(except clauses 4, 5, 20, 28, 57 to 77, 86, 111 and 282 to 289, and schedules 1, 3, 11, 12, 21 and 37 to 39) - Clause 84 - Charge to income tax by reference to enjoyment of property previously owned

Finance Bill – in a Public Bill Committee at 2:30 pm on 18th May 2004.

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Question proposed [this day], That the clause stand part of the Bill.

Question again proposed.

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

I welcome you, Sir John, to the Chair for our deliberations this afternoon. This morning, I was making a point of principle about the clause, which is very much about the natural human desire to hand on property to children. Many of the problems that the clause addresses are caused by the bubble in house prices from Birmingham to the southern part of the country, which is a wider issue that needs to be considered.

The Government are either deliberately or in a somewhat blinkered manner ignoring some of the possible impacts of their proposals. I wish to focus on the opposition of the Low Incomes Tax Reform Group. Its basic concern about the provisions has to do with the practice, which has become necessary and widespread, of parents giving their children capital for a deposit to buy a house. Later, when the parents are old and one may be widowed, it becomes desirable that the children take in the widowed person and provide a granny flat. Even with the slightly improved exemptions provided in the Government's amendments, it is quite likely that the value of the granny flat will be £100,000 or more, and a situation could arise in which granny moves in and finds a tax bill. I am sure that that is not the Government's intention, but what people perceive is as important as what is intended, and the legislation ought not to result in such circumstances.

I would like to put on record the objections of the tax reform group. It is concerned that the invention of a new income tax charge will bring with it many potential disadvantages for people who are not well off. Tax returns and tax situations will become much more complex, more record keeping will be required and more literature will have to be read and understood.

Uncertainty as to the scope of the legislation will require non-taxpayers to gain tax knowledge in order to ensure that they are outside it. The tax reform group has been advised several times by Revenue officials

that it worries too much about people who are outside the tax net and that, as such people's incomes are too low, tax and contact with the Revenue should not be an issue for them. However, from its experience over several years of running clinics to help people—pensioners in particular—whose income may be only a few thousand pounds per year, it has learned that people's concerns as to whether they should be paying tax loom large in their minds.

The tax reform group makes the point that the potential annual charge under the proposals will be seen in the press and elsewhere as concerning money given away by parents or people who are related to the main residents, and that that is likely to generate fear among those who have given away things in the past or who are thinking of doing so in the future. It is clear that extra Revenue resources will be required to reassure people and explain the implications of the legislation. The tax reform group is particularly concerned that an evaluation of the scope of the charge may require knowledge of family transactions dating back a long time. The provisions require detailed record keeping for the future, which will be potentially inclusive of normal family arrangements.

The provisions could create all sorts of unintended effects. People who have given away assets or cash to their children, perhaps many years ago, and fallen on less favourable times could find themselves subject to an income tax charge if helped by their children in their later years. There is a multitude of arrangements concerning the use of the family home in a long-term care scenario, and where family arrangements enable the older relative to remain in the community, they could be rendered impractical by an income tax charge. Gifts given over many years, for example, by grandparents to grandchildren could generate an income tax charge if related family members helped the grandparents in later life.

It would be unwise of the Paymaster General to dismiss those concerns. Ordinary citizens are extremely conscientious about their tax obligations. What Conservative Members dislike about the proposals and their details is that they could result in many unexpected circumstances. The de minimis limit ought to be similar in quantum to the nil rate band under inheritance tax, which has already been raised by the hon. Member for Torridge and West Devon (Mr. Burnett). If the limit were lower, as the Government propose, all the bureaucracy, intrusion, arbitrary results and worry that are envisaged could come to pass. The basis of the de minimis limit should be clear to a typical pensioner; we should not have a computational de minimis where a person has to collect all the facts, do the sums and see whether the result is less than the set figures. All that would achieve is an increase in staff and in fees paid to advisers.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

Is the hon. Gentleman saying that he objects to the fine print of the clause, or that he and his party object to the principle that it embodies?

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

I think that I made it clear before we retired for lunch that we object to the principle of retrospective taxation. I am now trying to spell out why the provisions, which the Paymaster General explained are aimed at the better-off, are a cause for worry to all sorts of ordinary citizens. There are two separate aspects, but I made it clear up front that we object to the retrospective nature of the provisions. If this is a hole that needs to be plugged, it should properly be plugged by amending the IHT legislation rather than by the retrospective impact of what is being proposed.

