under Schedule 20, the spouse exemption would now not apply before decree absolute where a new trust is created by one spouse for the other. This we believe wrongly penalises the use of trusts on divorce settlements."

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury) 4:45 pm, 4th July 2006

I have already heard that point from Mrs. Villiers, who was lobbied by the same people as Julia Goldsworthy. However, there is an alternative, because a charge could be taken on the property, so it is simply not true that it cannot be done. Those who have been unfortunate enough to go through divorce know that the normal procedure, if a clean break cannot be made, is that a charge is taken on the property.

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

I understand from explanations given by the Paymaster General that the intention behind the changes on the use of trusts was to tackle inheritance tax evasion, but I wonder whether she will state the extent of avoidance in that area.

The hon. Member for Chipping Barnet has discussed some of the remaining problems on life insurance. I declare an interest as someone who took out a life insurance policy after the Budget, but before the Finance Bill, because I still do not know how I will be affected. My estate is well below the inheritance tax threshold, but I understand that I may still need to change my affairs, which I have recently set up—there is a still a lot of uncertainty.

On Second Reading, concerns were raised about the number of people affected by the proposals. Again, I ask the Treasury to publish the background work that it undertook before determining whether a regulatory impact assessment was necessary. It has been stated in written answers that it is not "normal procedure" to publish that information, but given the fact that the Treasury Committee asked for it before the Bill was considered in Committee, is there any reason why the Treasury cannot make it available, because many organisations and individuals would benefit from knowing the intended scope of the regulations?

It has not been explained why wholesale changes to the provisions on trusts are required to tackle what the Government have emphasised is still a small number of abuses. Although the key concerns surrounding the spouse exemption have been removed, in other cases normal family arrangements will fall foul of the rules, although there is no evidence of trusts being used to abuse the exemption.

The potentially exempt transfer option remains for those who want to transfer their wealth and escape inheritance tax, provided that such individuals have the liquidity and life expectancy to fulfil the requirements. Given the harshness with which the Government have approached the trust regimes, do they have similar plans for potentially exempt transfers?

The Government have improved the legislation, but there are still plenty of rough edges, despite all the amendments tabled in Committee and on Report. I fear that we will have to revisit the issues and deal with further unintended consequences in future Finance Bills.

Photo of John Redwood John Redwood Conservative, Wokingham

Unusually, I find myself in sympathy with amendments tabled by hon. Members on both sides of the House, which is a tribute to the mess that clause 2 and schedule 20 were in before the Bill was considered in Committee.

I am delighted that the Government have seen fit to make modest improvements around the edges, but I hope that they will think again about both the clause and the schedule and realise that the Bill would be better and stronger without either of them, because the existing regime of trusts works okay. It was not full of scandal or the centrepiece of tax evasion and avoidance. The provisions are therefore unnecessary.

The explanatory notes state:

"The clause and Schedule align the inheritance tax (IHT) rules for assets held in trust...The IHT treatment for trusts which do not come within the special rules will be aligned with the mainstream IHT rules for trusts. The clause and Schedule provide transitional arrangements for existing trusts."

We have never had a satisfactory explanation of where that emanated from. Those who wish to be kind to Ministers could say that the provisions are a product of a bureaucratic mind that likes compatibility, tidying and creating symmetry in a complex and evolving tax structure. If that is all that has happened, Ministers should have no hesitation in dumping the provisions immediately. The worst thing that a Minister can do is give in to a bureaucratic request that something should be tidied up, aligned or changed for the sake of it.

The alternative explanation, which we have sometimes heard from the Treasury, is that Ministers believe that they are trying to tackle a problem. They appear to believe that, from time to time, the trust arrangements enable people to avoid paying inheritance tax, which the Government think they should pay. The case would be greatly strengthened if we had more reliable numbers and it would be useful if the Paymaster General could tell us more about how much more missing tax revenue would be captured if the Government amendments were accepted but the others were not. The Government should remember that there are knock-on effects to the proceeds from capital gains tax, which should also be taken into account. Some of those consequential effects would defer or prevent payment of CGT that would otherwise have fallen due. The position would not be win-win, even on the Government's basis.

It is strange that a Government renowned for their fascination with the popular mood and the media should choose not only to attack head on children, people who are in mourning and the disabled, but to do so at the same time. It is a rare and infelicitous conjunction in a Minister's life to be on charges of being unkind to all three categories. Indeed, there is an even more hard-pressed category—children whose parents are recently deceased. One would have thought that they, above all, needed help and support from every adult in the community. However, that does not apply to the Government, who, in their new role of ruthless oppressors of anyone with any money left after all their other taxes, are now trying to squeeze out more from the minors who are in such unfortunate situations.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

Earlier, the right hon. Gentleman quoted the explanatory notes to clause 157. If he read on—I am sure that he did—he would realise that they continued:

"So far as new trusts are concerned... it continues the current special treatment for 'interest-in-possession' trusts created on intestacy and straightforward interest in possession trusts created by will; and for 'accumulation and maintenance trusts' to trusts created on the death of a parent where beneficiaries will take the trust assets at age 18."

Although the right hon. Gentleman may argue—incorrectly, in my view—that the Government are attacking specific groups, he is wrong about the recently bereaved.

Photo of John Redwood John Redwood Conservative, Wokingham

Although the Government have moved somewhat to protect vulnerable groups in specific circumstances, the protection is not comprehensive. There will be hard cases and difficulties if all we do today is accept the Government amendments. The simplest way to protect vulnerable people is not to proceed in that direction. We therefore revert to the fundamental questions: what is the purpose of the provisions? How much money is at stake? Are the Government sure that they will capture a few rich people who use the current system unreasonably, in their view, while not capturing many others? We have learned that those others perhaps include Julia Goldsworthy, who imprudently took out a life protection policy without knowing what her tax position would be. Wallowing in ignorance in that way, with one's money at risk under the very measure that one is trying to amend or improve, is not a good advert for Liberal Democrat advice on financial planning. Obviously, the hon. Lady has a lot to learn in all sorts of ways as she trains on the job of speaking to the difficult set of clauses and schedules before us.

