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

Finance Bill – in a Public Bill Committee at 3:45 pm on 18th May 2004.

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Amendment made: No. 117, in

schedule 15, page 341, line 2, leave out

'in any year of assessment'.—[Dawn Primarolo.]

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

I beg to move amendment No. 34, in

schedule 15, page 341, line 8, leave out '17th March 1986' and insert '9th December 2003'.

[R] Relevant registered interest declared.

Photo of John Butterfill John Butterfill Conservative, Bournemouth West

With this it will be convenient to discuss the following amendments:

No. 35, in

schedule 15, page 341, line 17, leave out '17th March 1986' and insert '9th December 2003'.

No. 39, in

schedule 15, page 343, line 2, leave out '17th March 1986' and insert '9th December 2003'.

No. 41, in

schedule 15, page 343, line 10, leave out '17th March 1986' and insert '9th December 2003'.

No. 43, in

schedule 15, page 344, line 24, leave out '17th March 1986' and insert '9th December 2003'.

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

All these amendments replace the effective date of 17 March 1986 with 9 December 2003 to counteract the retrospective nature of the proposals. The Low Incomes Tax Reform Group and others have given broad examples of the potential impact of retrospective legislation. People who have given away assets or cash to their children and have fewer resources behind them risk an income tax charge if they are helped in their final years by their children. The later Government amendments do not necessarily avoid that.

There are a multitude of arrangements surrounding the use of the family home, including granny flats, which enable older people to remain within the family community. Such arrangements could become liable to an income tax charge, and that must be wrong in principle. The provisions are so widely drawn that in

many cases it is impossible for a taxpayer to know whether they will apply to them. If a person had made a cash gift to his child in 1986, how could he possibly know whether cash used by the child 20 years later to buy a property for occupation by his elderly parents indirectly derived from the cash that was initially given?

The Paymaster General will be aware of the specific example in the representations made by the Institute of Chartered Accountants. It states:

''Let us assume that someone gives his son £10,000. Seven years later the son buys a house for £50,000. Seven years after that the father, being elderly, moves into a granny annex at the house which is now worth £150,000. Under the current proposals, it appears that the father will be liable to the new income tax charge'', and that includes the de minimis extensions. By making the new rules prospective, rather than retrospective, the possibility of such unfair situations would be removed. By removing the retrospective nature of the provisions we would necessarily not require the tracing provisions, which have attracted considerable criticism and which the Paymaster General has not satisfied me are adequately removed by some of the Government's amendments.

The Law Society uses the following example, asking us to assume

''a gift of a holiday cottage in 1987. The donee sold it in 1990 and used half of the proceeds to start a business, adding the other half to his quoted investment portfolio. In 2004 the original donee sells his business, liquidates his investment portfolio (to and from which there have been various additions and withdrawals in the meantime but which overall has grown significantly) and buys a large country house, allowing the original donor to occupy a cottage in its grounds; or buys a work of art at auction which he leaves with the original donor while he goes to work in an unstable part of the world. The donor will have no right to obtain information—if indeed it is still extant—which would enable him or anyone to assess how far, if at all, his original gift of the holiday cottage can be traced through into the value of the cottage . . . or of the work of art,'' as required under the provisions of the schedule. The Government have not introduced any amendments to change the effective date from March 1986, as my amendments propose, although I accept that certain Government amendments do broaden the reliefs and exemptions from the charge.

The Paymaster General will no doubt talk about the impact being retroactive rather than retrospective, but I remain of the view that the retrospective nature of the legislation as it falls on individuals is wrong and leaves uncertainty about all sorts of potential situations.

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

The hon. Gentleman seeks to make two points about his amendments. The first is about retrospection. He claims that inheritance tax arrangements made in 1986 should be completely immune from any change anywhere else in the tax system. As he well knows, no taxpayer is ever provided with such reassurance. Taxpayers make plans for the use of their income in the knowledge that the tax system may change. Retrospective measures in tax law seek to make a charge on benefits that have already accrued, but the schedule does no such thing. The bringing into charge occurs from the 2005-06 tax year. Therefore, the benefits that accrue in that tax year will fall within the charge. If the legislation were

retrospective, it would backdate the charge to 1986 for accrued benefits over that entire period, but we do not seek to do that. I absolutely reject the hon. Gentleman's proposition that the proposals are retrospective. They start in 2005 and will assess the benefits at that point.

If the taxpayer does not wish to pay the income tax charge at that time, they make an election. The inheritance tax rules will be deemed to operate, and the property is theirs and will be dealt with at the point at which the estate comes into charge.

The hon. Gentleman's second point is that not only is the provision retrospective but it introduces unnecessary burdens on the individual, including outrageous requirements for record keeping, possibly going back to 1986. I believe that the Committee would agree that it is sensible and reasonable that the record-keeping obligations in this measure should be consistent with those of the inheritance tax system, because that is basically the option open to the taxpayer. That is why the Government have introduced a provision to ensure that the charge will not apply to gifts if seven years have elapsed without the donor enjoying the benefit.

The hon. Gentleman made a point about a father giving x amount some 20 years ago to a son, who invests a proportion of it and uses the rest for property. That is not how this measure operates within the rules on the seven years. Although it is right for the hon. Gentleman to press the Government on the point, I say to him that the provision is not retrospective. We do not seek to cast a charge back into preceding years, as retrospection would. Under the clause, an arrangement gives rise to future tax charges as a result of a change in the tax system that is provided for in schedule 15—no more, no less.

As we progress, hon. Members will see that there are many exceptions and many ways in which people will not be liable under any of the provisions in any of the schedules that we are discussing. Those who are liable have a clear choice between the inheritance tax or an income tax charge; the matter is in their hands.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West 4:00 pm, 18th May 2004

Does my right hon. Friend share my surprise that the hon. Member for Arundel and South Downs prettily read an example from the Law Society, of which I am a member, but did not say that the Law Society proposed two long amendments to address that issue which are not along the lines of the amendments that he tabled today?"

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

We will debate that under another group of amendments. Government amendment No. 137 specifically deals with that issue and takes care of the point that the hon. Member for Arundel and South Downs made about a father giving money to a son, with various transactions occurring after that.

In conclusion, Government amendment No. 137 means that if the gift was made more than seven years ago, it will not be chargeable. The amendment is designed to ensure the position referred to by the hon. Gentleman when he made the point about how far

back the record keeping must go, and it is reasonable for the Government to hold that position. The provision is not retrospective. It is about a future tax liability arising from the arrangements made by the taxpayer for their assets while they continue to enjoy them.

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

First, we welcome the provision, as we will in due course welcome Government amendment No. 137, but the situation is not as simple as the Paymaster General has described it. If I understand the amendment, in particular situations of concern—for example, where parents give capital to children to buy a house, then, much later in life, return to live with them—it all depends on there being a seven-year period between the parent giving the money and coming back to enjoy the benefit.

Record keeping will be required to establish the position. One of our objections is with the record-keeping burdens imposed on hundreds of thousands of non-rich, ordinary people. Even though amendment No. 137 may ultimately remove the concerns raised by many hon. Members, it would not do so without record keeping to establish that there was a seven-year gap during which the original donor did not enjoy any benefit.

Secondly, my right hon. Friend the Member for Fylde, who has left the Room, made an important contribution about the essence of, and the semantic debate about, the meaning of the word ''retrospective''. His point was that even the Inland Revenue website sets out the methods available to taxpayers to mitigate inheritance tax liabilities. The Paymaster General may have read the letter in The Times by Jeremy Woolf, QC, and she may even have seen his more substantial opinions backing up that letter. I think that, particularly in the overall context and practical consequences of inheritance tax, the issue is that the measures are retrospective on the individuals concerned, whatever clever semantics one wants to get up to.

Earlier, we touched on how the measures may not even bite, but the fact is that many people who made arrangements that were perfectly legal 18 years ago find that those are suddenly being overturned as they approach old age.

The Paymaster General earlier made what, I regret to say, I thought were ill-informed remarks about my making shallow comments about historic homes. I suggest that the Revenue work with the Historic Houses Association and plot through the perfectly genuine cases where people could not qualify for conditional relief. The Paymaster General made reference to chattels that were not sufficiently valuable to qualify. She should be aware that it is quite difficult to qualify for conditional relief. That relates to the principal point about retrospection.

With respect, the Paymaster General glossed over a major problem of families who have done their best to preserve a house and its collection and to hand it on, and who are not, otherwise, rich people. They have a motive that the Paymaster General may not approve

of, but they are going to find themselves either with a bill that they cannot afford to pay or having to sell the property and go to live somewhere else at the age of 75 or 80. That is not in the national interest.

The complexity produced by making the measures retrospective is still significant. Helpful though some of the Government amendments are, a great deal of investigation and evidence production is required to understand how they bite. We are still of the view that, in this territory, if one accepts that there is a big hole to be filled—which is itself debatable—the correct thing to do would be to fill it going forward.

In a sense, this problem is caused by a failure of Government to block holes in inheritance tax satisfactorily in the past. We are against what we view as, in practice, the retrospective elements, and we want to put the matter to the vote.

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

The hon. Gentleman said that we should fill the gap going forward. That is precisely what schedule 15 does. It says, ''This is where it is and the benefits should be taxed''. I did not say that the hon. Gentleman had made shallow comments about historic homes. I would not dream of saying that.

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

I did say that it was a red herring, because it is not connected with the issue. I have done a great deal of work on the question of conditional relief. Where people are liable to pay inheritance tax, but come to the Government and say, ''This house is of such importance to the nation that we should not have to pay inheritance tax, so that it can be kept for the nation'', other taxpayers are entitled to set conditions on the quality of the objects and the access to those homes and objects that we are paying to keep for the nation. We should be able to see them.

The point that I was making to the hon. Gentleman is that the conditional relief and exemption and the arrangements for historic homes are not touched by the proposal, unless he is saying that the owners of historic homes are engaged in contrived schemes over and above the conditional exemption. If he has some points to make on that, I would be pleased to hear them. When the Government, on behalf of the taxpayer, invest money—that is to say when they do not collect inheritance tax, in order to preserve a house or objects—the rest of the nation is entitled to view what they are investing in.

On record keeping and gifts, I have told the hon. Gentleman that Government amendment No. 137 deals with cases in which there is a seven-year gap. If the gift is large enough—we are talking about £100,000; this is also subject to one of the amendments—record keeping is required, but that is no different from the current situation. People have to keep that information now when they are transferring assets, if they are within the inheritance tax net. The hon. Gentleman may be trying to assert that these are new requirements for keeping information, but they are actually requirements that should already be being complied with. The Government have been very careful about that. We are trying to ensure compliance

with current rules. That is laudable. If the hon. Gentleman decides to put his amendment to the vote, I will have to ask my hon. Friends to oppose it.

