I thought that it would be appropriate at the beginning of the debate to mention the points that you made about clause 84, Mr. McWilliam, which simply enables schedule 15 to take effect. I shall not discuss the details of the schedule, but set the scene of the Government's approach.
The provision implements one aspect of the anti-avoidance measures that we announced in the pre-Budget report last year, directed at avoidance involving the contrived use of trusts. We are concerned specifically with the range of schemes that allow wealthy taxpayers to give their assets away, or achieve the appearance of doing so, and so benefit from the inheritance tax exemption for lifetime gifts, while in reality retaining continuing enjoyment of and access to those assets, much as before.
I am grateful. For the sake of our understanding of the Government's line on this matter, will the right hon. Lady define what she means by the word ''wealthy'', which she just used, and suggest the amount of assets that she believes have been protected by the mechanisms that she described?
Indeed. The right hon. Gentleman is, as always, using his experience as a most highly regarded Financial Secretary to anticipate the major points that I want to make in my brief opening remarks. I will deal with those points as I develop the argument.
As Committee members will be aware, avoidance on those lines has been a risk ever since inheritance tax was introduced in 1986. Successive Finance Acts have tried to keep inheritance tax avoidance under control by disapplying the normal rules in the case of gifts with reservations, and attempting to block loopholes revealed by attempts by tax planners to work around
the rules. This Government made the last effort on those lines as recently as the Report stage of what is now the Finance Act 2003. Despite those efforts, schemes to circumvent the ''gifts with reservations'' laws continued to multiply rapidly until December 2003. The schemes were increasingly contrived and were being marketed as packaged solutions that could be offered to people by their financial advisers.
We do not have a complete count of how many of those schemes have been executed. It is in the nature of things that the Inland Revenue gets to hear of such schemes—if ever—only when they become active, after the individual concerned dies and inheritance tax rules come into play. Since the pre-Budget report, however, it has been suggested that there are more than 30,000 clients for particular schemes that have had wide success most recently. Assuming that schemes involve assets of the order of £500,000 on average, which seems to be the consensus among their marketers, some tens of millions of pounds, or more, must be wrapped up in them. The Government are facing a substantial loss to the Exchequer.
Faced with such figures, the Committee will not be surprised to hear that the Government decided to take action. It is not enough to tackle new arrangements and future avoidance. The Government wanted to send a clear message that artificial avoidance of that kind is not acceptable. Those who devise and market such schemes, and the people who take advantage of them, need to understand that and not assume that avoidance is risk-free.
Such schemes have grown so rapidly because they have are regarded as a one-way bet. The essential point is that nothing really changes. For example, let us consider somebody who wants to ensure that the house that they live in is not part of their taxable estate, but they want to remain living there. They see their adviser, sign a series of papers and pay a substantial fee, even though there might be a relatively small amount of work in it. The client goes home, the paperwork is filed and the arrangements are designed to unscramble when the client dies and have no lasting effect. The only real effect is inheritance tax savings that can run into hundreds of thousands of pounds or more. Given that perception of risk and rewards, it is not surprising that people and advisers have found such schemes increasingly attractive. The clause gives notice that that is a false perception.
People who have used such schemes, or who contemplate others like them in future, are right to think that they will get any inheritance tax saving that their scheme is able to assure, but they are wrong to think that that protects them against any future tax charge. That is at the heart of the changes under schedule 15.
The Paymaster General has kindly given some figures. My maths may be slow, but will she quantify what lost tax the Government have assessed? What loss of inheritance tax yield per annum are the measures designed to recover?
Forgive my trying to put the matter delicately, but it is not possible to give an annual yield. That depends on the age of people when they enter the scheme, and how long they live, which are unpredictable factors. We are reliably informed by the market that 30,000 schemes have developed up to the December period. Billions of pounds of assets are wrapped up in those schemes, so over time hundreds of millions of pounds of inheritance tax will not be paid, and that is a substantial loss over a long period. Indeed, the figure could rise into billions of pounds.
The question posed for the Government about the clause concerns the challenge whereby gifts with reservations are being negated and the desire to ensure that wealth is appropriately taxed as the tax system requires it.
I want to concentrate on the figures. It is difficult to accept that, when the Treasury asked the Revenue for recommendations to deal with the schemes, a figure concerning the amount of tax that was at risk was not given with some accuracy. Perhaps I am wrong mathematically, but if there are 30,000 schemes at £500,000, that is £15 million of assets and, at 40 per cent. tax, £600 million. [Hon. Members: ''Billion.''] Is that the right amount? Perhaps we can have an answer.