A general and worthwhile point is that the potential impact of so much of what gets done is not thought through. I am about to speak about the other end of the scale—historic homes—but I thought it appropriate to mention that it was the Low Incomes Tax Reform Group that voiced the strongest objections. As the Paymaster General will say, the provisions were not intended to impact on those on lower incomes at all, but they may do and that is a concern.

The arrangements present major problems for historic houses and their contents, where, for bona fide reasons, the owners cannot comply with the more demanding standards to qualify for conditional exemption. The great majority of the electorate value our historic homes and their heritage and are, by and large, supportive of many families for whom it is quite a financial struggle to maintain them.

There are more than 1,800 recorded privately owned historic homes remaining in Britain. Some 350 are open to the public regularly and attract 15 million visitors each year. A further 200 provide some degree of public access less regularly. The Historic Houses Association recently conducted a survey that found that of the 350 major houses open to the public, 45 will be affected by the proposals. The largest recorded tax change relates to chattels and in quantum is in the order of £1 million per annum.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

Does the hon. Gentleman agree that those 350 historic homes, and the other 200, are open to the public because of UK inheritance tax legislation? That is why the public can, on occasions, gain access to the 200 and can quite frequently gain access to the 350.

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

The point is not immediately relevant, but I do not agree. If the hon. Gentleman had read his literature, he would have discovered that even in 1800 virtually every historic house was open to any member of the public who cared to knock at the front door. The tradition of houses being open to the public, which I do not deny has been put on a commercial basis, is long established. It is a mistake to believe that the collective social interest in the historic homes of this country does not go back a very long time.

The point that I seek to make—this is slightly irrelevant—is that the arrangements that we are discussing cause problems and in various ways are likely to lead not to more houses being open, but if anything to the reverse. I am sure that hon. Members

of all parties would agree that we want to see our historic assets preserved and available to those who want to visit them.

Photo of Steve Pound Steve Pound Labour, Ealing North

A number of my relatives visited many stately homes—usually after dark, it has to be said, and not by invitation.

The hon. Gentleman mentioned earlier the onerous conditions. Let us consider the life of a truly great parliamentarian, one who is still respected and revered in many parts of this building: Tom Driberg. When he wanted to leave his house at Bradwell-juxta-Mare to the nation, he had to come up with half the money, which was £500,000. He could not do that. Today's papers tell us that Lord Hesketh—I was going to say that he was an equally distinguished parliamentarian, but I would not normally compare Tom Driberg to Lord Hesketh—is selling his house because he is unwilling to allow any public access. It is one of the most beautiful stately homes in Northamptonshire, and, whereas his father and grandfather married rich Americans and saved it, he is now selling it and it could be bought by a Russian. Does the hon. Gentleman really want that?

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

I thank the hon. Gentleman for his interesting observation. I am disappointed to hear his racial prejudice against Russians. I hope that whoever buys the house will do the right thing and open it to the public.

There needs to be a fair trade-off in such matters. I do not know the detailed circumstances of Lord Hesketh's case, but one of the things that really worries me is that a human reaction to many of the proposals is to say, ''Forget it. We'll cash in the chips and go somewhere else.'' Whatever the fiscal proposals are, they must go with the grain of things, and not against it.

Of the 350 great houses, 45 will be affected by the proposals. At least 150 of the second-tier historic homes, many of which contain historic collections, will be hit. The proposals would make it difficult to fulfil the recently increased qualifications for conditional exemption. I would point out to the hon. Gentleman that the Finance Act 1998 made it more difficult to qualify for conditional exemption.

I want to read out one or two quotations. The hon. Gentleman may not have much sympathy with them, but I think that they are realistic. The owner of the home of an eminent Victorian statesman and political figure said:

''We shall not be able to afford the 5 per cent. on chattels and since the whole object is to keep them in this Grade 1 listed building, we shall have to quit the house which will be unoccupied for at least some years. The house is listed Grade 1 because of its association with'' the famous Victorian politician and statesman. The owner continues:

''If the house is vacated, an additional caretaker and security will need to be employed. Such people would however be unable to personally escort individuals and parties . . . The rent for the trusts was fixed after taking careful legal advice and a retrospective rule would therefore seem totally unfair. Income tax is paid by

both trusts on the rent. If the house is vacated, all the many charity events and functions we hold in the house, garden and field will come to an end.''