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

The language used by the Paymaster General glosses over considerable problems. Meeting the requirements for conditional exemption for historic houses is extremely demanding. Which houses and collections meet a certain level of quality and which do not is a matter of judgment. Where she is mistaken in her perceptions is that the general view of the population of this country is that it is a good thing that families struggle to keep together historic homes and their collections. It would be generally viewed as extremely unfortunate if, for whatever reason, some bureaucrat decreed that the contents were not good enough to meet the target and the whole place was sold up as a result.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury) 4:15 pm, 18th May 2004

I cannot let the hon. Gentleman get away with the comment about some bureaucrat dreaming up standards. The Government took wide-ranging advice from heritage organisations, the Department for Culture, Media and Sport and other organisations that invest a huge amount of time in preserving the national heritage. They advised the Revenue on the standards that should be applied to conditional exemption. The standards were not dreamt up; they were based on information from experts. They are not there to do down anybody who is preserving their house. We are talking about setting a standard that the nation agrees with.

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

No matter how grand the bodies may be, what merits conditional exemption and what does not is still a subjective judgment. There is a practical issue: there are houses with collections that may not meet those standards, but which are none the less historic, and the overwhelming majority of citizens would think them worthy of holding together. It would pay the Paymaster General to have further discussions with the Department for Culture, Media and Sport. It will have some helpful comments to contribute on chattels.

The central point remains that the citizens perceive the situation in the following way: a range of possible routes to mitigate death duty liabilities are described on the Inland Revenue website, and there have been more sophisticated arrangements that the Inland Revenue has not challenged for nearly 20 years, even though it has been well aware of them because they have been in operation. It is a retrospective measure suddenly to come back and say, ''You may have done it 18 years ago, but hard luck, mate.'' That is not a correct way to proceed in plugging what the Government regard as avoidance loopholes.

Question put, That the amendment be made:—

The Committee divided: Ayes 4, Noes 15.

Division number 2 Adults Abused in Childhood — Schedule 15 - Charge to income tax on benefits received by former owner of property

Aye: 4 MPs

No: 14 MPs

Ayes: A-Z by last name

Nos: A-Z by last name

Question accordingly negatived.

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

I beg to move amendment No. 36, in

schedule 15, page 341, line 11, after 'which', insert 'interest'.

Photo of John Butterfill John Butterfill Conservative, Bournemouth West

With this it will be convenient to discuss the following amendments:

No. 37, in

schedule 15, page 341, line 28, leave out first 'a' and insert 'the chargeable'.

No. 40, in

schedule 15, page 343, line 5, after 'which', insert 'interest'.

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

The amendments are intended to avoid ambiguity by clarifying the fact that where paragraphs 3 and 6 mention

''the proceeds of the disposal'' they refer to the proceeds of the disposal of the interest referred to earlier in the measure. Amendment No. 37 simply avoids ambiguity by clarifying the fact that the person in question is the chargeable person as defined earlier. I hope that the Minister will confirm on the record that that is the case, which may avoid any need for amendments to be made.

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

Amendments Nos. 36 and 40 would slightly change the wording where a former owner has provided the funding in whole or in part for the acquisition of a property by someone else, and that property is then disposed of with the proceeds being reinvested in a further property. The amendments may intend that only the former owner's share of the predecessor property should be regarded as feeding through in to the successor property. If that is the case, I agree that that is the right approach, but I do not think that it needs to be spelt out as suggested in the amendment, because in those circumstances any charge on the former owner will apply only to the extent that the benefit that they ultimately receive is reasonably attributable to what originally fed into the process. Paragraphs 4 and 7 refer to reasonable attribution for the cases in paragraphs 3(2)(a)(ii) and 6(2)(a)(ii) precisely to recognise the issue that I believe the hon. Member for Arundel and South Downs may have in mind. I am happy to put that clarification on the record, but I believe that his amendment is totally unnecessary.

Amendment No. 37 is a matter of taste. I understand why the Opposition believe that it might be an improvement, but it follows that the same change should be made in paragraph 6(4). Instead of starting to amend the Bill and leaving the job half done, it will be less confusing for our successors if we leave the provision as it is. It provides for the arrangements that the hon. Gentleman is seeking, whereas under his

amendment the two paragraphs would not reflect each other, which could cause problems with interpretation.

After that clarification, I hope that the hon. Gentleman will not press his amendment to a vote, but if he decides to do so I shall ask my hon. Friends to oppose it.

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

The Paymaster General has written into the record the clarification that I made it clear we were seeking through the amendments, so I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Mr. Flight: I beg to move amendment No. 38, in

schedule 15, page 341, line 33, leave out

'in pursuance of any legal obligation'.

Photo of John Butterfill John Butterfill Conservative, Bournemouth West

With this it will be convenient to discuss amendment No. 42, in

schedule 15, page 343, line 23, leave out

'in pursuance of any legal obligation'.

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

These two amendments would erase two references to the phrase

''in pursuance of any legal obligation''.

We believe that they are important, and I hope that the Paymaster General will be able to write into the record a way of addressing the serious issue behind them.

Historically, many people have sought to avoid a gift with reservation by the voluntary payment of a full commercial consideration for their occupation, when they have no legal right to occupy. Restricting the available deduction to payments made in pursuance of a legal obligation will severely prejudice such individuals and ensure that, notwithstanding the fact that they will be legitimately outside the gift with reservation rules, they will be caught by the pre-owned asset rules. For example, there are instances of elderly relatives living in granny annexes with no formal tenancy agreement but who pay rent voluntarily to their relatives, often their children, who own the house. Under these provisions, such elderly relatives would be penalised with no deduction for their rent, and we seek confirmation from the Paymaster General that that problem needs to be addressed.

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

The amendments would extend the range of payments made by someone who enjoys an asset that can be set off against the benefit that would otherwise be chargeable under the schedule. If I have understood correctly, the hon. Gentleman is concerned about some rather specialised transactions, in which valuable art and antiques are given away, in a formal sense, by the previous owner either to another family member or to a family trust, and are then immediately leased back. The hon. Gentleman is also concerned about the granny flat issue, which I will talk about in a minute.

There is a difficulty here: the property never actually moves. It may have been fixed to the wall—often in the same place, but certainly in the same house—for centuries. It is appealing to the former owner to

remove the property, and we are designing a trap to deal with that under the schedule. The owner removes from his estate the property that would be subject to inheritance tax, sometimes to the tune of millions of pounds, yet continues to enjoy the property in some way at a very modest outlay. That is the problem with the proposals put forward by the hon. Gentleman.

The issue for the tax authorities is that there is no market at all for the long-term rental of high-value art and antiques between parties at arm's length from each other that we can use to estimate what a realistic rent would be. The users of the scheme have been accustomed to strike what would politely be called an optimistic-looking deal, renting out highly desirable assets for rents of less—often much less—than 1 per cent. of their capital value.

If the Committee were looking for comparisons with other markets—this relates to the hon. Gentleman's point about the legal obligation—I would suggest the parallel of an equally valuable and desirable residential property. In that case, we would expect the yield to be in the order of 5 to 10 per cent. Under the schedule, we will be charging the benefit that arises in the circumstances, starting with a rental yield that will be specified in secondary legislation following a further round of consultations. The schedule provides, quite rightly, for a set-off if former owners are paying something for the benefit that they are getting, rather than getting it totally free. The hon. Gentleman simply used a different example.

The schedule says that the deduction is available only when the payments are made under a legal obligation. Put bluntly, that requirement is intended to stop any manipulation and ensure that there is reasonable symmetry between the tax positions of the two parties. If something reduces the taxable benefits in the hands of the payer, it should clearly be taxable in the hands of the payee as rent.

It has been said that various sorts of payments ought to qualify, but I have not yet heard any convincing reason for that, and there are excellent reasons why they should not. For example, it has been suggested in representations that costs such as insurance, security and cleaning should be deductible. However, those are just the costs that any lessee can expect to bear as part of their obligation. In return, the lessor has the property intact at the end of the lease. No tenant in a market situation expects to give their lessor or landlord less than comparative rental yield. More generally, we are talking about definitions and transactions between people connected with each other. If we do not have a clear objective standard, such as the one in the schedule, it is impossible to estimate what costs they might try to load against the benefit otherwise chargeable under the schedule.

The hon. Gentleman mentioned a different case but, in our examples, we are trying to deal with the extremes, such as a case in which there was an elderly person in the ''granny flat''. In most cases, there will be no charge at all because it is likely to come within the de minimis rules. It is the example that I gave that we are trying to deal with. Where there is a charge, there

is no exclusion, because it is a valuable benefit that is being enjoyed, but that was not the point that the hon. Gentleman sought to make. He made a point about the modest arrangements with regard to the granny flat. It is open to the parties to make a formal agreement, or they can use elections.

In summary, if a benefit is to be charged because the asset has been transferred through the income tax mechanism, any costs that are deductible have to be on the basis of a legal obligation between the two parties, because the payment is taxable in someone's hands. In such cases, either the person is receiving the rent or, if the arrangement has been made, receiving the benefit for free, despite the fact that it is still a valuable asset and the income tax is triggered. Of course, in those circumstances, the taxpayer can make an election and return to the income tax rules as if they had made a gift with reservation, if that is what they chose.

In those circumstances, I ask the Committee to reject the hon. Gentleman's amendment. First, another area clearly needs to be dealt with, of which I have given an example. Secondly, if there needs to be an arrangement for payment it should be a legal obligation. Thirdly, if there are small sums, they will be within the exemption. Finally, if it is only a small contribution, such contributions are normally made in the day-to-day running of premises—as in the example of the granny flat—and therefore there is no case for deductions in the electricity bill, for example. I ask the hon. Gentleman to withdraw his amendment, or I shall ask my hon. Friends to oppose it should he press it to a Division.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary To the Treasury, Economic Affairs, Shadow Chief Secretary to the Treasury 4:30 pm, 18th May 2004

The point is perfectly simple. The Government's intention is that, if a fair and appropriate rent is being paid for the assets, the Government's measures do not obtain. I am afraid this control-freak Government now require a legal document, which adds costs and, in many cases, such as the one I cited, unnecessary complexity.