If research was undertaken, will the Paymaster General explain the relationship between the high marginal rate of tax in inheritance tax and the incidence of the schemes? On the contrary, if we lowered the rate of tax and got away with exemptions, would that be another way of tackling the problem?
Before the consultation exercise, the publication of the clauses and the extremely revealing responses that were received, the potential loss of revenue has increased. I am referring to the Revenue's knowledge of the types of marketing schemes. What is provided for is when the asset continues to be enjoyed, as if owned, and that is what comes into the tax charge. Taxpayers then have the choice of whether they want to remain within the inheritance tax laws, and if they do, they can make an election to keep their scheme in place. If they do not come under exemptions in the proposals in the schedule, and they are not within the de minimis, which deals with a huge number of the processes—
I will be happy to give way, but it is helpful if I am allowed to finish one point before I move on to the next. Otherwise, I shall lose my way and venture into discussing the schedule inadvertently.
The schedule provides for an either/or situation. It will either allow the inheritance tax rules to operate as they should without the contrived schemes, or if the scheme is used and the taxpayer does not want to unwind that scheme—or simply elects for it to disapply, which the schedule provides for—an assessment will be made each year of whether they have benefited from use of an unearned asset that
comes into taxable capacity, in exactly the same way as the benefit in kind legislation operates. In a nutshell, that is what is provided for in the measures.
Mr. Burnett rose—
I will give way to the hon. Gentleman later. I have not forgotten him.
When we discuss the schedule, the right hon. Member for Fylde will see the fantastically complicated schemes that are currently in place. The Government have sought to create a simple mechanism that will allow people either to come out of the scheme or to allow it to run and take a charge on the assets elsewhere. We shall come to that when we discuss the schedule. I have not forgotten the right hon. Gentleman's point on wealth, and we shall come to that when I have dealt with the question from the hon. Member for Torridge and West Devon.
I know that the Paymaster General is probably bringing her opening remarks to a close fairly soon, but I am sure that she would not want to mislead the Committee into believing that the de minimis limit is in any way generous. Notwithstanding the proposed Government amendment, we are talking about a de minimis limit—predicated at times 20 for a 5 per cent. return—of £100,000. The IHT threshold is considerably more than that. By using the income tax sledgehammer, we are going to catch people who are not even within the IHT limit. It is a deplorable piece of legislation that we shall debate.
The hon. Gentleman is quite right that we will be debating it, but in the Government's view he is absolutely wrong to suggest that people who would normally be exempt will be caught by it under the normal rules of inheritance tax.
Indeed, Mr. McWilliam. That is all I was going to say on the matter.
I would like to deal with the point following on from the questions of the right hon. Member for Fylde. When taxpayers engage in such planning, it leaves future taxpayers as a whole out of kilter. The Government wish to deal with that. To all appearances, the taxpayer has modest means, but they enjoy valuable future benefits, such as a rent-free home, valuable art and antiques, and access to a fund of financial assets if they feel the need, that their less-fortunate neighbours—that is, the vast majority—can get only by spending hard-earned, and taxed, income. The Government think that it is perfectly proper to have regard to that for income tax purposes looking forward. That is what we are proposing.
One of the issues that we will discuss extensively when we reach the schedule is whether it is retrospective. When we reach that point, I will explain to the Committee why the Government reject that proposition. Clearly, the charge starts from 2005-06 and there are choices that the taxpayer can make.
It is absolutely true that the Government have benefited from what, in polite circles, we would call a lively consultation process following the announcement of the principle in December. We have made it clear that we wanted to target schemes with the potential to cause serious lose of inheritance tax. The responses in the consultation were of significant benefit in realising that objective, not only because they revealed the extent of the problem—which was considerably wider than I, as a Minister, had appreciated—but because they resulted in some important points being made. The Government are responding to those in our amendments. With a provision of this nature, it is not surprising that interested parties have continued to come forward with points as they have seen the fine print of the legislation. The debate on a substantial number of amendments, both Opposition and Government, will give all those major points a fair airing and discussion.
As I said, the Government have been more than happy to take up points in Government amendments. I am happy that there is a significant degree of overlap between what we are proposing and some of the amendments tabled by the hon. Member for Arundel and South Downs and his colleagues.