Another house of major importance and political significance has been owned by the same family for some 700 years. The owner states:

''My efforts to rescue and restore this property for the benefit of the nation and future generations could come to nothing. We could not possibly afford the extra tax charges. My son, in Government service, could not move in, the house would be abandoned, the business would suffer and we might have to contemplate selling the entire property.

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

Closer to home, I think.

I have another quotation regarding an open house in the midlands:

''The owner will have to move out as there is no other suitable place to house the chattels. This will reduce public access. It is not possible to fund the proposed increase in the tax charge.''

Another smaller property, not regularly open, but important, has been rescued and restored by its current owners, who say:

''The new measures pose a real body blow. In a nutshell, they will make it impossible to hand over our life's work down to our children, never mind our wealth which is inconsiderable. We have laboured long and hard over the last 25 years to save this house and park from dereliction. The sleepless nights and years without holidays would not count against CGT. As it looks at the moment we shall be able to afford neither to stay nor to sell. What a prospect.''

It is easy to make cheap comments, but hon. Members will recollect that in the early days of the current Government surveys were commissioned to determine whether people cared about cool Britannia, and they found that people were not interested in that at all; they were interested in our heritage. It is absolutely fundamental—and I hope the Paymaster General will have something to say about this—that the arrangements do not damage the prospects of people who are often almost excessively motivated to look after their houses and contents for the next generation. There is huge public support for that process. I am well aware of situations where these arrangements will create problems for those who do not meet the criteria for exemption and have problems with chattels.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

I think that the hon. Gentleman said there are approximately 1,850 historic homes.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

Some 550 of those are fully or partially open. Does the hon. Gentleman think that the other 1,300—or 1,250—that are not currently open are more or less likely to become open to the public if the legislation is introduced?

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

The point I was trying to make is that the net effect will be that those homes are less likely to open to the public. It is now such a nightmare to get the arrangements right tax-wise that the better options are to shut the property up and move out or to sell it. The hon. Gentleman has put his finger on my real concern: the net effect will be that historic houses will be less open and less maintained.

Later, I hope, the shadow Paymaster General will tell us that the Government are interested in sorting out all those problems.

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

Sorry, I mean the genuine Paymaster General.

Our basic principle is that the proposals are unfair and unreasonable because of the extent of retrospection, which could fall on many people. Many taxpayers took what were entirely lawful steps to mitigate the inheritance tax liabilities on their properties—in some cases, nearly 20 years ago. They could find themselves worse off than if they had taken no action at all. One leading QC has made the point that the measures are unprecedented in their retrospective impact. To a large extent that is recognised in the concession of the 1986 start date.

The Society of Trust and Estate Practitioners said in its response to the measures:

''The proposals . . . cover existing structures. These may not be easily unwound or indeed possible to dismantle at all. In many cases the parties concerned may not be wealthy or indeed higher rate taxpayers and will not be able to afford to pay an open market rent''.

The taxpayer should be entitled to organise their affairs in accordance with current law and with a reasonable degree of certainty.

The Government will say that the legislation is not retrospective but retroactive because the income tax charge will not have an effect until next year—it is no doubt intended for introduction after the next general election so that many people who are hit will not feel it before the election—and that taxpayers have the opportunity to dismantle the arrangements before then or accept that they will be caught by the provisions.

It will not, however, be possible for many to dismantle the arrangements. They might include trusts involving minors, or the dismantling could trigger other consequential tax charges. Many taxpayers who accept that they are caught by the provisions, or decide to elect and thereby escape the proposed income tax charge, will end up worse off than if they had taken no action at all for one or more of the following reasons: they may have incurred professional fees, or they will have accepted other tax charges to mitigate the IHT charge and may be uninsurable as asset values have increased considerably in the meantime and other tax planning strategies, which might have been pursued, are no longer feasible.

Considering the detail relevant to the principle, the proposals are hastily contrived and not thoroughly thought through. They are based on the briefest of consultation documents and one of the shortest consultation periods. The income tax charge will be difficult and costly to administer and collect, requiring regular valuations. We question how cost-effective the measure will be. Cases will arise in which the subsequent use of an asset is never foreseen or intended and a tax charge might result.