I hoped that the Paymaster General would be able to address the practical situation. I am afraid that she is entirely wrong if she thinks that the Government's exemptions in the amendments to come are going to deal with lots of granny flat situations in future. If the housing price bubble continues at its present rate, they will certainly be unlikely to exclude them. It would be appropriate if the Paymaster General put on record that the legal obligation means, in essence, that it would be better if there were a clear legal document, but that the intent is that a fair rent is paid. Without that, the measure is overbearing. It is obviously a complete waste of time to put the matter to a vote, but it reconfirms the impression of the public that we have an overbearing Government. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

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

I beg to move amendment No. 105, in

schedule 15, page 341, line 36, after 'person', insert

', less the appropriate part of any capital payment made to the owner of the relevant land in respect of the land by the chargeable person.'.

Photo of John Butterfill John Butterfill Conservative, Bournemouth West

With this it will be convenient to discuss amendment No. 106, in

schedule 15, page 343, line 25, after 'person', insert

'less the appropriate part of any capital payment made to the owner of the chattel in respect of the chattel by the chargeable person.'.

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

Estates groups and the Historic Houses Association have proposed that some provision be made in paragraphs 4(1) and 7(1) to cater for capital payments, such as lease premiums, to be included in the deduction for the calculation of benefit in kind. It is self-evident that that is right and fair. The amendment is essentially probing and requests that the Government introduce a proper mechanism for amortising lease premium payments, which is clearly required. I look forward to hearing how the Government intend to address the issue.

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

The Government considered the same point during the consultation. The sale and leaseback arrangements are entered into only to remove assets from someone's chargeable estate—that is, to remove assets from inheritance tax. In some cases, it is attractive for tax reasons to make capital payments, too, as that further diminishes the taxable estate. In the most ingenious schemes, the arrangements are constructed, so that payments under the lease are tax deductible.

We concluded that it was not appropriate to cater for those particular variations of the sale and leaseback device. In any case, the amendments might have a wider impact because they do not link the capital payments to the occupation, or the use of the asset in question. They might well enable occupiers to reduce the impact of, or to avoid all together, the new provisions by the simple expedient of making gifts to the owners. For those reasons, I ask Committee members not to support the amendment.

The schedule deals with arrangements that individual taxpayers enter into to avoid paying their inheritance tax charge or liability. I do not see why we should give them a tax-deductible expense to achieve that through the leaseback arrangements. If they do not seek to avoid the inheritance tax charge, and they have the normal leaseback arrangements, provisions exist in the tax system to allow for deductible expenses. That is absolutely appropriate, and we defend that part of tax legislation. However, we should not allow people to avoid tax and give them tax deductions for having done so.

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

The Paymaster General's suspicions may or may not be genuine, but she will have left the Inland Revenue with the problem that where, for whatever reason, people are paying in one way or another fair market rental for assets enjoyed, capital payments, such as lease premiums, may be involved. There will be yet more complexity, and the revenue will have to sort it out. The amendment is probing, and points out that we will have a compounding of complexity and an issue not clearly resolved. The issue

will drag on and cause trouble, so good luck to the Paymaster General. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendment proposed: No. 118, in

schedule 15, page 341, line 43, leave out first 'relevant' and insert 'valuation'.—[Dawn Primarolo.]

Photo of John Butterfill John Butterfill Conservative, Bournemouth West

With this it will be convenient to discuss Government amendments Nos. 119 to 121, and 124 to 127.

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

Although we do not oppose the amendments, we do not feel that they fully address the issues that they are designed to address. The amendments are designed to refine the computational provisions for land and chattels to cater for cases in which property is disposed of at an undervalue; for example, a former owner intends to make a gift, but not one representing the full value of the property.

As the Paymaster General will be aware, the Law Society made representations that the provisions should allow clarity for gifts made in undervalue. The amendments would not address any of our relevant amendments, but are welcome as they give some relief, where a transfer is part sale and part gift, by providing a relief fraction to ensure that the person involved would not suffer the full charge if the sum price were paid for the transfer. We will come to our amendments later.

Amendment agreed to.

Amendments made: No. 119, in

schedule 15, page 341, line 45, at end insert

'or, where the disposal was a non-exempt sale, the appropriate proportion of that value'.

No. 120, in

schedule 15, page 342, line 4, after 'person' insert

'or, where the original disposal was a non-exempt sale, to the appropriate proportion of that property'.

No. 121, in

schedule 15, page 342, line 12, at end insert—

'(3A) The disposal by the chargeable person of an interest in land is a ''non-exempt sale'' if (although not an excluded transaction) it was a sale of his whole interest in the property for a consideration paid in money in sterling or any other currency; and, in relation to a non-exempt sale, ''the appropriate proportion'' is—

where—

MV-P is the value of the interest in land at the time of the sale;

P is the amount paid.'.—[Dawn Primarolo.]

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

I beg to move amendment No. 114, in

schedule 15, page 342, line 29, after second 'year', insert 'with vacant possession'.

Photo of John Butterfill John Butterfill Conservative, Bournemouth West

With this it will be convenient to discuss the following amendments:

No. 115, in

schedule 15, page 342, line 38, leave out 'only'.

No. 116, in

schedule 15, page 342, line 41, at end insert—

'(c) in any case where, since the transfer, the transferor of the relevant land has undertaken any works or expenditure deemed to have been undertaken or paid by the landlord or continues to meet any such costs, all such annual expenditure or the annual expenditure thereof may also be deducted'.

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

The amendments would deal with the basis of the valuation of the rental arrangement. At present, they are drafted to provide for gross rental only. We can see no reason why they should not include the more typical tenant repairing lease. For what it is worth, many of my constituents have written to me and made that specific point. As far as I am aware, the Government have not tabled any amendments to deal with that issue.

The drafting has been picked up from the Rating Act 1966. It is blatantly unfair that people, in cases where there are repairing leases, who have acted entirely properly and within the spirit of the law in paying the right rent and all the rest of it, should be undone as a result of the arrangements covering gross rental arrangements as opposed to typical tenant repairing leases.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury) 4:45 pm, 18th May 2004

Schedule 15 would almost always have to provide the terms of a hypothetical landlord and tenant relationship, and estimate the rent that might be paid with no help from the facts on the ground. In recent cases where former owners sought to avoid inheritance tax, the new owners were known as ''straw men''—trustees of a trust created purely for the purposes of taking over the property and issuing an IOU for it. Having done that paperwork, the former owner goes home and carries on as before. If the insurance subsequently has to be paid or the drains get blocked, the former owner deals with that just as before. I do not suppose that they even consider sending a bill to the trustees, because they know that they would be wasting their time.

Given that, the Committee will not want to spend much time or use up much space in the statute book on hypothetical assumptions about how to tax those dealings. I understand the point behind amendment No. 114, and it is intended constructively, but I hope that it is unnecessary. The equivalent provisions in the code for employment income have been understood well enough to be applied without undue difficulty, and without strong reasons for doing so I am reluctant to accept an amendment that would bear on that existing understanding. Dealings are made clear in the code on employment income.

Amendment No. 115 would substantially complicate the legislation without achieving very much. The paragraph that it would amend explains how a hypothetical rent is to be estimated. It says that one should assume the sort of division of responsibility between landlord and tenant that one would expect to see in a real arm's-length situation. The landlord is willing to undertake the responsibilities that they normally undertake and the rental value cannot be adjusted downwards for the costs that they incur in doing so.

The paragraph allows rental values to be established as directly as possible from the arm's-length evidence, so saving compliance costs. That advantage is as worthwhile in this Bill as it is in the employment income code. The amendment makes it unclear how the hypothetical rent is calculated, and I do not see how it is likely to benefit anyone at all.

The concerns behind amendment No. 116 are that the former owner might be taxed on a benefit that assumes that someone else is meeting the costs that they are in fact meeting themselves. It would graft a deduction for actual expenses borne by the former owner on to what is otherwise a hypothetical calculation about a hypothetical tenancy. Not surprisingly, neither my officials nor I think that the amendment works on a technical level. An effective response would require vastly more provision than in the amendment, specifying exactly what expenses the former owner can be expected to bear, how expenses of a capital nature should be dealt with and how they should be split if they partly belong to the landlord and partly to the tenant.

The amendment is complicated and it seeks to respond to a situation as if it was a normal tenant-landlord situation when it is not. I remind the Committee that we are dealing with an avoidance mechanism and that the arrangements are almost entirely artificial. Taking that into account, it is obvious that our approach is necessary and proportionate. I am not attracted to the proposition whereby somebody transfers their property, continues to enjoy it and seeks to get taxable deductions for it. I hope that the hon. Gentleman will accept my explanation, but if he wishes to put his amendment to the vote, I will ask my hon. Friends to oppose it.

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

The issue is simple and straightforward, and I am disappointed that the Paymaster General used clever-cuts language to duck it. There are many bona fide situations—not clever-cuts schemes—where people have transferred the property, agreed a fair rental, and not sought to avoid the gifts with reservation arrangements. However, as she would find if she did her research, there are hundreds of thousands of rental arrangements with typical tenant repairing leases. There are generally tenant repairing leases on historic or old houses.

The relevant part of schedule 15 refers to a payment being accepted as fair only where it is a gross rental payment. That is grossly unfair and needs to be dealt with. I do not understand why the Minister cannot say something to address that. If she does not like our amendments—I do not deny that they may raise other issues—there is a simple answer: the Inland Revenue should consider and appraise tenant repairing leases as equivalent to a gross lease. That is the fair, honest and decent response.

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

With great respect, the hon. Gentleman is losing sight of the specific, narrow issues with which the clause and schedule deal. I have said something about the benefits in kind legislation, which operates well elsewhere in the tax system without the complications that he identifies. Where there is a tax

charge, that charge will be followed in this provision. The simple way out is to make the election and put the asset back into the inheritance tax net, so none of the complicated arrangements would even need to be addressed.

If the taxpayer does want to be subject to an income tax charge in those circumstances, under the long-standing rules that exist in the benefits in kind legislation, their option is to make an election and return to the inheritance tax rules, not to add further complication to the tax code by trying to mediate a contrived scheme. That is a reasonable proposition and a reasonable set of choices to put before taxpayers. They do not have to unwind schemes; they simply have to make an election that becomes effective at the point that the estate comes into the inheritance tax charge.

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

I am upset by the inconsiderate and authoritarian approach being taken by the Minister, which is untypical of her. These are not contrived arrangements. They are proper arrangements made by people who have sought not to avoid the benefits in kind arrangements. This is about people who have given the property and are paying a proper rent. However, whether a proper fair market rent is gross or established with a repairing lease, both situations are equivalent. Where a tenant has the cost of repairs on a repairing lease, the net rent is less. If there is a gross lease, the owner has the cost of repairs. It is a net-net similar situation, not a contrivance. In most cases, the typical arrangement is a tenant repairing lease. It is completely unreasonable not to deal with that situation.