Those on the Treasury Bench find themselves in some difficulty over these measures. I do not think that they have a great deal of enthusiasm for the job in hand; I do not see them leaping to their feet to say that this is the best thing that they have ever done. I do not suppose that they will include in their leaflets to their constituents the fact that they are proud to have done considerable damage to the trust regime for those who are divorcing. Nor am I sure that that will be the leading subject in their election leaflets when we get to the next general election. They will not be saying, "I have great news, o electors! The Labour party has managed to make your divorce even more painful and to secure even more money for the Treasury rather than for you."

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

May I say how much I am looking forward to seeing the right hon. Gentleman's next newsletter, in which he explains this issue to his constituents? If he believes what Mrs. Villiers has said, but it turns out not to be true, he will have to issue a subsequent newsletter.

Photo of John Redwood John Redwood Conservative, Wokingham

I am always extremely careful to check the accuracy of the information that I put out to my constituents, and I am pleased to say that, so far, I have not had to send out any corrections. I will endeavour to be equally careful in the future. However, I will not find myself in the position of having to put out an apology or an explanation of why my party has backed a silly scheme that messes around with the complex tax regime on trusts in such a way that it might capture the vulnerable as well as those—whom the Government have still to name—who are apparently more worthy targets for increased taxation.

It gives me great pleasure to support the noble work of my hon. Friend Mrs. Villiers in trying to chip away at the undesirable consequences of this clause and schedule. I am not sure that I am in sympathy with the hon. Member for Falmouth and Camborne, however, whose remarks were as tedious as they were opaque. I look forward to the Government having third thoughts on this matter. I enjoyed their second thoughts, which were certainly better than their first thoughts. When in doubt, Ministers should not legislate, not proceed, not pass "Go", and not collect our £200. They should think again, ditch the clause and the schedule, then we would all be much better off. We could then put something in our newsletter about which we all agreed, namely, that it was a good idea that, on this occasion, the Government had thought better of legislating.

Photo of Philip Dunne Philip Dunne Conservative, Ludlow

I am extremely honoured to follow that highly entertaining and thought-provoking contribution from my right hon. Friend Mr. Redwood. I rise to discuss some of the issues on schedule 20 that were picked up in Committee, and I should like to start with the Government's two-and-a-half-year consultation period on the modernisation of the trust regime, during which the age reduction for accumulation and maintenance trusts from 25 to 18, as proposed in the schedule, was not raised.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

I am trying to cast my mind back to the Committee proceedings. Will the hon. Gentleman tell the House whether he has an interest to declare?

Photo of Philip Dunne Philip Dunne Conservative, Ludlow

I am most grateful to the hon. Gentleman for that reminder. I declared my interest at almost every sitting of the Committee, and I am happy to do so again today. I am a settlor of an accumulation and maintenance trust for the benefit of my children, which gives me a certain amount of authority on this subject, unlike the Government, who appear to have entered into these arrangements without any understanding of their implications—as we have heard, they are now into the third set of major revisions—and without any consultation with the industry on the extent of the supposed mischief or abuse that the measures were designed to prevent. The Paymaster General was challenged repeatedly in Committee to provide evidence of the abuse, but was able to come up with only one or two astonishingly tortuous examples. When challenged by my right hon. Friend the Member for Wokingham, she could provide no information on the scale of the abuse, but I hope that she will now have been briefed on how widespread it is.

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

The hon. Gentleman is not fairly reflecting what happened in Committee. The Committee asked for examples, and I gave examples. Conservative Members do not like the examples that I gave, and consider them theoretical. Amazingly, that does not stop them advancing a theoretical case to attack the Bill. I gave the hon. Gentleman the evidence: I specified the types of tax planning. He does not agree with me, and that is fair enough, but I did supply the evidence.

Photo of Philip Dunne Philip Dunne Conservative, Ludlow 5:00 pm, 4th July 2006

The Paymaster General is obviously somewhat irritated by my accusation that she failed to give proper evidence. What she did give were two theoretical examples. On several other occasions, she listed organisations that had substantiated the case she was making, but in this instance she did not mention any, presumably because there was none.

That takes me to the point that I wanted to make about the age issue. The Government are trying to introduce a blanket change in the age limit below which children can benefit outright from the accumulation of maintenance trusts, without taking account of the individual circumstances of many of those children. Given that people become adults at the age of 18, I might be using the word "children" rather loosely. We are talking about young people under 25.

It is not unheard of for people to acknowledge that the financial sophistication of those under 25 is not what one might hope to see in more mature adults. Most commercial industries that must contend with those aged between 18 and 25 in a financial context impose certain constraints. Most mortgage lenders, for instance, have their own policies on the granting of mortgages to young people, but many require a parental guarantee. Those aged between 18 and 25 are likely to pay higher motor insurance premiums, because they are perceived to be a greater financial risk to the insurance companies. Many car rental companies will not allow people under 25 to hire cars, or, if they do, will impose a surcharge.

In March this year one of the Government's own regulatory agencies, the Financial Services Authority, undertook research in an attempt to establish how sophisticated young people were in financial matters. It concluded that

"whilst the need to plan ahead is perhaps greatest in early adulthood, financial capability in terms of planning ahead clearly improves with age".

Those aged between 18 and 20 scored 27 out of 100 in terms of financial capability, while those between 20 and 29 scored 40. One of the Government's own regulatory agencies has acknowledged that people under the age of 25 are not as well adjusted to the business of dealing with their financial affairs as older people.

I wholeheartedly agree with my right hon. Friend the Member for Wokingham. The schedule has been dreamt up by the Government for reasons that were not thought through properly, hence the plethora of amendments with which we are regularly having to deal. In my view, the logic stems from the Government's resentment that people may be in a position to control the distribution of their money during their lifetimes. What they are doing is meddlesome and interfering, and it is characteristic of their approach.

There is a specific illogicality in the Government's actions. The Paymaster General has tried to claim that they are simply bringing the inheritance tax regime relating to trusts of this kind into line with those relating to others. That might be so in a very narrow sense, but the Government are also throwing the system completely out of kilter with the existing inheritance tax regime relating to gifts. Clearly, someone who places assets in a trust—often for sound practical reasons—will no longer be able to benefit from the potentially exempt transfer regime, and must therefore subject those assets to potential inheritance tax charges that did not exist before. That is not tidying up, but creating an additional layer of complexity.