We will debate each of those as we move to the schedule attached to the clause.In the meantime, with those opening remarks, I commend clause 84 to the Committee.
I am also grateful to the hon. Member for Arundel and South Downs. We discussed inheritance tax for a short period in last year's Finance Bill. There was remarkable similarity of view between him and myself. What is fair about a tax that the rich can escape with impunity but that catches millions of people with modest means who may well be subject to the income tax charge and not even have the cash to pay it?
The clause does nothing to redress those problems. It is a short-term, measly, muddled, useless bit of legislation. Proposed changes to the rules on pre-owned assets will make people completely and unknowingly dishonest. They can fall foul of the legislation and be completely unaware of the fact. Say a daughter or son moves in with their parents, entirely altruistically, and cares for them, forsaking an opportunity to get on the property ladder, and spends money improving the property and refurbishing it. Of course, the daughter or son is saving the state thousands of pounds by looking after the parents, but they will probably fall into the charge to income tax, because they will, by operation of law, have an equitable interest in the property, and any sane, sensible and able lawyer will advise them of that fact after the effect.
The legislation catches all post-1986 transactions. We should not be in the business of passing retrospective legislation. Not only is the legislation repugnant because it is retrospective, but it is characterised by muddled drafting and confused
objectives. For example, why use an income tax measure to endeavour to correct the shortcomings of inheritance tax legislation? I have referred to the de minimis sum that I know Government amendment. No. 146 will increase to £5,000. However, as I said in an intervention, that will put into charge to income tax people who may well be under the IHT threshold. Will the income tax charge be levied on pre-owned assets that qualify for inheritance tax exemptions—for example, business assets and agricultural property? What will happen in small and medium-sized businesses—family farming partnerships or family businesses—where there are adjustments to capital accounts? What about the Boden principle and the Ralli principle? It is well known that young sons or daughters take on businesses and work for 20 years or so, having been told, ''This business will one day be yours.'' Will they face an income tax charge levied over 20 years? This is horrendous.
The hon. Gentleman is perhaps more familiar with this than I am, but I thought that the prospective taxpayer could make an election, and that therefore they would not be forced into such a situation.
You are right. Mr. McWilliam, but I am trying to illustrate the point that, with the confusion and muddle of using income tax, there will be inadvertent liability to tax, and liability to tax where an individual should not be taxed on any principled application of this legislation. Many individuals in small and medium-sized businesses could innocently fall within the ambit of this tax. This legislation will give rise to a large increase in personnel in the capital taxes office and probably to an even larger increase in the valuation office.
There are confused definitions, for example with regard to intangible assets. Intangible property means any property other than chattels or interests in land.
I am grateful to you, Mr. McWilliam. There are confused definitions, and I will not talk in detail about them. Shared occupation is not dealt with properly, and it has always been a principle that for the owner even of a small equitable interest in property adequate consideration is given to his or her occupation or their use of the property and enjoyment of it.
This is flawed legislation. It is retrospective, and it is muddled and confused. That is why we should be spending days correcting it.
We oppose the clause on principle. We feel that the Government are going about the objective that the Paymaster General described—of plugging what are identified as holes in the inheritance tax gifts through the reservation of benefits rules—the wrong
way. We think that the correct approach is to change the rules on IHT reservation of benefits and to prevent future gifts that avoid the rules from being made. That hits straight at the principle of retrospection. The Government have instead introduced a new tax on gifts that could apply to any relevant situation going back to 17 March 1986.
The measures are retrospective in their impact on elderly people, many of whom are too old to be able to do anything much about it. More particularly, there is the potential for a much wider range of unintended effect, to which the hon. Member for Torridge and West Devon just referred, and there is scope for unfair and unreasonable impacts on people. Given the wide powers of regulations, there is also the opportunity to misuse in the future what would be put on the statute book now.
There is a wider point. It is an old bit of human nature to want to hand from one generation to another the family home, whether large or small. That is a natural and right thing for people to want to do. Every parent wants to do the best for their children. The problem arises because the enormous increase, or bubble, in house prices from Birmingham southwards, as opposed to other parts of the country, has created a huge distortion between IHT arrangements and house prices. It drags in—
It being twenty-five minutes past Eleven o'clock, The Chairman adjourned the Committee without Question put, pursuant to the Standing Order.
Adjourned till this day at half-past Two o'clock.