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

I do not wish to upset or goad the hon. Gentleman. If there is a straightforward relationship between a landlord and a tenant that is not within these schemes, it is not caught by the schedule, and therefore the schedule does not need to address it. We are seeking to address only situations where property is owned and it is transferred to another owner in order to avoid an eventual inheritance tax charge, yet the individual carries on enjoying that asset. If they have made a different arrangement, and they are in a straightforward landlord and tenant relationship, the normal rules will apply and this schedule will not apply.

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

I am afraid that the Paymaster General has now confused me completely. We are self-evidently talking about a situation where the owners of a house have given the property to their children, but they continue living there and pay a fair market rent. It always used to be the principle that if people did that, that was fair dice. Is she saying that if that fair market rent is on the basis of a tenant's repairing lease then that is fine? If so, I have no quarrel and I am sorry that I have not been put out of my agony earlier. However, my reading of schedule 15 is that it has to be a gross rent and that if it is a tenant repairing lease, the idea that the whole existing legal situation is perfectly okay is thrown out of the window. That is nonsensical.

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

There appears to be difficulty in appreciating this point. We are not aware of there being thousands of cases for the Inland Revenue, and I cannot see why the result of this is unfair. If there are normal arrangements between a landlord and a tenant in the circumstances that the hon. Gentleman refers to, that will be under a lease and things will be arranged—there will be payments, agreements and obligations. I do not see how the rules give rise to a problem for him. They may have gifted the property away, but they are then making a payment at a reasonable rent with all the assumed obligations that a tenant would have under a tenant and landlord relationship, so the point is addressed.

I thought that the hon. Gentleman was addressing a further point—which his amendments certainly do—about where there is no agreement, it is unclear what the relationship is and a payment cannot be ascertained. Schedule 15 seeks to deem that by making clear choices about what is a hypothetical relationship between landlord and tenant. It has to be hypothetical because the lease does not exist. If the lease does exist, the arrangements are clear, the payments are being made and there are obligations, I do not see that it is caught under this schedule because it has been made within the rules and there is fair payment. However, I will look at that again.

I hope that I have now made myself clear. I am not keen to antagonise the hon. Gentleman, because I know that he has worked very hard on this issue and that he studies these matters very closely. However, I think that he has a misconception about what the schedule does. I will be happy to write in a fuller context to him to explain exactly why I think that what he says is not the case, but I am now in danger of repeating my points on proper relationship or no proper relationship.

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 Paymaster General for her comments. The simple point that I am trying to get at is that if the old couple are paying a proper arm's-length rent, it is a tenant repairing arrangement. My reading of the relevant parts of schedule 15 was that it had to be a gross rent and that a tenant repairing lease was not satisfactory. The Paymaster General gave me an answer with which I am happy, and kindly agreed to write. I add that many older people have written to me on just this issue. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Sitting suspended.

On resuming —

Amendments made: No. 122, in

schedule 15, page 342, line 45, leave out

'in any year of assessment'.

No. 123, in

schedule 15, page 343, line 17, at end insert—

'( ) For the purposes of this paragraph, a disposition which creates a new interest in a chattel out of an existing interest in a chattel is to be taken to be a disposal of part of the existing interest.'

No. 124, in

schedule 15, page 343, line 34, leave out 'relevant' and insert 'valuation'.

No. 125, in

schedule 15, page 343, line 36, at end insert

'or, where the disposal was a non-exempt sale, the appropriate proportion of that value'.

No. 126, in

schedule 15, page 343, line 40, after 'person' insert

'or, where the original disposal was a non-exempt sale, to the appropriate proportion of that property'.

No. 127, in

schedule 15, page 343, line 45, at end insert—

'(2A) The disposal by the chargeable person of an interest in a chattel is a ''non-exempt sale'' if (although not an excluded transaction) it was a sale of his whole interest in the chattel for a consideration paid in money in sterling or any other currency; and, in relation to a non-exempt sale, ''the appropriate proportion'' is—

where—

MV-P is the value of the interest in the chattel at the time of the sale;

P is the amount paid.'.

No. 128, in

schedule 15, page 344, line 11, leave out

'in any year of assessment'.—[Dawn Primarolo.]

Amendment proposed: No. 129, in

schedule 15, page 344, line 12, leave out

'any income arising under a settlement'

and insert

'the terms of a settlement, as they affect any property comprised in the settlement, are such that any income arising from the property'.—[Dawn Primarolo.]

Photo of John Butterfill John Butterfill Conservative, Bournemouth West 5:30 pm, 18th May 2004

With this it will be convenient to discuss the following:

Amendment No. 44, in

schedule 15, page 344, line 18, after 'settlor', insert

'and the words ''or will or may become'' were replaced by the word ''currently'' in the subsection'.

Government amendment No. 130.

Amendment No. 45, in

schedule 15, page 344, leave out lines 34 to 38 and insert—

'T is the amount of income and capital gains on which any income tax or capital gains tax is payable by virtue of section 660A or section 739 of the Taxes Act 1988 or section 77 or section 86 of the Taxation of Chargeable Gains Act 1992 (c.12), so far as attributable to the relevant property.'.

Amendment No. 107, in

schedule 15, page 344, line 34, leave out

'of any income tax or capital gains tax payable'

and insert

'by reference to which any income tax or capital gains tax is payable'.

Government amendment No. 131.

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

The intention of Government amendment No. 129 is to ensure that settlements are chargeable under paragraph 8 only if income would be caught by section 660A of the Taxes Act 1988 by virtue of the terms of the settlement, and not for other

reasons such as the settlor's ability to switch income into the settlement by waiving dividends on shares standing outside the settlement. The amendment is fine, but it does not specifically address the concerns raised by my amendment No. 44.

The context is that paragraph 8 is included to restrict the application of section 660A, bringing it into line with the gift with reservation rules. The particular circumstance excluded from charge is that in which the settled property cannot currently be payable to, or applicable for, the benefit of the chargeable person but where it will or may become so payable or applicable. The Inland Revenue accepts that a donor's retention of a reversionary interest under a trust will not constitute a reservation. That point is important in respect of trusts if the settlor is the ultimate default beneficiary under the terms of a resulting trust only because the draftsman omitted to include an exhaustive default clause that entirely excludes the settlor.

Likewise, the Revenue's advanced instruction manual states in an example at D.74:

''A transfers assets into a discretionary settlement under which he is not included in the class of beneficiaries. There is however power to the trustees to add beneficiaries including A to the class at some future date. The question of whether the possibility that A's name might be added to the class is a reservation is one which can be determined only on the particular facts.''

As currently drafted, paragraph 8 ignores those two important exemptions from the gift with reservation charge by adopting the much wider scope of section 66(2)(a). Our amendment seeks to correct that and to ensure that there is a pre-owned assets charge only when there is a current possibility of benefit. In other words, we are dealing with something on which the Revenue's position is already clear, irrespective of what the Government have viewed as avoidance.

Government amendment No. 130 clarifies that when different property in a settlement is subject to different trusts, it is only the property caught by the provisions that is subject to the charge. That does not address various matters in our related amendments but is welcome.

Our amendment No. 45 would apply to the calculation of the income tax charge on pre-owned intangibles, which is a tricky area that has not so far been addressed. The set-off should be on a comparable basis so that either tax is offset against tax or the value on which one tax is paid is offset against the value on which the other tax is paid. As currently drawn, a deduction for the tax paid will be offset not against the new tax charge but against the amount on which the new tax charge is to be assessed. That is inequitable and will lead to ridiculously high marginal rates. Even if the income attributable to the relevant property for the taxable period is the same amount as ''N'' there will, nevertheless, be a tax charge pursuant to paragraph 8(3). There should be a reference to sections 73(9) and 86 to cover income and gains of non-UK resident trusts which are assessed on the settlor. The amendment seeks to correct those points and to ensure that the sum in the provision works so that no inequity arises.

Government amendment No. 131 goes half way towards our amendment No. 45 by introducing a reference to sections 73(9) and 86, but it does not correct the computational problems that we have sought to address in amendments Nos. 45 and 107.

Amendment No. 107 comes from the estates group, which noticed an error in the formula in the calculation in paragraph 9, under which only 40 per cent. of the appropriate deduction can be taken.

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

This large group of amendments tabled by the Government and the hon. Member for Arundel and South Downs covers similar areas in some respects. I want to deal with the areas on which the Opposition amendments do not touch.

All the amendments aim to fine tune the charge in paragraph 8 which applies to intangible assets. Paragraph 8 charges the benefit when people take intangible assets out of their estate for inheritance tax purposes but continue to have effective access to them. A typical case is when the taxpayer sets up a discretionary trust to hold their assets. The current inheritance tax rules exempt lifetime gifts of those assets, like other lifetime gifts, only if the taxpayer really gives them away. There are schemes to get round that rule for intangible assets, just as there are schemes to get round the rules for tangible assets such as houses, art and antiques.

A taxpayer can, by artificial mechanisms, set up a trust and sidestep the existing inheritance tax rules, which are intended to ensure that such trusts do not reduce their estate which is liable to inheritance tax. The end result is exactly comparable with schemes for tangible assets and, in some cases, the paperwork is the same for both assets. Making such an arrangement brings clear benefits. Knowing that taxpayers have substantial capital sums available to them, but will not have to pay the inheritance tax like other owners, would clearly leave those taxpayers better off than their neighbours, who either do not have the wealth or have it but choose to pay their prospective tax bills.

Opposition amendments Nos. 45 and 107 deal with the same point in different terms. I cannot accept them, because they would not address the points that the Government want to deal with in our amendments. Amendment No. 45 raises a secondary point, which is dealt with more comprehensively by Government amendment No. 129 to which I shall return. The main point arises from the fact that the charge on intangible assets is aimed at elaborate trust structures. It is much the same arrangement as has been used for income tax and capital gains tax, which has provided various past efforts at anti-avoidance legislation.

As the schedule recognises, some of the existing charges may already apply to the structures that we are now charging under the schedule. That leads me yet again to section 660A, which seems to have featured a lot in our debates thus far. Under the schedule, the former owner can have a deduction for tax paid under the existing rules when calculating the benefit that he is treated as receiving for the purpose of the new charge. Under the Opposition amendments, the deduction for tax should be converted into a set-off for the underlying taxable income.

The Opposition are suggesting that if the former owner has to take account of income of, say, £10,000 from his different structure under section 660A when calculating his tax liability and charge under schedule 15, and that amounts to £12,000, only £2,000 would be taxable. That would be so even if the amount taxable under section 660A were offset by other reliefs and losses. I am sure that the hon. Gentleman can see where I am going. He wants to persuade me that I should allow a charge arising from a structure under 660A to offset a charge under schedule 15, but to ignore the fact that the charge under 660A might have been used to offset reliefs and losses in that area. Clearly, that is not justified.