I support what my hon. Friend Mrs. Villiers said about the definitions of disability. On a couple of occasions, we discussed in Committee the means of ensuring that the Bill provides an appropriate definition to cover people who are experiencing either partial or fluctuating capacity or who have a progressive illness. We discussed individual illnesses and conditions at some length.

Although the Government have made some movement, they have still failed to address the matter adequately. The issue of the settlor who is able to benefit from the exemptions for disability has been dealt with poorly. The provisions do not cover individuals who become disabled or people who are in a position of parental authority. That amounts to a glaring omission, which I hope the Paymaster General will reflect on and seek to put right. I am thinking particularly of people who are made wards and where courts or insurance companies, neither of which are in a position of parental responsibility, are making provisions to set up trusts.

In conclusion, it appears that the Government are seeking to deal with an abuse that they have failed to prove. They are seeking to impose constraints on individuals and how they organise their financial affairs, which shows their mistrust of people. I wholeheartedly endorse the suggestion of my right hon. Friend the Member for Wokingham that the Government should scrap the schedule in its entirety.

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

There was a great deal of uncertainty when the Bill was published and when it began its progress in Committee. The large number of amendments that were supported by hon. Members of all parties is testament to that, and some of the uncertainty remains. I hope that it will be fixed by the Government amendments and others as we progress. I am particularly pleased with Government amendment No. 70, which brings those with parental responsibility into play in the same way that birth parents are in respect of trusts. We discussed that issue in Committee and I am delighted that the Government have taken it into account.

I shall not re-summarise all the briefing notes that others have mentioned—we have all read them anyway—but I shall make one or two specific points. It is important to discuss vulnerable people and I am not at all convinced that the definition of such people is sufficient. It is too narrow and some vulnerable people clearly fall outside the specified disability living allowance category. I would like to bring to the House's attention a letter from a small solicitor firm, J W Hughes and Co. from Llandudno, which was given to me by my hon. Friend Mr. Llwyd. The letter makes that very point—that some vulnerable people fall outwith that definition. The concern was expressed by a small county lawyer with no political axe to grind.

It is interesting that other lawyers have approached me about other issues. Even as the amendments were being progressed and more information was emerging about the shape of the Bill, there remained a great deal of concern about the number of wills that would have to be changed as a result of insurance and other policies being written into trusts in the wills. Another local solicitor—a small, county solicitor based near my constituency—advised me that his business has some 18,000 to 19,000 wills under management and that in his best assessment about 40 or 50 per cent. of them would need to be changed. Unfortunately, it is not certain which 40 or 50 per cent. will require it. It may be based on a misunderstanding that the changes will impact only on trusts and funds that breach the inheritance tax threshold. None the less, I ask the Paymaster General to concentrate on the issue of vulnerable people and how they will be looked after under the new regime. She should also focus on the inheritance tax threshold with particular regard to the great fears of many people and many law firms about the potential for hundreds, thousands or millions of wills having to be changed.

Photo of David Gauke David Gauke Conservative, South West Hertfordshire

In the continuing debate about these matters, and especially in respect of the definition of a disabled person, the Paymaster General has made great play of the fact that a consultation process was held two years ago and that a particular answer was reached. I shall return to that in a moment, but we are discussing the question of trusts today, a matter that was debated at some length in Committee. It is therefore somewhat ironic that the right hon. Lady should praise the role played by consultation, given that the Government have produced a set of proposals in respect of trusts without engaging in any consultation at all.

The proposals have been rushed out, but the Government have not asked legal professionals or accountants how trusts work in reality. They have failed to understand how insurance companies draft policies, or how lawyers draft wills. Rob Marris quoted from the explanatory notes, but they were drafted before the Government came up with the various amendments that they have tabled to schedule 20.

In essence, the hon. Member for Wolverhampton, South-West said that straightforward interest-in-possession trusts would be unaffected by the Government's proposals, but the reality turns out to be somewhat different. Under the original wording of schedule 20, a standard will—for example, one in which a person who gets married for a second time seeks to ensure that the second spouse receives an interest in possession but that the capital goes to the children of the first marriage—would indeed have been affected.

As a result, both in Committee and again today, the Government have staged a series of withdrawals from their original position. Their approach deserves very serious criticism, as there is no good reason why the matter could not have been consulted on. The Paymaster General rightly said that, in Committee, she gave examples of potential abuses under the existing law, but Government projections suggest that we are talking about only £15 million in the first year. The amounts involved are not so sizeable, nor the abuses so great, that the Government had to deal with the matter with such enormous urgency. Why was there no consultation, especially when the Government were consulting about trusts in any event?

Indeed, Her Majesty's Revenue and Customs considered that trusts should be tax neutral. It said that, although trusts should not be used as a way to avoid tax—and I entirely agree with that—it also believed that artificial obstacles should not be raised against their use for that purpose.

Photo of Brooks Newmark Brooks Newmark Conservative, Braintree

Does my hon. Friend agree that the Government suffer from a cultural problem? They believe that any trust is set up to avoid tax so, rather than going into detail and understanding the nuances of trust, they simply use a rather blunt instrument and say, "Trusts are bad, and therefore we will do anything to shut them down."

Photo of David Gauke David Gauke Conservative, South West Hertfordshire

My hon. Friend makes an excellent point. During the Bill's passage through the House, people have asked repeatedly, "Why would anyone set up a trust? It must be a mechanism for tax avoidance." They have not appreciated that there are non-tax reasons for setting up a trust.

Moreover, why are the Government suddenly so concerned about trusts? They have been in power for nine years and not done much about them, but trusts have suddenly become a major issue. That leaves me somewhat bewildered, and we have heard no explanation.

I am a member of the Treasury Committee, which asked the Government how they had arrived at their estimate that the new rules on the tax treatment of certain trusts would affect only a minority of the 100,000 discretionary trusts. As yet, we have had no answer.

Photo of Brooks Newmark Brooks Newmark Conservative, Braintree

Will my hon. Friend give way on that point?

Photo of Brooks Newmark Brooks Newmark Conservative, Braintree 5:15 pm, 4th July 2006

I thank my hon. Friend, who raises an important question: why are the Government going to such enormous lengths? I suggest that it is because they are quickly running out of cash, so they are trying to be more and more creative in squeezing money out of every corner and every orifice of the people living in this country.

