Clause 195 - Special lump sum death benefits charge

Finance Bill – in a Public Bill Committee at 4:30 pm on 15th June 2004.

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Photo of George Osborne George Osborne Conservative, Tatton 4:30 pm, 15th June 2004

I beg to move amendment No. 336, in

clause 195, page 164, line 17, leave out '35%' and insert '32%'.

Photo of John Butterfill John Butterfill Conservative, Bournemouth West

With this it will be convenient to discuss the following:

Amendment No. 337, in

clause 196, page 164, line 39, leave out '35%' and insert '32%'.

Photo of George Osborne George Osborne Conservative, Tatton

This amendment is another attempt to reduce tax and to ensure that the Government do not take too much of our income. The clause explains that a 35 per cent. charge for income tax, known as a special lump sum death benefits charge—there is an easy phrase—is to be levied on, for example, pension

protection lump sum death benefits, annuity protection lump sum death benefits and unsecured pension lump sum death benefits. The clause provides for a 35 per cent. charge to income tax on authorised surplus payments, known, as one might guess, as an authorised surplus payments charge.

I understand that both those rates—the 35 per cent. rates—were set in 1995, when income tax was 25 per cent. Some 10 per cent. was added to that to compensate for the tax-free nature of the fund; for example, the benefits of advance corporation tax. We could have had a lengthy debate if I had managed to table an amendment about advance corporation tax, but I had lost the will to live at some point and did not do so. The point is that at the time the charge was justified as being roughly right. Income tax was 25 per cent., and 10 per cent. was added to create the level for those charges.

Since then, of course, income tax has dropped to 22 per cent. A couple of those drops were caused by my right hon. and learned Friend the Member for Rushcliffe (Mr. Clarke), and one was caused by the current Chancellor. In addition, of course, ACT has been abolished. However, the charge remains at 35 per cent. It should be 33 per cent. at most, and possibly lower, given the abolition of ACT. Why is the Inland Revenue very ready to increase taxes, but never forthcoming in reducing them? The amendments would reduce the charge to 32 per cent.

It is worth the Committee remembering that we are not talking about a penalty charge. Many of the charges that we talk about are penalty charges for unauthorised payments of one kind or another. This, however, is a tax on people's pension pots and the money paid out when they die. Although in this clause and clause 196 the Inland Revenue takes on itself the power to change the rate by regulation, it is more important to have that power in the Bill. The Revenue has the power to change the rate by regulation from 35 per cent. and has never exercised it, so perhaps the Committee should encourage it by putting 32 per cent. in the Bill.

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

As the hon. Gentleman has expounded, the amendments are to reduce from 35 per cent. to 32 per cent. the rate of tax that we propose for the special lump sum death benefits charge in this clause and the authorised surplus payments charge in clause 196. He has set out why he thinks that it is the right time to make the change, but I will explain why in those two circumstances we think a charge of 35 per cent. is right.

In a simplified regime, pension schemes will have much greater flexibility in the benefits that they can offer members. In particular, they will be able to offer a tax-free lump sum death benefit up to the value of the lifetime allowance that the member had unused at the time of his or her death. The vast majority of lump sum death benefits will not be subject to the special lump sum death benefits charge, nor will they be subject to the lifetime allowance charge.

The lump sum death benefits charge applies only to certain lump sum death benefits that are paid when the member dies before he or she has reached 75 and the

pension funds have already crystallised. The circumstances in which the charge is most likely are where the member has chosen the option of an alternative tax treatment under a scheme pension or a value protected lifetime annuity. As the hon. Gentleman rightly points out, the tax charge replicates a similar provision in the current regime where the rate is also 35 per cent. The rate is both attractive and fair.

Let us examine who would be likely to pay tax under the special tax charge. It may be someone who had used up all their lifetime allowance and specified that death benefits were to be treated as a pension protection lump sum death benefit because the special charge is at 35 per cent. rather than 55 per cent., which is the rate at which lump sums in excess of the lifetime allowance are chargeable. That is wholly acceptable, as the funds will have already been tested against the lifetime allowance.

The vast majority of taxpayers below the lifetime allowance will not pay the charge and their death benefits will be tax-free. The vast majority of people using the provision will be higher rate taxpayers, so 35 per cent. is a generous rate of tax to apply to those funds. It is certainly not a penal rate of tax. It is probably not revenue-neutral and probably represents a cost to the Exchequer. In no sense could it be described as a stealth tax. On those grounds, I hope that the hon. Gentleman will accept that we have before us a generous rate of tax and not press his amendments.

Photo of George Osborne George Osborne Conservative, Tatton

Of course, it was a generous rate of tax when the Conservative Government introduced it. The problem is that after they subsequently reduced income tax and, as I conceded, the current Chancellor also reduced it, it has been left high and dry by events. However, I am not going to persuade the Financial Secretary to change her mind and I do not wish to press it to a Division, so I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 195 ordered to stand part of the Bill.