The existing charges and the new charges under schedule 15 will tackle two different aspects. The existing charges will tackle avoidance of tax on the income and realised capital gains earned by the structures, if there are any. It is possible to present risks in that direction without containing the added ingredients needed to achieve the inheritance tax avoidance. If that is all that is going on, the existing charges will deal with it and they are all that should be paid. Depending on the assets involved, it is equally possible for structures to contain the special features needed to avoid inheritance tax without risking any avoidance of income tax or capital gains tax. In that case, the charge under schedule 15 is all that should apply and the existing charges are not relevant.

Sometimes, both features will be present, and the existing charge and the new one will apply. That is because two distinct things are going on, both of which deserve to be taxed. As drafted, the schedule treats the tax paid under the existing rules as a deductible cost against the taxable benefit, which is treated as arising from inheritance tax avoidance. That is generous, to put it mildly, and it would be justified even to treat the two aspects as quite separate and give no deduction. I do not propose that the Committee should remove the deduction contained in the schedule. There is no justification for going further. This is generous enough, and I hope that the hon. Gentleman will accept it.

Amendment No. 45 would add two further existing charges under section 739 of the Taxes Act and section 86 of the Taxation of Chargeable Gains Act 1992 to the two charges that are mentioned in the schedule. I accept that those should have added, but the list is incomplete, even in the Opposition amendment. Government amendment No. 131 does the same job a little more thoroughly than was achieved in their first attempt, or as attempted in the Opposition amendment, by adding charges under section 547 of the Taxes Act. I hope that the hon. Gentleman will accept that, too.

Government amendments Nos. 29 and 30 make two further improvements to paragraph 8, so that it does not apply where it should not. Paragraph 8 is aimed at situations where a formal owner has shifted intangible assets outside the taxable estate in such a way that he

can still benefit from them. It has been pointed out that the schedule, as drafted, can apply in situations where the former owner's control does not go quite as far as that. The clearest example of that arises with dividend waivers. If someone who owns a company puts some of their shares into the trust, but retains the rest, they can manipulate the income of the trust by waiving the dividends on the shares they retain, even though they may put the capital value of the trust generally out of their reach. Such a situation would be caught by schedule 15, and we agree that it should be excluded. Amendment No. 129 would restrict the charge on assets in a trust to cases where the former owner's interest in the trust asset derives only from the terms of the trust.

Amendment No. 130 covers a narrower point. Sometimes a single trust contains distinct sub-funds held in different trusts. One sub-fund might be caught by the test in paragraph 8, while the other sub-fund might not. The amendment ensures that we only tax the assets of the caught sub-fund or funds, rather than the whole assets of the trust.

Finally, I recommend that the Committee does not accept amendment No. 44, because it would effectively wreck the charge in paragraph 8, whether it was intended to do so or not. It would require the charge only where the structure is generating income that is taxable on the settlor under the existing anti-avoidance provisions. However, that is not the mischief that we are trying to tax. Although many of the structures arrange their funds so that they do not generate any current taxable income, notably in the form of insurance bonds, that does not mean that they generate no benefit. The benefit comes from knowing that the taxpayer has substantial funds that are available to them if they want them, and they will never have to pay the inheritance tax bill that normally goes with that level of wealth. We aim to tax that benefit.

The Opposition amendments would let such people off scot-free, so long as people using such structures were careful to invest the contents in the right sort of assets. As I said at the beginning, I am not sure whether that was the intention of amendment No. 44. I think not. However, that would happen in its interaction with the schedules. The Committee will not be surprised that I am not keen to accept that principle.

In summary, the amendments contain more relieving measures and provide clarity on the operation as regard intangible assets. Opposition amendments Nos. 44, 45 and 107 are either superseded by the Government amendments, or go further than the Government is prepared to go. Therefore, if the hon. Gentleman wishes to press any of them to a vote, I will ask my hon. Friends to oppose them.

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

Thank you.

There are two points of principle that I ask the Paymaster General and the Revenue to look into and make sure that they are happy about. The first is in

relation to clause 44. As I stated, there are, as we understand it, two important existing exemptions from a gift with reservation which have been ignored in the drafting of schedule 15 and the adoption of the much wider scope of section 660A. The first question is whether that is intended. If so, that needs to be made clear. If it is not intended, and the amendment is not satisfactory, perhaps another route to address the problem might be found.

The second point is the subject of amendments Nos. 45 and 107. I understand what the Paymaster General says about the fact that, if the tax paid has already been offset by something else, it should not be double-used; that is fair enough. However, if that is not the point, it seems common sense that the provisions should allow tax for tax, or value for value. The amendments are not designed to open doors to particular wheezes; the point simply seemed a reasonably fair one to make on a common-sense basis.

There is no point in putting our amendments to the vote; the Government amendments address part of the issues. I would be grateful if my two specific points could be looked into further.

Amendment agreed to.

Amendments made: No. 130, in

schedule 15, page 344, line 19, leave out

'the property comprised in the settlement'

and insert 'that property'.

No. 131, in

schedule 15, page 344, line 36, leave out from beginning to 'attributable' in line 37 and insert

'any of the following provisions—

(a) section 547 of the Taxes Act 1988,

(b) section 660A of that Act,

(c) section 739 of that Act,

(d) section 77 of the Taxation of Chargeable Gains Act 1992 (c.12), and

(e) section 86 of that Act,

so far as the tax is'.—[Dawn Primarolo.]

Amendment proposed: No. 132, in

schedule 15, page 345, line 2, leave out 'this Schedule' and insert

'paragraphs 3(2) and 6(2) (the disposal condition)'.—[Dawn Primarolo.]

Photo of John Butterfill John Butterfill Conservative, Bournemouth West

With this it will be convenient to discuss the following:

Amendment No. 46, in

schedule 15, page 345, line 5, leave out 'whole'.

Government amendments Nos. 133 to 135.

Amendment No. 47, in

schedule 15, page 345, line 18, at end insert—

'(e) it was a disposal more than seven years prior to the date when he first occupies the relevant land or is first in possession of or first has the use of the chattel, or

(f) it was a disposal by way of gift, the value of which at the date of the gift did not exceed the upper limit shown in the second column of the Table in Schedule 1 to IHTA 1984.'.

Government amendments Nos. 136 to 139.

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

The Government amendments in this group relate in the main to the broadening of reliefs for certain situations. Amendment No. 136 provides for three exemptions that relate to transactions in which a disposal was for the maintenance of the family. A gift that falls within the annual exemption and a small gift

are also covered. That extends the excluded transactions to include IHT exemptions that were not previously covered, and the amendment is therefore welcome.

Amendment No. 137 broadens the excluded transactions from the contribution condition, and extends reliefs to gifts of money if they have not given rise to a chargeable benefit within seven years of the gift—an improvement referred to in previous debate and one which will be helpful for the tracing provisions—to expenditure for the maintenance of the taxpayer's family and to gifts covered by IHT annual exemption and small gifts exemption. Those points do not address amendment No. 46, but go some way towards dealing with the issues we wish to raise through amendment No. 47 by easing the onerous tracing conditions.

Amendment No. 46 reflects the question why disposals of only an entire interest and property should be excluded transactions. It seems odd that a taxpayer could give a half-share of his property to a child who occupies the property with him. Such arrangements would be exempt from charge pursuant to paragraph 11(1)(c), but the taxpayer who sells half a share to his son, who then occupies the property with him, is subject to a proposed tax charge, arguably because the sale concerned is less than the sale of the whole interest.

That seems a rather stupid anomaly, and I do not understand the rationale behind it. The Historic Houses Association makes the point that someone who sells part of his property at full value, such as a basement flat, but remains in occupation of the rest, ought to have the benefit of being included in the category of excluded transactions. Such deals are frequently struck within families. It would be most unfair if that were not the case in what the Government are getting at.

Amendment No. 47 is designed to have two effects. The first part brings in a seven-year cut-off date for tracing gifts, and the second part suggests an exemption for gifts within the nil rate band. Essentially, the Government have accepted the seven year point, but I am not clear whether the nil rate band has been accepted.

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

I shall just deal with amendments Nos. 46 and 47 because I understood the hon. Gentleman to agree with all of the Government's amendments. Amendment No. 46 proposes to relax the provision in paragraph 10 which caters for cases where people enjoy property that they have previously sold. The schedule restricts that relief to cases where the former owner's whole interest has been sold apart from any right that they retain to carry on using the property. The amendment would remove the requirement that the whole interest should be sold without making clear what new tests would go in its place. That is a technical problem with the amendment.

I do not object in principle to a relaxation in this case as long as both I and the Inland Revenue are satisfied that it meets a real need and that it can be done without exposing the Exchequer to significant risk. There may

be issues that we need to consider if homeowners, for example, want to raise money through equity-release type transactions without disposing of the whole equity on the property.

I should say to the hon. Gentleman that, as I am sure he appreciates, we need to proceed on the matter very carefully because the Exchequer risks are very high. Many of the most artificial schemes that we are trying to counter involve what are formally sales of the former owner's property that were made in contrived terms as part of a wider avoidance scheme. If there is a case for change, amendment No. 46 is not the right response. I still want to ensure that we have carved out the contrived schemes to be dealt with by the schedule.

I am prepared to give the matter further consideration. I am not saying that that will done on Report, as I think we need to consider it carefully. I need to know more about the transactions that we are being asked to cover. Should we subsequently be convinced that a further exemption is required, the enabling power in paragraph 14 provides the ability for us to craft new exemptions into that paragraph as and when the need arises. I do not want to raise the hon. Gentleman's hopes too high, but there is an issue about equity release and we need much more information about it.

One of the big problems with that whole area in clause 84 and in schedule 15 has been the apparent reluctance of taxpayers to come forward and tell us exactly the type of schemes to which they have signed up. Therefore, the matter has been very difficult, and I think that the exchange that the hon. Gentleman and I had not long before we suspended on the tenant-landlord relationship in a leaseback was an example of that. I hope that he will not press his amendment on the basis that the area that we are discussing is one to which I am prepared to give further consideration.

Amendment No. 47 overlaps to a large degree with the proposals contained in Government amendment No. 137. Both are designed to relieve gifts after a quarantine period of seven years if the donor has not had benefit from them of the sort that would be charged by the schedule within the period. The gifts are to be disregarded from that time on. Our amendment is more generous in that it is not restricted, as the Opposition proposal is, to gifts that were below the inheritance tax threshold when they were made. Our amendment is restricted to gifts of money.