Photo of David Gauke David Gauke Conservative, South West Hertfordshire

My hon. Friend may be right, albeit rather inelegantly. I am not entirely sure what the explanation is; perhaps the Paymaster General will enlighten us later.

Photo of John Redwood John Redwood Conservative, Wokingham

My hon. Friend is the only person to have supplied a figure. As he rightly reminds us, £15 million was the first year forecast. Has he any thoughts about how much of that £15 million will be given back by the 27 Treasury amendments tabled for that purpose today?

Photo of David Gauke David Gauke Conservative, South West Hertfordshire

My right hon. Friend Mr. Redwood makes an excellent point. The Paymaster General's response suggests that the original drafting was poor; there was certainly much uncertainty and the amendments could have resolved the matter. However, if the answer is none, why did we go through all these proceedings, when we could have been in the same position originally if the Treasury had taken its time and held consultations? It completely failed to do so.

The Paymaster General said earlier that part of the whole process of dealing with Bills such as this is for the Government to listen to outside advisers and make changes accordingly. I accept that amendments have been made to deal with uncontroversial technical points, but these provisions are more fundamental. The Government changed their policy substantially and produced something out of the blue, and then realised that their proposals would hit people they did not intend to hit. I accept that they did not intend the provisions to be as widespread as they turned out to be in reality. That is not listening to outside advisers—it is a fundamental failure.

The Government produced something that did not work and caused much upset and uncertainty. No doubt, it was a boon to the legal profession as clients charge off to their law firms for further advice, which is not to be welcomed—and I speak as a former lawyer.

As we have heard, there was consultation two years ago about the definition of a disabled person. It appears that the Government are insisting on continuing to rely on the definition in the Mental Health Act 1983. An alternative definition is available but we hear that they do not want to rely on it because it is in legislation that has not yet come into force. I am at a loss to understand why one should not use such a definition. The point of a definition is to define something; the context does not matter particularly. If the definition works, why not use it? But if the definition in the Mental Health Act and the alternative definition are inappropriate, why not use a new one?

There is widespread concern that the proposed law with regard to disabled persons and trusts is inadequate. I am grateful to a constituent who informed me of the submission made on that point by the Low Incomes Tax Reform Group, which stated that the definition in

"the Mental Health Act 1983 is inadequate to deal with people who have partial, fluctuating or diminishing mental capacity—people with a diagnosis of Alzheimer's or Parkinson's disease, for example, or of schizophrenia."

I have heard nothing this afternoon to suggest that the Government's approach is justifiable. They have made a series of U-turns and backed down on a series of points, but they should still concede some important points, and this is one of them. Perhaps the Paymaster General will make a forceful argument—no doubt, she will be forceful, but whether she will be persuasive is another matter—but the Government should table further amendment, as they have done on many occasions.

Most importantly, will the Government refrain from the cheap shot of putting out a policy that involves no understanding of how trusts work in practice and does nothing but cause uncertainty and create legal fees? The Government's policy does nothing to address tax avoidance, but it encourages their Back Benchers to fly the class-warrior flag. That is poor government, and the Government have rightly had to back down.

Photo of Brooks Newmark Brooks Newmark Conservative, Braintree

I will try to be brief and, rather than rehashing the points that we made in Committee, I merely wish to seek clarification from the Paymaster General on several points that she made, particularly with respect to amendment No. 5. In Committee, she admitted:

"For people who find it difficult or impossible to cope with the demands of owning assets outright, a trust will often be the most practical way for substantial assets to be held."

However, what about people who find it difficult or impossible to cope with the demand of owning assets because of drugs, alcohol or gambling—the very point raised by my hon. Friend Mrs. Villiers?

The Paymaster General made three technical and non-substantive objections to amendment No. 5, which deals with the definition of disability—a point made by my hon. Friend Mr. Gauke. The first was that the new definition would conflict with trusts already in existence. The second was that the Mental Capacity Act 2005 is not yet in force. The third was that it applies only to England and Wales. Can the Paymaster General confirm whether she objects to the wider definition of vulnerability itself, or is she merely shying away from the technical difficulties?

The Paymaster General said:

"While I sympathise with the desire to keep the tax code up to date with developments in non-tax legislation, I do not consider that those particular changes would really improve matters."

Is she acknowledging that matters need improving? If so, how does the legislation improve the situation faced by vulnerable people?

The Paymaster General further said:

"I can see the desired effect of the changes proposed by the hon. Member for Chipping Barnet, the route she suggests would be a difficult one to take at this point."—[ Official Report, Standing Committee A, 13 June 2006; c. 613-15.]

If the Paymaster General can see the desired effect, why can she not see another route? I look forward to her response to those questions.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

I am prompted to make some brief remarks by the many remarks made by Opposition Members. First, I reject the calumny that the Opposition have projected on to Labour Members that, somehow, we are not aware that trusts are often used for non-tax avoidance purposes. We are aware of that and I say that as someone who was a practising solicitor and who, on occasion, drew up trusts——although not for many years——and they were not for tax avoidance purposes. Many Labour Members recognise that, and I will not be tarred with the brush of being some kind of class warrior on this issue.

Correspondingly, it behoves Opposition Members to recognise more forcefully than many of them have done in Committee and today that, on occasion, trusts are used for tax avoidance and that, from our perspective, trusts are abused in that way. It is understandable that individuals will try to minimise their tax bills in any tax regime. It is also understandable that a Government, particularly a Labour Government, will occasionally seek to clamp down on that. That is part of what schedule 20, which is the principal point now under debate, attempted to do.

Photo of Brooks Newmark Brooks Newmark Conservative, Braintree

I totally understand what the hon. Gentleman has said. In the same way that we should, and do, acknowledge some of the points that he raised—there are people who try to abuse the system through trusts—I ask Labour Members to acknowledge many of the valuable points that the Opposition have made, particularly with respect to the definition of disability, which at this stage is vague and woolly. We are simply trying to tighten things up on some of those points.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

Some of the points made by the Opposition have been valid and have been accepted by the Government. I wait with great interest to hear what my right hon. Friend the Paymaster General says about disability. The definition of disability, as I understand it, is not woolly. Mr. Newmark may disagree with it. I quite understand that. He said that he disagreed with it. But it is not woolly. It may not be the right definition from his point of view, but it is precise.

