Clause 130 - Life policies etc.:

Finance Bill – in a Public Bill Committee at 3:45 pm on 25th May 2004.

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Amendment made: No. 95, in

clause 130, page 120, line 30, leave out '541(d)' and insert '541(1)(d)'.—[Ruth Kelly.]

Question proposed, That the clause, as amended, stand part of the Bill.

Photo of Andrew Tyrie Andrew Tyrie Shadow Financial Secretary

I thought that this was going to be another clauses 128 and 129 job, and it nearly is, or at least it may well turn out to be. The clause is another anti-avoidance measure, and at first blush one might think it absolutely right to introduce the clause in

principle. I am not absolutely convinced and I would like some further help from the Financial Secretary.

The stated purpose of the clause is to restrict the use of corresponding deficiency relief. In fact, neither the clause nor the explanatory notes makes that clear. The main purpose of the clause could be much more simply stated. Unless I have misunderstood it, it is to prevent people trading losses in life insurance companies and annuity contracts. It is a little disingenuous not to make that clear in the explanatory notes, or perhaps it was a slip, but I am not entirely convinced of the case for the provision.

Why should people who have losses on such products, which may be damaging to them as they are of comparatively modest means, not sell them at a price that reflects the tax benefit for a seller lucky enough to be able use the tax loss to reduce his tax bill? All that would do is enable people who do not have the benefit of higher-rate tax liability to reap some of the tax benefit if they are unlucky enough to incur a loss, which will put them on the same footing as a wealthier taxpayer, or one whose experience with those products has been more fortunate.

The tax law rightly allows companies to trade losses. One can buy a company with an accumulated loss that it is carrying forward to consolidate it for tax purposes and to reduce the group's corporation tax liabilities. What is the logic of depriving individuals of that same benefit?

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury 4:00 pm, 25th May 2004

The clause is an anti-avoidance measure. It is aimed at contrived schemes designed to reduce an individual's liability to higher rate income tax. The schemes use life insurance policies to manufacture a tax rule called deficiency relief. They artificially create substantial amounts of tax relief through a series of transactions that have no genuine economic purpose. The transactions are designed solely to ensure that individuals who acquire the policies pick up the tax relief at no cost to them other than the fees they pay for the use of the scheme.

The schemes depend on a loophole that allows the taxpayer to claim deficiency relief in relation to earlier gains made by a previous owner of the policy, including gains that were not subject to tax at all. The clause closes that loophole. We have not had any representations stating that that would catch people unfairly. We are in the business of giving incentives to genuine economic relationships, but not the sort of transactions caught by the clause.

We estimate a yield to the Exchequer from the measure of £120 million over the next three years. If use of the schemes continued to grow, the loss of tax stemmed by the measure could be much higher. With such an amount at stake for no clear economic purpose, I am sure that the hon. Gentleman will understand that we need to close the loophole and will, therefore, choose to support the clause.

Photo of Andrew Tyrie Andrew Tyrie Shadow Financial Secretary

The Minister may well be right. Sometimes the Inland Revenue can get it wrong—

Photo of Andrew Tyrie Andrew Tyrie Shadow Financial Secretary

Of course not. One was trying to place the responsibility where it should lie. I wonder whether the Financial Secretary will reflect on what I have said about the mismatch between the treatment of the corporate sector and individuals with respect to accumulated losses on life policies and consider whether the matter merits further examination. Perhaps she would write to me with her view in due course.

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

I certainly will endeavour to consider that point. I can assure the Committee, however, that we have not received a single representation suggesting that the measure could operate unfairly. It is unlikely that it would disadvantage anyone not using a life insurance policy for avoidance. In the normal course of events, life policies are owned by the same individual throughout the life of the policy, and any gains in the policy go to that individual. If that is so, his or her entitlement to deficiency relief will be unaffected by the measure. I think that the hon. Gentleman is suggesting that it is somehow desirable that Government money, running into several hundreds of millions of pounds, should be used to a different end. If he is not, I am sure that he will support the clause.

Question put and agreed to.

Clause 130, as amended, ordered to stand part of the Bill.