The summary of responses to the consultation document was a misleading whitewash, it included only a small number of the 192 replies and was worded

to slide over some of the controversial aspects of the proposals. The tax consultant to the Institute of Chartered Accountants said that it had found many problems in the proposed legislation already, that the proposals are riddled with holes and should be withdrawn for redrafting, and that some of the problems are due to unforeseen circumstances, some are technical and some are just wrong. It cites the example of parents giving a child money with which to set up a business. Years later, after prospering, the child might buy the parents a house and an income tax charge could arise. There could be a double taxation problem if the child gave money to the parents who then bought a house and died, because the estate might also pay inheritance tax.

We have tabled 42 amendments to the schedule after widespread consultation with legal specialists to address the specific problems. I am pleased to see that the Government have tabled 40 amendments, some of which address in whole or in part the issues that we have raised in our amendments, but in no way do they fully address all the issues. We object to a charge remaining retrospective on elderly people who may no longer be able to finance changes or to sort themselves out.

If I had an historic home and was caught by the provisions, my reaction would be to squat under Waterloo bridge and let the state sort me out because, clearly, it is only sensible for anyone affected to get out of the house fast if they have an emotional commitment to preserving the property for future generations.

We welcome the Government's broadening of the exemptions and some of the improvements in the provisions for election under transitional arrangements, but we remain concerned about the principles that the measures introduce.

My perception is that this is the start of a major Labour Government stealth tax offensive in the area of inheritance tax. I hope that they will be unable to pursue it beyond the next general election, but I am mindful that a subtle offensive on stamp duty revenues has increased them from £2.5 billion to £10 billion. The Paymaster General will be aware that the present standard practice is for spouses and partners each to make bequests to their children up to the value of the inheritance tax exemption. When the first parent dies, the cash may not be available to pay the bequests and the assets are locked into the house. The children must wait for the second parent to die, and the house is then sold and they get the two bites. There seem to be many ways within the broad regulation powers, if the provision is enacted, to adapt it to impose a tax charge on such situations, which the law as proposed does not. I am concerned to see a route for future Governments of socialist persuasion to widen the initial provisions in the Bill.

I end by saying that I believe that the Government are making an error of political judgment. I return to what I said earlier: people's basic motivation to pass on their house, large or small, to their children is a

deeply embedded and worthy aspect of our culture. Measures that make that financially impossible and introduce all sorts of problems and reporting requirements that can penetrate throughout society are politically ill-conceived. We shall vote against the measure. When we debate the details, our object—given that we do not have the power to defeat the measure—will be to mitigate its effects as far as possible. The issue that it is designed to attack would be more properly attacked by addressing the specific inheritance tax law problems.

Photo of Michael Jack Michael Jack Conservative, Fylde 3:00 pm, 18th May 2004

With the forbearance of the Committee, I will outline some fundamental issues about inheritance tax that are raised by clause 84. The Bill introduces another patch for a broken tax. Through the schedule, it attempts to seal up a hole through which people have passed, almost with the encouragement of successive Governments, since capital transfer tax became inheritance tax. The Government of the day should not be surprised that people have taken perfectly legal means to step round the tax.

Many of the reasons that have motivated them to do that have been put on record by my hon. Friend the Member for Arundel and South Downs (Mr. Flight). I suspect that when they reply to the debate, the Government will—as my hon. Friend, in presenting his proper objections to the clause, and the hon. Member for Torridge and West Devon, who spoke earlier on behalf of the Liberal party, did—step away from facing the fundamental question of why we have inheritance tax. Is it the right tax? Is it constructed properly, in which case the clause might not be necessary?

The Paymaster General was kind enough to respond to my question about the level of assets that were protected by the mechanisms that are the subject of schedule 15. She said that up to £15 billion of assets might be sheltered. The inability of inheritance tax, as now constructed, to get a hand on those assets is clearly a threat to revenue. One cannot ignore that fact.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

I am not saying that I agree with the right hon. Gentleman's delineation of the problems, but as he is setting out his stall in that way, does he agree that those problems stem from the fact that in 1986 the Conservative Government introduced inheritance tax, reversing capital transfer tax, which had been brought in by the Labour Government in 1970? Capital transfer tax replaced the previous regime of inheritance tax, which was extremely similar to the one introduced in 1986.