Mr. Redwood kindly accepted an intervention in which I read from the explanatory notes. My point was that that was, in a sense, a statement of aim by the Government as to what they hoped to achieve with schedule 20. Because it was an intervention, I did not carry on and read a large part of what followed, but with your indulgence Mr. Deputy Speaker, I will now read a little more from the explanatory notes to clause 157 and schedule 20. After the piece that I read out, which ended at "assets at age 18", the notes state:

"Trusts for 'disabled persons' will also continue to enjoy special treatment."

That was a statement of aim by the Government. There were problems and the Government listened to some of those criticisms—hence the Government amendments before us today, which I hope that my right hon. Friend the Paymaster General will explain.

I have had the pleasure of serving on five Finance Bill Standing Committees in my time in Parliament—there are hon. Members, and particularly right hon. Members, who have served on a great many more—and I suspect that a similar kind of procedure, on occasions, unfolded when the Conservatives were in government. Whether in the explanatory notes, or a Budget statement, or a Budget press release, there was a statement of what a particular series of measures embodied in a Finance Bill were intended to achieve. Then experts came along—whether it was Mrs. Gauke or the Chartered Institute of Taxation—and said, "Leaving aside for a minute whether we agree with that statement of purpose or aim, what you have put in your Finance Bill does not embody that and will not get you where you say that you wish to go."

In terms of the debate in Committee and here today on where the Government wish to go with these trusts and the change in the tax regimes for them, the Government have listened. On some of the more technical aspects, they have said: "We set out clearly where we wished to go. We set out the clauses and the schedule in the Finance Bill by which we wished to achieve that goal. We have not technically always got it right. We have listened to those technical criticisms and we have tabled amendments that are in front of the House this evening—they are likely, in the nature of things to be passed—that will deal with those technical deficiencies." I see that as a positive endorsement of the parliamentary process and of the way in which the Treasury and its Ministers listen—perhaps more than some right hon. and hon. Members give them credit for—to arguments and proposals made both by outside organisations and, within debate, by Members on both sides of the House. I applaud what the Government have done. They have listened.

As I understand the Government amendments—I am not a huge expert on them—they will get the Government much closer to the goal that they and I have. That goal is to clamp down on tax avoidance in certain areas, but still allow "special treatment"—to use the words from the explanatory notes—in the particular areas to which the explanatory notes refer. Those are sensitive areas in human terms and judging from the debate, all hon. Members broadly support them. I am talking about looking after individuals who have disabilities, whether or not they are minors, following the death of those who care for them and about broadening the definition of those who care for them, and also about looking after those, whether or not they have disabilities, who are minors when they are bereaved. I applaud what the Government have tried to do. As far as I can tell, they have got it right.

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

I am not going to try to persuade or convince Mr. Gauke, because he has told me clearly in previous debates that he absolutely disagrees with the principles that I assert and prefers to side with the advisers who have provided support to the Opposition in these debates. He will forgive me if I do not rise to that challenge, as I think that I will be wasting my time.

I will discuss the Government amendments and then answer the substantive points that have been made, particularly about disability and which is the appropriate Act for the schedule to use as its anchor.

Photo of David Gauke David Gauke Conservative, South West Hertfordshire 5:30 pm, 4th July 2006

I think that the Paymaster General is referring to our exchange on Second Reading, when she argued that Treasury officials were saying that the original provisions in the Bill would not have a particular effect, and I argued that professional advisers were saying that it would have a particular effect. If I understand her correctly, I think that the Government's position is now that those professional advisers were right.

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

No, the hon. Gentleman is not correct. He wriggles a lot. I fear that he has already made up his mind on which way he might vote, should there be a vote, regardless of what I say.

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Why is it that when asked an awkward question dawn primalolo is ubale to answer?

Submitted by mike beattie

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

It might be sensible if I made a little progress. I will give way to the hon. Lady on substantive points, because she was generous in giving way to me when she made her long opening remarks——remarks which she has made several times now during the Bill's passage.

Schedule 20 introduces changes to the way in which certain types of trust are treated for tax purposes. In particular, it brings the tax regime for accumulation and maintenance and interest in possession trusts in line with the mainstream inheritance tax regime for discretionary trusts that is already in operation. We have debated this topic at great length on the Floor of the House and in Committee. I do not propose to go over all the ground again, but it is necessary for me to respond to the points that have been made. Before doing so, I reiterate the central point that I have made from the beginning in discussions on this measure. Its purpose is to prevent wealthy individuals from being able to take tax advantage of trusts to avoid inheritance tax. That avoidance is clearly unfair and it is right that the Government should seek to counter it. Some hon. Members have sought to characterise that as an assault on trusts, but it is not. Generous provisions for trusts were in place before the Budget and will continue to be in place. The rules will not catch the large numbers of ordinary families that hon. Members have suggested.

Let me deal with two specific points on consultation and the Treasury Committee.

Photo of David Winnick David Winnick Labour, Walsall North

I am sure that all Labour Members are delighted that this step is being taken. Does my right hon. Friend agree that there is something undesirable about the way in which successive generations of the very richest people in this country have been able to pass their wealth down through the years, indeed the centuries, as a result of all these trust arrangements? This affects the very rich, and why on earth should we start apologising it?

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

It is not a matter of apologising for the action that the Government have taken. It is clear that there is a tax regime in place for discretionary trusts and the changes being made are intended to bring two remaining types of trust in line with that. As the consultation document made clear, the Government are asserting that there should not be artificial tax incentives for using trusts—people should not be driven in that direction—although we accept, as I am sure my hon. Friend does, that, in a number of areas, which I will cover, trusts are appropriate structures that many people use to plan their affairs. The Government do not take issue with that in our proposals.

These clauses have a narrow focus, and hon. Members have touched on their revenue implications. I made it clear in Committee that it is not always possible to consult on matters to do with avoidance because there is always a risk of large-scale forestalling, particularly in this area. That was the case under Conservative Governments, as well as under this Government. Appearing before the Lords Economics Affairs Committee on 10 May, a leading member of the accountancy profession said that, in his opinion, there would be large-scale forestalling if there were consultation in this case. The Government have a fine record of consulting on our legislation, including drafts, wherever we can before it is incorporated in a Finance Bill, but there are still some points at which that is not possible, given the worries about forestalling.