I do not think that there is anything between us on the thinking behind those proposals. They reflect proposals that have been made in representations since the Bill was published. They reduce any extra record keeping and compliance costs arising out of the schedule because they mean that donors will generally have to keep track of their gifts only for the seven-year period that already applies for inheritance tax purposes. They eliminate the risk that gifts covered by this new relief, such as assistance from a parent to a

child to buy a house, might provoke a similar charge, because of a change in the circumstances of the two parties long after the original gift.

We propose to focus the relief on gifts of money, because that is where it is needed. Frankly, if we give away something other than money, and subsequently come to benefit from it, that will generally be covered by the existing inheritance tax gift with reservation rules. Anything that is covered by those rules is already excluded from the new charge by the reliefs in paragraph 11 There is no need to relieve those cases a second time, and I hope that the hon. Gentleman will accept that the matters have been dealt with. There is an undertaking to consider the details on, for example, the equity release covered by amendment No. 46 when the measure is in place.

I say to the hon. Gentleman that he must encourage those who are supplying him with the information to come forward to the tax authorities with exactly what they seek to encourage us to exempt and what their arrangements are. If that were done and the case were made, I would certainly bring proposals to the House at the appropriate time. I hope that he will not press the amendment on that basis.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary To the Treasury, Economic Affairs, Shadow Chief Secretary to the Treasury 6:00 pm, 18th May 2004

Amendment No. 46 is the only issue being considered. I welcome the Paymaster General's comments. I made specific reference to a comment that was made by the Historic Houses Association, so there is one possible lead for the Revenue. However, it seems a pretty obvious point that, irrespective of whatever fancy schemes people might have thought of in the past, it is nonsense for there to be a situation whereby if one gives a half-share to a child, it is exempt, but if one sells the half-share to the child, it is not. That straightforward point, along with equity release schemes, needs to be addressed. It would be desirable to address it before schedule 15 becomes law.

Amendment agreed to.

Amendments made: No. 133, in

schedule 15, page 345, leave out lines 11 to 13.

No. 134, in

schedule 15, page 345, line 15, leave out 'or'.

No. 135, in

schedule 15, page 345, line 16, leave out from beginning to 'settled' and insert

'it was a disposal by way of gift (or, where the transfer is for the benefit of his former spouse, in accordance with a court order), by virtue of which the property became'.

No. 136, in

schedule 15, page 345, line 18, at end insert—

'(e) the disposal was a disposition falling within section 11 of IHTA 1984 (dispositions for maintenance of family), or

(f) the disposal is an outright gift to an individual and is for the purposes of IHTA 1984 a transfer of value that is wholly exempt by virtue of section 19 (annual exemption) or section 20 (small gifts).'

No. 137, in

schedule 15, page 345, line 18, at end insert—

'(1A) For the purposes of paragraphs 3(3) and 6(3) (the contribution condition) the provision by a person (''the chargeable person'') of consideration for another's acquisition of any property is an ''excluded transaction'' in relation to the chargeable person if—

(a) the other person was his spouse (or, where the transfer has been ordered by the court, his former spouse),

(b) on its acquisition the property became settled property in which his spouse or former spouse is beneficially entitled to an interest in possession,

(c) the provision of the consideration constituted an outright gift of money (in sterling or any other currency) by the chargeable person to the other person and was made at least seven years before the earliest date on which the chargeable person met the condition in paragraph 3(1)(a) or, as the case may be, 6(1)(a),

(d) the provision of the consideration is a disposition falling within section 11 of IHTA 1984 (dispositions for maintenance of family), or

(e) the provision of the consideration is an outright gift to an individual and is for the purposes of IHTA 1984 a transfer of value that is wholly exempt by virtue of section 19 (annual exemption) or section 20 (small gifts).'

No. 138, in

schedule 15, page 345, leave out lines 20 and 21.

No. 139, in

schedule 15, page 345, line 22, after '(1)(d)' insert 'or (1A)(b)'.—[Dawn Primarolo.]

Amendment proposed: No. 140, in

schedule 15, page 345, line 26, leave out from beginning to 'property' in line 28 and insert—

'(A1) Paragraph 3 (land), paragraph 6 (chattels) and paragraph 8 (intangible property) do not apply to a person at a time when his estate for the purposes of IHTA 1984 includes—

(a) the relevant property, or

(b) other property—

(i) which derives its value from the relevant property, and

(ii) whose value, so far as attributable to the relevant property, is not substantially less than the value of the relevant property.

(A2) Where the estate for the purposes of IHTA 1984 of a person to whom paragraph 3, 6 or 8 applies includes property—

(a) which derives its value from the relevant property, and

(b) whose value, so far as attributable to the relevant property, is substantially less than the value of the relevant property,

the appropriate rental value in paragraph 4, the appropriate amount in paragraph 7 or the chargeable amount in paragraph 9 (as the case may be) is to be reduced by such proportion as is reasonable to take account of the inclusion of the property in his estate.

(1) Paragraphs 3, 6 and 8 do not apply to a person at a time when the relevant'.—[Dawn Primarolo.]

Photo of John Butterfill John Butterfill Conservative, Bournemouth West

With this it will be convenient to discuss the following:

Amendment No. 48, in

schedule 15, page 345, line 31, at end insert

'or would have fallen to be so treated by the provisions of sections 102A or 102B of the 1986 Act if the disposal by way of gift had been made on or after 9th March 1999 or would have fallen to be so treated by the provisions of section 102 of the 1986 Act if the disposal by way of gift had been made on or after 19th June 2003.'.

Government amendment No. 141.

Amendment No. 49, in

schedule 15, page 345, line 42, at end insert

'or would fall to be so treated but for the provisions of section 102C(3) of the 1986 Act.

(e) would fall to be so treated but for the proviso to subsection (3) or subsections (4) or (5) of section 102A of the 1986 Act or would fall to be so treated but for subsection (3) of section 102B of the 1986 Act or would have fallen to be so treated but for any of those subsections if the disposal by way of gift had been made on or after 9th March 1999.

(f) would fall to be treated by virtue of the IHTA 1984 as property to which he, his spouse or former spouse is beneficially entitled or where the value of the property is attributable to other property which would fall to be treated by virtue of the IHTA 1984 as property to which he, his spouse or former spouse is beneficially entitled.'.

Government amendment No. 142.

Amendment No. 108, in

schedule 15, page 345, line 42, at end insert—

'(g) is settled property which became settled property by virtue of a disposal by way of gift made by him and in which he, his spouse, or former spouse is for the time being beneficially entitled to an interest in possession (whether or not any such interest in possession subsisted when the property first became settled property)'.

Government amendment No. 143.

Amendment No. 50, in

schedule 15, page 345, line 45, after second 'property', insert 'directly or indirectly'.

Amendment No. 109, in

schedule 15, page 345, line 47, leave out subparagraph (b) and insert—

'(b) he, his spouse or former spouse is for the time being beneficially entitled to an interest in possession in the settled property (whether or not any such interest in possession subsisted when the property first became settled property).'.

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

The Government amendments in this group provide for substantial additional reliefs, which are welcome. Amendment No. 140 would provide for an exemption where the property occupied by a former owner is included in their estate for inheritance tax, or where their estate includes other property whose value reflects the value of the property being enjoyed.

That addresses in the main our aims in tabling amendment No. 49, which would cover a similar scenario. We were seeking an extension of the change in circumstances rules to give relief where a former owner reoccupies a property on account of old age or infirmity. Government amendment No. 141 would at least partially address that by making an exemption for circumstances in section 102C of the Finance Act 1986.

The amendment is required only if a start date of 10 December 2003 is not conceded, which it has not been. The gifts with reservation rules have already been twice amended by the Government, following Inland Revenue defeats in the cases of Ingram and Eversden. Those amendments took effect on 9 March 1999 and 19 June 2003 respectively.

Anyone who had undertaken planning of the sort approved in those cases prior to the date of amendment would be caught by the proposed amendment and therefore fall within paragraph 11(1)(a). They would therefore avoid a pre-owned assets charge. Paradoxically, anyone having undertaken planning before these earlier dates, whose planning was therefore legitimised by the court, would not fall within paragraph 11(1) and would therefore be subject to a pre-owned assets charge. My amendment would rectify the anomaly.

The situation is perverse. For example, an individual who entered into Lady Ingram-style planning before 9 March 1999, and therefore had not made a gift with reservation, would be caught by the new charge.

Amendment No. 49 would add to paragraph 11(1)(d) and insert two new paragraphs. The explanatory notes explain that the paragraph is necessary because a pre-owned assets charge would be inappropriate where

''a former owner needs to move back into the gifted property following a change in their circumstances.''

The continuation of the IHT exemption in such circumstances is welcome. The IHT exemption is contained in paragraph 6 of schedule 20 to the 1986 Act and in section 102C(4) and (3). Without this amendment, anyone falling within the IHT exemption contained in section 102C(3) would still be subject to a pre-owned assets charge.

New paragraph 11(1)(e) mirrors the provision in paragraph 11(1)(c), which applies to shared ownership or shared occupational arrangements, in relation to the other statutory IHT exemptions under section 102 of the 1986 Act. In the absence of any explanation to the contrary, it seems perverse that a number of exemptions to the IHT gifts with reservation of benefit rules were included when those rules were changed by the current Government in the Finance Act 1999, yet only one of those exemptions is mirrored, by existing paragraph 11(1)(c), which is to be mirrored in the new rules.

The first limb of new paragraph 11(1)(f) is intended to ensure that where the property potentially is subject to the pre-owned assets charges already included as part of the charge for a person's estate on general inheritance tax principles, pre-owned assets charge will not apply. That point is particularly important when arrangements are dismantled, as the Government have suggested they might be, and when therefore the property originally disposed of is returned.

The key comment here is that it is perfectly possible for property to revert unexpectedly to a donor following the death of a donee, and in those circumstances where the property will be back in the estate of the donor for IHT purposes, he should not be required to pay the new income tax charged by virtue of the fact that he is occupying a property he once gave away. He cannot elect to avoid the income tax charged for having the property revert to this estate because it has already gone there by another route.

The second limb of the paragraph excludes from a pre-owned assets charge the situation where an individual transfers property to a company that he owns and the value of his shares in it is thereby augmented. Although the individual no longer owns the assets in those circumstances, the value of those assets is reflected as part of his estate for inheritance tax. That is of particular importance in relation to the incorporation of a business.

Amendment No. 50 is intended to make it clear that exemption applies not only to the particular property originally disposed of but to any replacement property subsequently acquired by the trustees. The excluded transactions arrangements appear to apply only where the interest in possession subsisted when the property was initially settled by the settlor. They do not appear to apply where there was originally no interest in possession—where there was a discretionary trust that was subsequently converted into an interest in possession trust. Amendment No. 108 would introduce a new paragraph providing an exemption to cover such a situation.