Photo of Michael Jack Michael Jack Conservative, Fylde

I do not want to have a long discourse on who is to blame, but I acknowledge that sequential changes to the law have brought us to the position that we are in now. In philosophical terms, however, we should go back to the beginning of the process—estate duty itself. I think that it raises a fundamental issue. Before we had the range of taxes that we have today, the only way to get at people's rolled-up income was to

tax them at the point of their death. Suddenly the income crystallised out, and there was a sum of money available to be taxed.

The world has moved on, as table T1.2 of the Inland Revenue statistics lays out in considerable detail. It lists where all the money in our tax system comes from. For example, while inheritance tax yielded £2.5 billion for the financial year 2003-04, income tax dwarfed it with £115, 220 million—or £115 billion. That puts inheritance tax into context.

I can understand why the Treasury might wish to protect its interests, given the way that the tax is constructed. A further visit to the Inland Revenue website that deals with inheritance and capital transfer tax reveals a list, for those who wish to know how to circumnavigate the tax, of all the ways in which that can be done, including transfers between husbands and wives. As we will see in schedule 15, if a range of assets is made available to a third party, they will be subject to that schedule—but if they are passed on to a person's wife, she can carry on using his house with no charge, because that is the way the law is. The Government have not sought to challenge that.

The Inland Revenue website helpfully lists transfers to national bodies, charities, political parties, various forms of lifetime gifts, wedding gifts, reversionary interests, certain securities held by the UK Government, farms, and so on. There are various ways legitimately to avoid paying this tax. In this clause and in schedule 15, however, the Inland Revenue has picked out for special treatment one method in a long list of methods of avoiding inheritance tax.

Photo of David Laws David Laws Shadow Chief Secretary to the Treasury

May I tempt the right hon. Gentleman into saying whether he believes that the solution to the endemic problems that he is rightly picking up is to scrap the tax completely—or is he suggesting a more fundamental reform of it?

Photo of Michael Jack Michael Jack Conservative, Fylde

I am on record as saying that this tax is past its sell-by date, but I am aware that if anybody goes down that route, they have to answer the question about where else they would get the £2.5 billion from. It would be wrong for somebody who has sat on the Government Benches, and who has faced the real-world problems faced by any Minister dealing with taxes, not to ask how, when the Government of the day have set out their stall to spend money, they might raise the revenue. I do not dodge that issue; indeed, I have reached some conclusions about it.

People can look through the various tables provided by the Inland Revenue and get, in excruciating detail, the number of estates and the amounts of money that are subject to the existing range of reliefs and exemptions. I make my point with some emphasis, because if there are legally available ways to avoid a tax, we cannot blame people for using them.

Photo of John Butterfill John Butterfill Conservative, Bournemouth West

The right hon. Gentleman is making an interesting speech, but most of it is quite wide of the clause. We are not debating whether there should be an inheritance tax, nor, if we do or do not have one, what alternative form it should take. We are debating clause 84. Some of the other things that the right hon. Gentleman has been discussing will be properly dealt

with under schedule 15, which we will come to shortly. There are a huge number of amendments to that schedule, and there will be sufficient opportunity for the right hon. Gentleman to make his points. I would prefer not to have a debate on schedule 15 during the debate on clause 84.

Photo of Michael Jack Michael Jack Conservative, Fylde

I am always grateful for guidance from the Chair, but I was trying to suggest why I agree with my hon. Friend the Member for Arundel and South Downs, and why clause 84 would not command my support. The clause introduces a new variation on the rules of inheritance tax. I wanted to make clear to the Committee my views on the tax that underpins schedule 15 and the content of the clause.

I did not seek to deal in detail with any of the aspects of schedule 15, Sir John, because your predecessor in the Chair, Mr. McWilliam, made it clear that he did not wish hon. Members who spoke at this stage to go inch by inch through what was to come. I am sorry if I have, in your judgment, trespassed. In justifying my position on the clause, I was merely picking up on many of the points that my hon. Friend made.