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

Surely there could be no danger of forestalling when it comes to wills. People are not going to bring forward the date of their own death to forestall the Government's legislation, so why does this measure retrospectively affect wills?

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

That is not worthy of the hon. Lady. She knows full well that we are dealing with the setting up of trusts and the tax advantages that some trusts had. She raised a number of other points, which I will turn to. She knows full well from her time in the European Parliament that there is a real and serious issue about forestalling on matters to do with tax, and any Government, regardless of their political persuasion, have to safeguard against that.

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

No, I want to make a little progress on the point about consultation and the Treasury Committee.

Another point that continues to be advanced is the number of those who would be caught by the measure. I remind the House that 94 per cent. of estates pay no inheritance tax whatsoever, so the vast majority of people have no chance of paying inheritance tax whatever their will says. It is only a small percentage of estates—6 per cent., or 34,000—that pay inheritance tax. The persistent allegations about the scale of problems that the measure will cause are unnecessary and untrue.

On the Treasury Committee, I am not going to repeat what I said on the record in Committee about the estimations made by the Treasury of the number of trusts involved because that would be wasting the time of the House. I confirm that the Treasury Committee has, quite properly, received responses on all the matters that it raised in its report in line with the requirement on the number of weeks to be taken.

Photo of John Redwood John Redwood Conservative, Wokingham

What is the latest forecast of the extra revenue that will be generated if the measure goes through amended as the Paymaster General would like it to be? Does not this show that we have government by the lawyers, of the lawyers, for the lawyers?

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

The forecast in the Budget will remain the same if and when the Government amendments are made. The right hon. Gentleman has a great deal of experience, so he will know that work can be drummed up for lawyers and accountants in many ways including, regrettably, the use of scare tactics.

I shall deal briefly with the Government amendments in this group, which make the technical changes necessary to correct errors in the drafting of the Bill, before turning to the Opposition amendments. Government amendments Nos. 78 to 81 and 83 to 87 make minor technical changes to the operation of the rules for trusts for disabled persons and trusts established by someone who expects to become disabled in future. I hope that they will all be welcomed. Government amendment No. 78 makes provision for an interest in possession—IIP—for a disabled person to qualify as a disabled person's interest when the property was put into a trust before 22 March 2006 but the disabled person only became beneficially entitled to it on or after that date. Without the amendment, that treatment would be available only to property put into trust on or after 21 March 2006.

Government amendment No. 79 is a drafting amendment to ensure that no inheritance tax arises when someone with a condition that is expected to lead to a disability settles property on themselves. Some Members have asked whether the existing provision risks a double charge, but the amendment makes it completely clear that such a settlement is not treated as a potentially exempt transfer. Government amendment No. 80 extends the rules in schedule 20 that apply when an IIP ends on or after 22 March 2006 to IIPs of which a disabled person is the beneficiary. Government amendment No. 81 deals with the rules in section 59 of the Inheritance Tax Act 1984—IHTA—that exclude a qualifying IIP from the inheritance tax charges on a relevant property. It modifies the definition concerning a company that is beneficially entitled to an IIP to include interests that were previously disabled persons' interests. Government amendments Nos. 83 to 87 modify section 88 of the IHTA so that special treatment given to pre-22 March 2006 protective trusts is available, too, to trusts created on or after 22 March 2006, where the underlying interest is a disabled person's interest.

Schedule 20 makes arrangements for IIP trusts set up before 22 March 2006, and Government amendment No. 75 is the core amendment in a series dealing with the transitional serial interest. It provides that a pre-Budget IIP to which someone becomes entitled on the death of their spouse or civil partner on or after 6 April 2008 will qualify as a transitional serial interest, and thus continue to be treated as owned by the surviving spouse or civil partner for inheritance tax purposes. Government amendments Nos. 71 to 74 restructure the existing provisions dealing with transitional serial interests in the light of that change, while Government amendments Nos. 76 and 77 make consequential changes elsewhere in schedule 20.

Mrs. Villiers made a similar point in Committee, although the amendments that she tabled did not address the precise issue that we have tackled. Opposition amendment No. 59 returns to the matter and would enable the benefit under the trust to be passed between spouses and civil partners while they are both living. The Government amendments, however, provide that that can happen only as a result of the death of one partner. The Opposition's approach is open to exploitation through the use of lifetime transfers, so I cannot accept it. Nevertheless, I hope the hon. Lady will agree that the Government's amendments address the core concerns in this area, and I hope that she will support them.

Government amendment No. 82 is a minor correction to the transitional serial interest rules which provide for disabled person's interests created for the settlor or their spouse to be disregarded when charging other trusts created by the same settlor. Opposition amendment No. 57 covers similar ground, but I am advised that there is a technical reason why it fails to hit the right target. Given the technicality of the subject, I hope the hon. Lady will agree that her amendment is not necessary. I assure the House that my officials will be happy to discuss the details with interested parties if necessary. The matter was debated at some length in Committee, and the hon. Lady and I agreed that it needed further consideration. I hope she will acknowledge that that has taken place.

Government amendment No. 70 deals with who should be able to set up a trust for a bereaved minor. That returns to the point that the hon. Members for Falmouth and Camborne (Julia Goldsworthy) and for Dundee, East (Stewart Hosie) raised in Committee regarding legal guardians being able to set up trusts for bereaved minors. As I mentioned then, people other than parents can still set up such trusts. All that schedule 20 does is apply tax charges to amounts in excess of the £285,000 which is the current inheritance tax threshold. I asked my officials to consider whether a wider definition of "parent" could safely be put within the scope of schedule 20, and to examine the technical and legal difficulties associated with guardianships and the various definitions.

Government amendment No. 70 deals with that point. It extends the meaning of "parent" for these purposes to cover individuals who, immediately before they died, had parental responsibility for a child under the relevant legislation for England, Wales and Northern Ireland. For Scotland, the amendment refers to parental responsibilities under Scottish law. I am informed that the amendment provides the security that will allow the provision to operate. That means that anyone with parental responsibility will be able to create trusts that are exempt from IHT charges in the event of their death, in exactly the same way as parents can. I hope that hon. Members will welcome the change. I am grateful to those who raised the matter and debated it in such a constructive way in Committee.