I turn to amendment No. 109. Paragraph 11(2) applies to intangible property. It is narrower than the excluded transactions provisions, which do not extend to intangible property, in that it does not apply to a trust where the spouse is a former spouse of a settlor who has an interest in possession. This amendment would extend paragraph 11(2) to provide an exemption in those circumstances and to make it clear, so as to parallel proposed paragraph 11(1)(g), that the exemption applies also where there was initially no interest in possession in the settled property.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury) 6:15 pm, 18th May 2004

Government amendments Nos. 140, 142 and 143 improve and extend the reliefs given by schedule 15 for cases where someone enjoys property that they formerly owned, so that the schedule could apply, but their taxable estate reflects all or part of the value of the asset that they have disposed of. I think the hon. Gentleman welcomed those proposals.

Amendments Nos. 48 and 49 would introduce limited protection for past users of inheritance tax avoidance schemes who were fortunate enough to implement them before they were blocked by specific anti-avoidance provision. I can see the arguments for saying that schedule 15 should have no application whatever to any transactions before last December, but I reject them. I do not see the logic of singling out those cases for special treatment. We have already discussed the general question of whether the schedule should affect the future tax consequences of past transactions, and I have already made the Government's position clear. We believe that schedule 15 can quite properly extend to existing structures, and that it is essential that it does so if we are to retain packaged tax avoidance under a measure of control.

The cases covered by Opposition amendments Nos. 48 and 49 are no different from any other existing cases in this context. People who use such schemes have established a favourable inheritance tax position for themselves. The anti-avoidance legislation to which the hon. Gentleman referred, introduced in 1999 and 2003, was, quite properly, not retrospective, and left those advantages undisturbed. The current legislation is also not retrospective and continues to leave those advantages undisturbed. The schedule does something else altogether: it charges income tax when people enjoy future benefits for the year 2005-06 onwards. If the amendments were made, the schedule would

continue to apply to future benefits arising from, we are told, tens of thousands of existing structures, which do not fit the Ingram or Eversden specifications. It is quite right that those cases should be charged, and if the Committee is prepared to go that far, there is no reason why it should stop at those cases that would be excused by these amendments. It goes to the heart of what the schedule is trying to do.

We have also had considerable discussion about the scheme being aimed at people who have circumvented the current inheritance tax rules, or who will do so in future. It is clear, from everything that the Government have published and that I have said in Committee, that we are determined to deal with such avoidance. Amendments Nos. 50, 108 and 109 touch on the most complex aspects of what are already complex provisions. They are complex by the nature of the schemes to which they seek to respond. It is not the tax system that has decided to become ever more complicated, but the schemes to which it is responding. The law is designed to counter cases where the owners of valuable property set up a complex structure to get rid of their ownership for tax purposes, while retaining the enjoyment of the property. That does not mean that all trust structures are suspect and should be caught under schedule 15. Some of them are set up for good, non-tax reasons, do not try to avoid inheritance tax, and do not do so. It is right that schedule 15 should exclude such cases, and it aims to do so.

If there is room for improvements in the provisions, we should make them, but we must be particularly careful that we do not reopen the type of avoidance opportunities that were exploited so enthusiastically before the pre-Budget report. The schedule gives relief for cases where the former owner or their spouse has an interest in possession of the property that they formerly owned. The idea is that they are treated for tax purposes as owning the property in which they have an interest in possession, so that they do not avoid tax by swapping ownership outright, for interest in possession. That is fine, so long as the value of the interest in possession is the same as the value of the underlying property, but that is where the Opposition proposals break down.

Amendments Nos. 108 and 109 would extend relief to cases whenever the former owner or their spouse came to own what is called an interest in possession in property in a trust. They would apply even if the trust was originally set up on other terms—as with a discretionary trust—and the interest in possession was decided only later. That is exactly the sort of situation where artificial steps could be inserted in the intervening period to ensure that the interest in possession had only a nominal value for tax purposes. It is not acceptable. Therefore, the Government have proposed an alternative approach, which is implemented in amendment Nos. 131, 132, 133 and 141, which we have dealt with.

If I correctly understand Opposition amendment No. 49, it aims to tackle the same broad point using different means. It is exposed to very much the same risk as are amendment Nos. 108 and 109, in that it would let in an opportunity for avoidance. To the

extent that they would cater for deserving cases, we believe that those are also covered by the Government amendments in a way that should prove safer for the Exchequer. Therefore, the amendments are not needed.

In summary, for the reasons that I have explained, I recommend to the Committee that it accept the Government amendments. Should the hon. Gentleman decide to put amendments Nos. 48, 49, 50, 108 and 109 to a vote, we will have to oppose them.

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

As I commented, we are happy with the Government amendments. I understand the position of the Paymaster General with regard to amendment No. 48. We are making two points. One is that the Ingram and Eversden legal case clarified the law at the time. We then had Government measures on 9 March 1999 and 19 June 2003. Aside from the overall argument about retrospection, there is an argument that, at those dates, that was the law. The Government had the opportunity to change the law as it is now changing it, but it did not do so. Therefore, those are key dates for clearance.

There also seems to be an anomaly in that the position is different depending on whether arrangements happened before or after those dates. In essence, the post-date situations get a preferred position to the pre-date positions. That is complex territory. In the main, I think it is part of the case against retrospective legislation, but there are some anomalies to be sorted out.

The Paymaster General opposes amendment Nos. 108 and 109 on the grounds that they open doors for avoidance. I think that there are some bona fide arguments that should be further considered by the Government in the interests of justice. All our amendments are reasonably technical.

Amendment agreed to.

Amendments made: No. 141, in

schedule 15, page 345, line 41, after 'for' insert 'section 102C(3) of and'—

No. 142, in

schedule 15, page 345, line 42, at end insert—

'(1A) Where at any time the value of a person's estate for the purposes of IHTA 1984 is reduced by an excluded liability affecting any property, that property is not to be treated for the purposes of sub-paragraph (A1) or (A2) as comprised in his estate except to the extent that the value of the property exceeds the amount of the excluded liability.

(1B) For the purposes of sub-paragraph (1A) a liability is an excluded liability if—

(a) the creation of the liability, and

(b) any transaction by virtue of which the person's estate came to include the relevant property or property which derives its value from the relevant property or by virtue of which the value of property in his estate came to be derived from the relevant property,

were associated operations, as defined by section 268 of IHTA 1984.

(1C) In determining whether the relevant property falls within sub-paragraph (1)(b), (c) or (d) in a case where the contribution condition in paragraph 3(3) or 6(3) is met, paragraph 2(2)(b) of Schedule 20 (exclusion of gifts of money) is to be disregarded.

(1D) In sub-paragraphs (A1) to (1C) ''the relevant property'' means—

(a) in relation to paragraphs 3 and 6—

(i) where the disposal condition in paragraph 3(2) or 6(2) is met, the property disposed of,

(ii) where the contribution condition in paragraph 3(3) or 6(3) is met, the property representing the consideration directly or indirectly provided,

(b) in relation to paragraph 8, the relevant property within the meaning of that paragraph.'—

No. 143, in

schedule 15, page 345, line 43, leave out sub-paragraph (2).—[Dawn Primarolo.]

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

I beg to move amendment No. 112, in

schedule 15, page 346, line 8, after '(2)', insert

'Subject to sub-paragraph (3) below.'.

Photo of John Butterfill John Butterfill Conservative, Bournemouth West

With this it will be convenient to discuss the following:

Government amendments No. 144 and 145.

Amendment No. 51, in

schedule 15, page 346, line 14, at end insert

'or in property directly or indirectly derived from the property so disposed of'.

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

The amendment is a means of seeking clarification on whether paragraph 12(2) or paragraph 12(3) has precedence. That is not addressed in the Government amendments. Although they provide useful clarification on which property falls within the scope of the charge, they do not appear to address the issues raised by our amendment. We understand that the Inland Revenue was deciding whether sub-paragraph (2) was subject to sub-paragraph (3) or vice versa.

Amendment No. 51 is intended to make it clear that the exemption applies not only to the particular property originally disposed of but to any replacement property subsequently acquired by the donee.

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

The Government amendments grouped with amendment No. 112 are intended to resolve the conflict between sub-paragraphs (2) and (3), which the hon. Gentleman identified. We have received some generally welcoming representations on the approach adopted in the Bill, but there were suggestions that we could make the precise impact of paragraph 12 even clearer. We see some force in that claim, which is why Government amendments Nos. 144 and 145 do precisely that.

Amendment No. 144 makes the purpose of sub-paragraph (2) even more explicit by making it clear that the charge can apply to someone who is not domiciled here only if the property in question is situated here. If there is any doubt about the original wording, the amendment removes it.

Amendment No. 145 makes it clear that the charge does not apply to any excluded property, as that is defined for inheritance tax purposes. Once again, that removes any possible doubt about the scope of the charge. The Government amendments provide that additional comfort to those affected by paragraph 12. I hope that the Committee will welcome that, and that the hon. Gentleman is satisfied that the matter is now resolved.

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

I would be grateful if the Paymaster General would comment on my latter remarks, on amendment No. 51. As I said, the amendment is designed to make it clear that the exemption covers replacement property.

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

I thought that the Government amendments did things rather better, and I was trying to be brief.

The Opposition amendments are intended to extend the exemption for people formerly domiciled outside the UK, but taken together they would exclude from the charge any property derived from assets that were disposed of before the person came to the UK. That has very wide-ranging implications. The exemption could include all or most of somebody's property in the UK, if it was derived from property disposed of before they became domiciled here. That is quite likely to be the case where someone has moved to take up permanent residence in the UK.

My view is that the Opposition amendments would significantly weaken paragraph 12 and would not do what the hon. Gentleman wants them to do: to clarify the operation of sub-paragraphs (2) and (3). The Government amendments do that adequately without opening up problems of future avoidance. That is why I ask him to withdraw the amendment.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary To the Treasury, Economic Affairs, Shadow Chief Secretary to the Treasury 6:30 pm, 18th May 2004

I am happy with the Paymaster General's comments on the point that we were seeking to address. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendments made: No. 144, in

schedule 15, page 346, line 9, leave out from 'Schedule' to the end of line 10 and insert

'does not apply to him unless the property falling within paragraph 3(1)(a), 6(1)(a) or 8(1)(c) is situated in the United Kingdom.'.

No. 145, in

schedule 15, page 346, line 12, leave out from 'any' to end of line 14 and insert

'property which is for the purposes of IHTA 1984 excluded property in relation to him by virtue of section 48(3)(a) of that Act'.—[Dawn Primarolo.]