Let me try to draw together my thoughts on the clause. The present structure of inheritance tax is not right. That tax should be re-examined to make schedule 15, and therefore clause 84, unnecessary. If it does nothing else, the Treasury should carefully study whether a tax without schedule 15, the implications of clause 84 and the many and associated exemptions to inheritance tax, but with a lower marginal rate, might be an alternative way to do things if we are to have a tax regime that taxes the capital that people have accumulated over time.

As my hon. Friend pointed out, some people—the truly wealthy—have very large estates. However, this clause will impact on those who have acquired a degree of wealth not by anything that they have done but by virtue of the fact that their principal asset—their home—has substantially increased in value as a result of its location and other factors that we are familiar with. In the light of what my hon. Friend said—that there is a natural desire for one generation to pass its wealth on to the next generation—it is unsurprising that people should use the available mechanisms to step around obstacles.

I will not go through the representations sent to Committee members by the Institute of Chartered Accountants of Scotland because that would take too long, but its two-page briefing makes it clear that much unfairness will be visited upon potential inheritance taxpayers in the future—particularly by virtue of the retrospective element of this clause, as my hon. Friend said. That it is possible, under the terms that we will debate, to step away from retrospection simply by an election is a novel introduction into the tax system. That is a sort of retrospective side-step; it is a dodge and a fix, and it should not exist.

In my humble judgment, the time has come to re-examine inheritance tax. We do not need complexity, which is what we have in clause 84 and the schedule that goes with it. We should reconsider this matter.

The Paymaster General (Dawn Primarolo): I shall briefly answer the points that have been made about the clause, but I will leave aside those that touch on the schedule, such as retrospection, until we debate those subjects.

It is important to remind Committee members that the schedule is needed only because people have made contrived arrangements to avoid inheritance tax. The Government want to stop that. Many points made in the debate—particularly by the hon. Member for Arundel and South Downs—were criticisms of inheritance tax in general. He was advancing the case for not having inheritance tax at all, and many of the rules that he referred to are the current rules for that tax.

I want to deal with the red herrings now, so that we can get beyond them. The hon. Member for Torridge and West Devon suggested that a daughter who moves in with her parents in order to care for them has an interest in that house, and that she will be caught by the schedule and the clause. That is wrong. If she has a share in the house, that is part of her estate and there will be no charge under the clause or the schedule.

As for the point that it is wrong in principle to use income tax to deal with the inheritance tax issue, as I have repeatedly said, schedule 15 is targeted on individuals who have arranged to enjoy valuable tax-free benefits as part of a scheme to avoid their inheritance tax liability. It is perfectly in order to subject those benefits to an income tax charge, particularly as that will deter a type of avoidance that has become widespread.

This morning, the hon. Gentleman referred to the Boden and Ralli principles, and he gave the example of a father and son working together on a farm. Again, that example was incorrect. The principles mean that if, for example, a son has worked for little or no reward on his father's farm, they should have regard to a part share of the farm. That is exactly how the rules operate. Each will have a share that is part of his estate, so no charge will arise under the clause or the schedule. The father has received full consideration, in the form of labour, for what he has given up. That example is another red herring, and would not be caught by the clause or the schedule.

It is simply not the case that there would be many unintended effects. I will deal with the relevant examples. The Government have built in significant safeguards to protect innocent transactions and to take out of the scope of the charge cases that present no real risk to the Exchequer. The de minimis limit is one of those safeguards.

The hon. Member for Arundel and South Downs said that the provisions would deal particularly harshly with elderly people who made the arrangements that we are talking about. We will have the opportunity to discuss that at greater length later, but I shall just say that people who have entered into the arrangements under schedule 15 have been well advised in any case—that is why they have taken up the packages. However, we have included a simple

escape mechanism in the form of the election, which is just a declaration. We will discuss that when we consider the schedule.

The hon. Gentleman said that the regulatory powers were too wide. The main point of the regulatory powers is to allow a further round of consultation before some of the operational detail is spelled out in secondary legislation. That is how the previous Government and this Government have proceeded with regard to guidance, consultation and secondary legislation, and we intend to go that way.

The hon. Gentleman says that it is natural to want to hand on the family home. I think that we need a reality check here. As we happily now live much longer, most people have established themselves in their own home by the time they are likely to inherit. The family home that they inherit is a store of value and is sold shortly after the inheritance. Tax is not imposed until an estate is worth more than £250,000, and frankly, wherever one lives, that is a lot of money.