Government amendments Nos. 90 to 96 deal with consequential changes to the capital gains tax regime. Amendment No. 93 alters a Taxation of Chargeable Gains Act 1992 reference, and amendment No. 96 extends holdover relief to property leaving age 18-to-25 trusts when the beneficiary attains or is under the age of 18.

Government amendments Nos. 88 and 89 make a small change to the way in which the new rules interact with section 144 of the Inheritance Tax Act. Amendment No. 89 allows a two-year period in which a will can effectively be rewritten to cover deaths that took place before Budget day, but where the rewriting takes place after Budget day. Amendment No. 88 is a straightforward drafting correction. In Committee the hon. Member for Chipping Barnet tabled amendments with a similar intention. She will recall that I noted at the time that the Opposition amendments were technically deficient, but I undertook to give the matter further consideration. I have done that. The hon. Lady has returned to the same point in her amendments Nos. 54 and 55, but I hope she will accept that the Government amendments deal with the point.

New clause 2, the consequential amendments and the Opposition amendments to schedule 20 are simply not necessary. New clause 2 seems to be intended to carve out special IHT treatment for trusts that are set up on divorce in relation to life insurance protection policies and for some disabled people. It starts by saying:

"The provisions of Schedule 20 shall not operate so as to discourage, impede or prevent the use of trusts which are set up"— for those purposes. That prompts the question of who would judge whether the test was satisfied. There is no justification for special treatment for life insurance protection policies. The Government are not denying that insurance is important, we are merely saying that this particular asset does not require special provision in the tax regime for trusts.

Secondly, on relationship breakdown settlements, I can only repeat what I have said on previous occasions. HMRC is advised that trusts are rarely used in divorce cases, and their use is certainly not necessary. There has been some discussion of that this afternoon. Where they are used, the balance will often have been tipped by the additional IHT advantages that a trust can bring. I referred at the beginning of my remarks to the importance of tax neutrality as one of the issues that the Government were addressing here in relation to trusts.

Photo of Theresa Villiers Theresa Villiers Shadow Chief Secretary to the Treasury 5:45 pm, 4th July 2006

Will the right hon. Lady acknowledge that if schedule 20 is agreed to, there will be an additional tax charge in divorce cases where a spouse is given the right to live in a house until the children finish their education, because either there will be a new IHT charge, if it is a trust, or there will be a new income tax or capital gains tax, if another mechanism is used?

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

We have crossed this ground before. The answer is no, because a charge against the property is often used to give protection in this situation. The hon. Lady puts the case for life policies in trust on the basis that they could give rapid access to cash with no need for probate, but I absolutely disagree with her because that can still be obtained by using trusts, in particular a bare trust.

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

On life insurance trusts, does the right hon. Lady stand by the statement made clearly in the guidelines issued by the Treasury on 7 April, and by the then Chief Secretary on Second Reading, that no life insurance policies written in trust before 22 March will be affected by schedule 20 charges—not one?

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

We covered that in Committee as well. I have made the position on insurance policies quite clear and the statements to the House have been correct.

On the hon. Lady's final point with regard to trusts for disabled persons, the Opposition seek again to operate the rules by reference to the Mental Capacity Act 2005 and to extend eligibility to those entitled to the lower components of disability living allowance. I have explained why the Government consider the existing definition, based on that Act, to be more appropriate, and that was supported by the vast majority of respondents to a recent consultation. It is also easy to administer. I have set out the case for not casting the eligibility criteria so wide as to include people who do not require a privileged trust to manage their financial affairs.

Let me deal first with the Mental Capacity Act. First, it is not yet in force and would mean a delay in the introduction of the provisions for disabled trusts. Opposition Members may think that that is desirable; I do not. In any case, it is a mistake to think that that Act will deliver a ready-made answer to the question that matters for IHT purposes. Capacity under the Act is not an all-or-nothing issue. A person may lack capacity for dealing with some matters while remaining quite capable of dealing with other aspects of their life. Any order under the Act will intervene in the person's affairs only to tell them what should happen.

The Opposition have also made the point that the consultation on the trust modernisation is not relevant to this point. That consultation dealt specifically with the question of catering for mental as well as physical incapacity, and was deliberately focused on cases where the disabled person faces substantial difficulties in handling their financial affairs. The measure was not intended as a relief for disability, and as such there is no justification for extending the definition.

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

The Paymaster General has repeatedly referred to the consultation that she carried out on the definition of disability. I have the summary of the responses and it says:

"some groups representing the disabled questioned whether this" — the definition—

"was too narrow, suggesting that, amongst other things, the definition used in the Disability Discrimination Act 1995 should be used instead."

They did express their concerns.

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

Yes, some did, and I shall go on to make the points for the hon. Lady. This is a difficult area of legislation and there is not unanimity among all the groups. I concede that point, and I have always conceded it. We are concerned with the majority. If the Government undertake a consultation and refuse to go with the majority on the basis that some now have a different view, or at the time had a different view, it makes it impossible to deal with any legislation in this area. The Department undertook extensive consultation with charities and groups representing the disabled when arriving at the definition of disability for income tax and capital gains tax purposes.

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

I will give way in a moment.

Those that participated were Contact a Family, the Council for Disabled Children, the Disability Alliance, Mencap, the Thalidomide Trust, Barnardo's, Scope, the Disability Rights Commissioner and the Family Fund.

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

No, I shall finish this point and then I will give way on the disability point.

The Council for Disabled Children represents a long list of organisations, which I do not have time to read into the record because the House needs to move on.

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

If the hon. Lady will let me make this point, I will give way to her. I have already said that.

That list includes organisations such as the Association of Directors of Social Services, the Royal College of Nursing, the Parents Autism Campaign for Education, the National Children's Bureau, Children in Scotland, and the Children's Trust. It also included the National Autistic Society, which I understand has since developed its view and now has a slightly different view, and is, along with Mind and the Parkinson's Disease Society, a signatory to a letter saying that its views have moved on. But the rest have not. I have repeatedly asked my officials whether the Department has had formal representations on this matter. Apart from the circular to members of the Committee, I cannot find any reference to these organisations wanting to come back again on this.

The point here is that this is a difficult area and it will always be. When any Government settle on a definition, they do so after consultation and understanding what the majority have said, and, in fairness, reflecting in their response where a different view was taken and why.

I said that I would give way to the hon. Member for Falmouth and Camborne and then I will give way to the hon. Member for Chipping Barnet.