Amendment proposed: No. 146, in

schedule 15, page 346, line 22, leave out '£2,500' and insert '£5,000'.—[Dawn Primarolo.]

The Chairman: With this it will be convenient to discuss amendment No. 60, in

schedule 15, page 346, line 22, leave out '£2,500' and insert '£10,000'.

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

Government amendment No. 146 increases the de minimis exemption from £2,500 to £5,000, which would have the broad effect of exempting gifts of up to approximately £100,000. Amendment No. 60 would increase the exemption to £10,000, thus exempting gifts up to £200,000. The latter is below, but closer to, the IHT exemption floor. I presume that we would all want to avoid the need to update this legislation every year, and inevitably inflation will reduce values. It would be more sensible

for the exemption limit in amendment No. 60 to apply. Although we are grateful for the Government's increasing the limit, a £200,000 limit is more appropriate in the circumstances.

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

I do not agree with the hon. Gentleman. The proposal to increase the de minimis exemption to £10,000 goes too far. It is primarily not about the short-run yield. Most of the avoidance schemes that people were operating recently involved assets worth £500,000 or more. It is not likely that such assets will benefit from any de minimis limit that we are talking about.

A level that is set at £10,000 implies underlying capital of around £200,000, or a potential inheritance tax saving of some £80,000. That is getting towards the inheritance tax threshold. People will start to find that it is worth going out of their way to achieve savings, with everything that that implies for fairness, complexity and the long-run cost to the Exchequer.

We will keep the de minimis rule under review in coming years, but for now the Government proposal in amendment No. 146 is generous and does not have the problems contained in amendment No. 60. Therefore, if the hon. Gentleman wishes to put his amendment to the vote, I shall have to ask my hon. Friends to oppose it.

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

We are pleased with the £100,000 level. On the granny flat situation, I simply point out to the Paymaster General that, certainly in parts of London, the £100,000 value will mean that such a situation is fraught. Again, if and when such surprise situations occur, the Government will pay the political price. However, we are pleased that there is some increase, and I see little point in pressing our amendment to a vote.

Amendment agreed to.

Amendment proposed: No. 147, in

schedule 15, page 347, line 4, leave out paragraph 16 and insert—

'16 Any disposition made by a person (''the chargeable person'') in relation to an interest in the estate of a deceased person is to be disregarded for the purposes of this Schedule if by virtue of section 17 of IHTA 1984 (changes in distribution of deceased's estate, etc.)the disposition is not treated for the purposes of inheritance tax as a transfer of value by the chargeable person.'—[Dawn Primarolo.]

Photo of John Butterfill John Butterfill Conservative, Bournemouth West

With this it will be convenient to discuss amendment No. 61, in

schedule 15, page 347, line 4, after 'sections', insert '93 and'.

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

Government amendment No. 147 is about post-death variations. Amendment No. 61 is designed to deal with a concern regarding disclaimers, and to make it clear that they are brought into line with deeds of variation and distributions from discretionary will trusts. Although there is an overlap, Government amendment No. 147 does not address the specific point that we have raised. I would welcome the Paymaster General's comments on that.

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

The Opposition amendment would specifically exclude the cases of disclaimers of interest on settled property. It would exclude cases in which a person has disclaimed an interest in settled

property and has received nothing in return. I certainly understand the intention, but I feel that the amendment is unnecessary. In order to be effective legally, and therefore also effective for tax purposes, the disclaimer must be made before any benefit is taken from the entitlement, so in genuine cases, there will be no charge.

If we made the Opposition amendment, it might be possible for someone to make a disclaimer and then subsequently arrange to enjoy free use of the property. That would circumvent the purpose for the charge. Consequently, amendment No. 61 is not necessary. It would reopen a loophole, and I ask the Committee to reject it. I commend Government amendment No. 147 instead, as it deals with the matter significantly better.

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 Paymaster General for her comments. It still seems to me that Government amendment No. 147 does not address all the points raised by amendment No. 61, but the issue is not one that we would want to debate further today.

Amendment agreed to.

Amendment proposed: No. 148, in

schedule 15, page 347, line 9, at end insert—

'Guarantees

16A Where a person (''A'') acts as guarantor in respect of a loan made to another person (''B'') by a third party in connection with B's acquisition of any property, the mere giving of the guarantee is not to be regarded as the provision by A of consideration for B's acquisition of the property.'—

[Dawn Primarolo.]

Mr. Flight: Amendment No. 103 would provide an exemption from the new regulations for chattels—

Photo of John Butterfill John Butterfill Conservative, Bournemouth West

Order. We are not considering amendment No. 103; we will consider it after Government amendment No. 148. I ask the hon. Gentleman to comment on the latter.

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

I beg to move amendment No. 103, in

schedule 15, page 347, line 41, after 'descriptions', insert—

'except chattels on display to the public for 28 or more days in any one year if a transfer of those chattels is not an exempt transfer of value under the conditional exemption provided under section 30 IHTA 1984'.

With the amendment, we seek to provide a fair exemption from the new regulations for chattels that are put on display to the general public for a required period—we suggest 28 days a year—thus allowing them to be rent-free and so excluded from the provisions if they are not otherwise exempt under conditional exemption.

I understand there to be a fundamental problem with conditional exemption for chattels, which can be shown in the following example. If chattels are not conditionally exempt and if the owner of an historic house buys back chattels that had gone with the house in order to put the collection back in place, conditional exemption would apply only on the owner's death. Therefore, an owner may end up in a situation—such situations do exist—in which they have put chattels

into trust in order to pass on a house and chattels, and the house has conditional exemption because it was there before, but the chattels cannot qualify for exemption until the person who bought them back and put them in trust dies.

As I have already said, the Historic Houses Association has pointed out that 45 out of 350 great houses have potential problems of that nature. The Government need to reconsider this issue. Surely, the principle is that the chattels should be available to the public for the appropriate time. That is a wholly bona fide point, which has been made by other members of the Committee.

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

I was a little puzzled by this amendment. Neither my advisers nor I were sure what the hon. Gentleman wanted to achieve—only that it was related to chattels. If I understand him correctly, it applies to a situation in which an owner has purchased family chattels or possessions, which might be described as heirlooms, to go with their home, and now has them all together, and they have never been subject, for that individual, to conditional exemption.

As the hon. Gentleman pointed out, conditional exemption is granted on death, when ownership of property and chattels is passed on. I think he said that, in his case, the house and chattels are in trust and the problem is that the owner may be subject to the charge, and the conditional exemption cannot be determined until after his death. The answer to his problem—I am not giving tax advice, so let me rephrase that. The schedule provides that the owner could elect to return the property and chattels to the inheritance tax regime and allow that regime to run. On his or her death, the conditional exemption would apply, and he or she would not suffer the charge in the meantime.

I think that that deals with the hon. Gentleman's point. The schedule offers ways out of such problems. I am not at all attracted to the idea of accepting an amendment that I cannot understand, as I would be fearful that it would open loopholes. Now that he has explained the case to me, I realise that the schedule already offers alternatives to such taxpayers, so the amendment is not necessary.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary To the Treasury, Economic Affairs, Shadow Chief Secretary to the Treasury 6:45 pm, 18th May 2004

I hope that the Paymaster General's response is correct, but I am not so certain that it is necessarily the case. The first obvious point is that as matters stand the individual cannot know whether conditional exemption will be granted on death.

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

As I understand it, that would be the case. The conditions such as the quality hurdles are set down. It is perfectly possible for the taxpayer concerned or the adviser to get that information and to see whether they fall within the conditional exemption. If they qualify, conditional exemption is automatically granted at death. It is just a question of settling on the criteria and quality now.

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

I am glad that the Paymaster General has indicated that the Revenue is willing to give pre-clearance of conditional exemption. Merely saying ''Here are the rules'' does not give any certainty. From a practical point of view, I can see no reason why pre-clearance should not be given.

There is a second potential problem area where the position of chattels and property may differ. It may be appropriate to leave the situation as it is in trust, because the property has conditional exemption, but the position of the chattels may be different because they do not have conditional exemption. My bottom line point is that the Historic Houses Association remains convinced that there is a problem with 45 out of the 350 great houses. I understand that the Department for Culture, Media and Sport is also persuaded of the problem. I therefore ask that the Revenue and the Paymaster General continue discussions to see whether there is an unresolved problem here, with a view to bottoming it before this becomes law if there is.

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

Let us be quite clear. The schedule deals with contrived schemes that are designed to avoid paying any inheritance tax at all. The hon. Gentleman asks me what the route into the conditional exemption is—a route for avoiding paying any inheritance tax at all tax because the property and the chattels are seen as part of the national heritage and inheritance tax is waived under certain conditions. This comes as close as I can think to having one's cake and eating it. He asks whether, if one scheme does not work, people can try another whereby they still do not pay inheritance tax? The answer is no. The schedule is clear.

As the hon. Gentleman well knows, the Inland Revenue does not give pre-clearance, and I did not say that it did. I said that the individual taxpayers could clearly see whether they qualified and what the arrangements are. As to his final point about discussions with the DCMS or the Historic Houses Association, if those discussions are going on I am sure that I will be informed in due course if they impinge on the criteria that we use. I will listen to the case carefully. I still do not see why dealing with contrived schemes puts our historic houses at risk. The case still has not been made. I am therefore not inclined to accept the amendment.

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

I am glad to have the Paymaster General's confirmation that she will look forward to hearing the results of further discussions. With respect, the way in which she has set her argument is entirely unfair and unreasonable. The issue is quite simple. There are historic homes with valuable chattels that the nation wishes to see preserved and held together. People have used different routes to achieve that. With clear, conditional exemptions, much can be and has been resolved. The houses are open, and all the rest of it. Some have used a mix of one thing or the other—some have bought back chattels that were not conditionally exempt, and some have used the planning arrangements—and all have been perfectly lawful ways of achieving the same end.

I am sure that the Paymaster General would agree that the end is perfectly worthy and in the national interest. If people have got the structures wrong and, for whatever reason, cannot easily get out of one and into another, it is unreasonable for them to face resultant tax charges that would not otherwise apply or for them to be led to say, ''Damn it! We're going to sell the assets and go somewhere else.'' The basic motive is to keep the houses as assets, but have them available to the public. The deal that goes with that is no inheritance tax charge. Sorting out the different ways of organising things is a worthy objective.

The intention behind the amendment is not to avoid inheritance tax but to get things right for our heritage. If there are things to be sorted, I am sure that the Minister would agree that the proposal, which I believe represents the view of the country at large, would be a sensible way to go. However, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Further consideration adjourned.—[Jim Fitzpatrick.]

Adjourned accordingly at nine minutes to Seven o'clock till Thursday 20 May at half-past Nine o'clock.