The hon. Gentleman asked why we did not revise the rules on gifts with reservation. We have tried to deal with that problem twice, but it has encouraged more ingenious schemes, so we have sought to deal with the matter under another proposition.

Photo of Richard Bacon Richard Bacon Conservative, South Norfolk 3:15 pm, 18th May 2004

The Minister quoted my hon. Friend the Member for Arundel and South Downs as saying that it is the most natural thing in the world to want to hand on one's assets to one's family, and then said, ''I think that we need a reality check here.'' Is she saying that that is not a natural desire? What would she say to those who, even if they acquired a substantial asset for themselves, still had the issue of their grandchildren to consider? In the current property market, it is probably more difficult than ever before to get on to the ladder and one may need the family assets in order to do that. Would the Minister, in turn, like to take a reality check?

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

Unfortunately, the hon. Gentleman has misunderstood my point. I am not disputing the fact that people have a desire to pass on inheritance. What I was trying to demonstrate to the hon. Member for Arundel and South Downs was that some of the extreme cases with which he sought to illustrate his point did not address the reality of what is happening. The threshold is already at £250,000, which is a substantial amount in anybody's terms. That is the point that I was making; I was not talking about whether people should pass on property. I will quote some of the hon. Gentleman's colleagues on what the response from the tax system should be. We had the spectre of granny flats, of taking away people's businesses and of infirm people not being able to return to their property. I was simply trying to explain that that is not the case. The exemptions would deal with such cases, as does the operation of inheritance tax now.

Of course I agree that it is regrettable that many people who will not be within the inheritance tax rules and so do not need to consider them, have real concerns that cause them aggravation and anxiety.

However, unfortunately, such anxieties seem largely driven by unfounded fears about inheritance tax—hence the point that I was trying to make. Those devising schemes seem to be encouraging those fears.

Let us park the red herrings and deal with those not caught in the schemes. The hon. Gentleman will see that there are exclusions that would ensure that low-income groups would not be affected by the clause.

The hon. Gentleman made the point that the clause would require knowledge of family matters going back many years. As he is probably aware, the Government have tabled an amendment, to be discussed later, that would align the record-keeping requirements with those that already exist under inheritance tax rules, so there is nothing huge and new in that area either. As I said, we will pick up the point about retrospection when we debate that.

Mr. Andrew Tyrie (Chichester) (Con) rose—

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

If I may conclude this point, I will be happy to give way to the hon. Gentleman.

The hon. Member for Arundel and South Downs quoted the Society of Trust and Estate Practitioners, and said that some people would be unable to unwind their arrangements. That is precisely why the Government have built the concept of election into the scheme. People can leave all their arrangements in place, and may or may not come into the charge depending on the value of the assets that they continue to use. Alternatively, they can make an election, which is binding, and which basically means that they are back within the inheritance tax rules, and it will all be sorted out at the appropriate time.

People will have the challenge of unwinding all the arrangements only if they want to do so to make other arrangements and to see whether they can get around these rules.

Mr. Flight rose—

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

I give way first to the hon. Member for Chichester (Mr. Tyrie).

Photo of Andrew Tyrie Andrew Tyrie Shadow Financial Secretary

A moment ago, the Paymaster General said that the arrangements for record keeping would be aligned with existing arrangements for inheritance tax. Does that mean that, despite the retrospection to 1986, no one will be required to keep records for more than seven years prior to a gift?

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

That is the subject of an amendment and of the debate about retrospection. I will reject the retrospection point. However, I will not try your patience, Sir John, by going into those debates. Record keeping is required to start at 1986 anyway under current inheritance tax rules. Any arrangements that people make now would involve records that they should keep for the purposes of inheritance tax.

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

Can the Paymaster General give a practical answer to a thought that has occurred to me from what she has just said? Let us imagine a situation

in which somebody has given a house that is worth £1 million—many houses are worth a great deal more than that.

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

You would be surprised. The owners might say, ''We can't unwind the arrangements. Legally, the house is owned by our children, so we opt to pay the inheritance tax bill.'' They then die, the house is worth £1 million and they have financial assets of, say, £100,000. I calculate that the inheritance tax bill would be about £350,000, but there is only £100,000 available to pay it, and the assets are legally owned by somebody else. Is the Paymaster General saying that there will be a large inheritance tax bill that is simply uncollectible because the assets are not there to pay it?