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

I thank the right hon. Lady for giving way. I wish to make a point about mental health organisations that represent people with fluctuating conditions. In my speech, I mentioned that people with fluctuating conditions might have capacity at some points and that at other points they might not. It is a fluctuating capacity—that is the definition—so although such people might have capacity at certain times, they are likely to become ill again. What representations did the Minister receive in the consultation that she refers to?

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury) 6:00 pm, 4th July 2006

We dealt with fluctuating conditions in Committee, and I made it absolutely clear to the hon. Lady then what would happen in such circumstances. If she cannot remember that, I cannot help her, but I will send her the reference.

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

The right hon. Lady said that she wished to have evidence of representations having been made to the Treasury on the definition of disability. I refer her to a document I have in my hand, "Response to Inland Revenue proposals: modernising the tax system for trusts" by the Disability Alliance, which is one of the organisations that the Paymaster General recently cited as supporting her definition. It states:

"The proposals to restrict eligibility to those mentioned in paragraph 2 above—" where it refers to the definition in question—

"appears to be far too restrictive and would exclude many disabled people who are currently defined under social security legislation. In this regard it would not appear to fit in with the government's proposal of fairness."

The Disability Alliance has expressed concern, and so have a number of other organisations, as set out in documents that I have in my possession.

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

The hon. Lady continues to demonstrate her lack of understanding of the complexity of the consultation with regard to definitions of disability, the range of organisations that took part in it, and my acknowledgement that some of those organisations—some of them—did not take the same view as us, and that some organisations have continued to advance their view. Their views are not ignored, but the Government have to take a reasonable decision. Having changed a regime only two years ago on the basis of what the majority wanted, it is not reasonable to change it yet again—especially as the Opposition go on so much about certainty—on the basis of the views of certain individuals.

I have dealt with the amendments in this group. I have explained to the hon. Lady about those of her amendments that I do not accept as they would fundamentally undermine the Government's objectives, and I have also explained about amendments of a similar nature to some of hers that the Government have tabled in order to deal with some of the points that Committee members thought should be looked at further.

What this debate has made clear is that Opposition Members want to strike down inheritance tax. The hon. Lady was not prepared to make a commitment today on whether it will be abolished if her party ever get elected, but she has confirmed that her party is considering abolishing it. It beggars belief that she has the audacity to stand before this House and say that the vulnerable will be attacked, when that is not true, and that the principle in question is being undermined, when that is not true, and then to say that at one fell swoop billions of pounds will be wiped off public expenditure, so that that money cannot be spent on services for such vulnerable people.

I commend the Government amendments to the House, and I call on my hon. Friends to oppose the Opposition amendments if they are pressed to a vote.

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

I thank Members for their contributions, and I emphasise that my party is not asking for special tax privileges for trusts. All we are saying is that the Government should not slap punitive new tax charges on trusts, the vast majority of which are set up for completely non tax-related reasons. They are set up to provide for family members—to provide security for families for the future—and we oppose the charges because they are an attack on prudent and responsible behaviour.

The Paymaster General persists with the misleading statement that the Government seek to align the tax treatment of trusts with mainstream treatment. That is simply not true; they seek to bring all trusts within the punitive regime that has existed for many years for discretionary trusts. The tax regime does not currently give special tax privileges for trusts; that is why they are not largely used for tax avoidance. We deny that we are seeking special privileges for trusts; we just wish to oppose the Government's punitive new charges in this area.

The Paymaster General believed that there was no problem in relation to people changing their wills, and that few people would be affected. In that case, why has she tabled 50 amendments to her own schedule? The Paymaster General seemed to regret that I have made the same speech on a few occasions. The last time I made the speech it seemed to have an impact, because the Government promptly did what I asked them to do three weeks later through amendments in Committee.

The Paymaster General gave a long list of organisations that apparently support her position on the disability consultation, but they patently do not. I have given the House an example of an organisation that she listed but which expressed grave concern about the definition in question. It is my understanding that only six organisations that represent disabled groups responded to the consultation on this point and, as I have told the House, they expressed concerns.

The Paymaster General says that the Government cannot adopt the Opposition's amendments because the Mental Capacity Act 2005 has not yet come into effect. That is no barrier. We can incorporate a provision in that Act, even though it has not yet come into effect. If we incorporate it in the Inheritance Tax Act 1984 as a result of this Finance Bill it can happily take effect from the moment of Royal Assent.

The Paymaster General says that there is no justification for introducing special treatment for life insurance policies. Why then did she table amendments in Committee to give special treatment to life insurance policies? She also refused to answer my question about whether the then Chief Secretary was correct in saying to the House that no life insurance written into trust before Budget day would be affected by the schedule 20 changes. She refused to answer that question because that statement was not true then and is not true now.

The Paymaster General brushed aside my concerns about divorce by saying, "You don't need trusts in divorce, as plenty of other mechanisms are available." Frankly, those mechanisms are not available to people whose divorces are already concluded. They might have trusts already, and now, thanks to the Paymaster General, they face the deeply unpleasant prospect—both financially and emotionally—of going back to court to have their divorce settlements varied to try to resist the Government's attempt to place new tax charges on divorce.

The Paymaster General also refused to be drawn on other alternatives on offer that perform a similar function to a trust in relation to a divorce—I acknowledge that—such as a charge or retaining legal ownership. Both those will involve a new tax charge, whether that is an additional income tax charge or a capital gains tax charge. In either case, unless the Opposition amendments are agreed to, there is the prospect that people who get divorced and wish to allow their spouse to live in a property until their children have completed their education will be paying new taxes, thanks to schedule 20.

We have emphasised throughout the debate the huge value that trusts provide to ordinary hard-working families. The Government's proposals will hit not just the super-rich, but a whole range of people who have done nothing more criminal or irresponsible than to try to provide financial security for their families' future, which is why I will press new clause 2 to a Division.

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

The House divided: Ayes 223, Noes 277.

Division number 272 Finance (No. 2) Bill [Ways and Means] — New Clause 2 — Trusts relating to divorce, life protection policies and disabled persons

Aye: 223 MPs

No: 277 MPs

Ayes: A-Z by last name

Tellers

Nos: A-Z by last name

Tellers

Question accordingly negatived.