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

As I said in my opening remarks, the arrangements that people have made in these contrived schemes can be left in place, and the income tax charge will be operated if it is relevant. Alternatively, they can decide to opt back into the inheritance tax rules, which they have de facto negated, for the liability of the assets at the point at which they die. Those are the two options. Several later amendments deal with when the election is made, when a charge would and would not be triggered and valuations. Perhaps we could save that debate until those amendments are moved.

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

If I understand it, opting for the inheritance tax liability does not unwind the legal changes that have occurred. One opts to pay inheritance tax as if the asset had not been transferred. I can think of many situations where, when the person dies, there are nowhere near enough assets in their estate, which is legally owned by that person, to pay the inheritance tax bill. What happens then?

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

In the circumstances that the hon. Gentleman is describing, there may, for instance, have been a gift with reservation. Regardless of value, how much of the estate is left to be subject to inheritance tax will vary. If there are no resources to pay the tax, then there are no resources. However, if a gift with reservation has been made, the rules would operate accordingly.

I want to turn to granny flats, to parents buying a house and to what I think is the red herring of historic homes. The hon. Gentleman asked what happens when parents give a child a business and years later the child dies. He asked whether the parents' house is caught. The seven-year rule addresses that point, and it would not be caught. On granny flats, Government amendment No. 142 inserts a new provision into paragraph 11 of schedule 15 to cover exactly that point.

Sitting suspended for a Division in the House.

On resuming —

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury) 3:44 pm, 18th May 2004

On the points that the hon. Member for Arundel and South Downs made about historic homes, he does not explain why the owners have not simply claimed the conditional exemption. If the houses are open to the public—there are various requirements involved—and if the chattels are shown, are of high quality in their own right, or are historically associated with the property, the relief is available. I am at a complete loss on his point that the provision would damage historic homes, as conditional exemption from inheritance tax is available.

The hon. Gentleman said that people would not be able to afford the 5 per cent. on the chattels. It would be an issue only if they do not elect to pay inheritance tax. If they elect to pay it, in due course, it opens a claim to the conditional exemption, so there is no need to vacate the house. Conditional exemption offers a route through inheritance tax.

The hon. Gentleman gave an example of an open house in the midlands. Again, I can see no reason why the owners must pay the income tax if they do not want to. The conditional exemption scheme within inheritance tax caters for historically associated chattels and the homes themselves, so his series of points about historic homes is a complete red herring, unless he has more information.

The final point that the hon. Gentleman made was that house price inflation is driving people to avoid inheritance tax. It certainly suits some—I do not hold that the hon. Gentleman is one—to play up the risk that the majority of us will pay inheritance tax. The truth is very different: 95 per cent. of estates do not pay inheritance tax. As the right hon. Member for Fylde (Mr. Jack) pointed out, the tax makes a valuable contribution to the Exchequer, and the need for it was acknowledged by the hon. Member for Havant (Mr. Willetts), an Opposition spokesperson, who said only last month that

''if it were possible to pass capital on through inheritance without any tax then that might create an efficient way of shifting money around that was in practice much less heavily taxed than his normal income''.

The real difference between us seems to be whether some people with well-paid advisers should be allowed to avoid tax and shift the burden on to the rest of us. The Government think that that is not fair, and I make no apologies for that. The inheritance tax rules are in place and we expect people to comply with them. We have introduced the clause and schedule to deal with the various contrived schemes that have been brought to our attention. The choice is the taxpayers': pay the inheritance tax as the law requires or elect to unwind the schemes and not pay it; or be subject, if relevant, to the income tax charge. I commend the clause to the Committee.

Question put, That the clause stand part of the Bill:—

The Committee divided: Ayes 14, Noes 6.

Division number 1 Adults Abused in Childhood — (except clauses 4, 5, 20, 28, 57 to 77, 86, 111 and 282 to 289, and schedules 1, 3, 11, 12, 21 and 37 to 39) - Clause 84 - Charge to income tax by reference to enjoyment of property previously owned

Aye: 14 MPs

No: 7 MPs

Ayes: A-Z by last name

Nos: A-Z by last name

Question accordingly agreed to.

Clause 84 ordered to stand part of the Bill.