Clause 207 - Gifts to charities etc

Finance Bill – in a Public Bill Committee at 11:15 am on 26th June 2012.

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

Photo of Peter Bone Peter Bone Conservative, Wellingborough

With this it will be convenient to discuss the following:

That schedule 32 be the Thirty-Second schedule to the Bill.

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Education)

We have had a wide-ranging, passionate and well considered debate on raising the inheritance tax threshold by CPI rather than RPI. Clause 207 deals with specific targeted tax relief relating to charitable giving, which can be set off against inheritance tax liability. Despite the wide-ranging—and raging—debate on clause 206, the Government’s intentions were clear. Unfortunately, at this stage, I cannot say that clause 207 is entirely clear.

On the face of it, the reduction of inheritance tax from 40% to 36% on estates where 10% has been given to charity, seems to be a tax break for large-scale charitable giving. We now know that the Government are no longer in favour of the principle of the default charity tax, which placed limits on existing tax relief for large donations—or are they? Clause 207 is still in the Bill, so we must assume that it was the charity tax that was the mistake, rather than this tax measure. As we know, the charity tax has already joined the growing pile of ill-thought-out taxes that the Government have had to scrap.

There is a serious point here. If the Government’s intention were truly to encourage large donations to charity through the clause, we would not be opposed to that. However, the mixed messages they have sent out do not help that cause. If they want people to give with confidence, it seems strange to put on a tax in one place and remove a tax from somewhere else. I would be grateful if the Minister clarified the Government’s position definitively on charitable giving and how the clause fits into that agenda and the decision to scrap the measures on charitable giving.

We also have some concerns about how the measure would work in practice. I would be grateful if the Minister clarified that. I understand that under the clause the reduced rate of inheritance tax will not be applied across the whole estate. Rather the estate would be treated as three components—survivorship, settled property and general—and the reduction would apply only to the remainder of the component of which 10% was given. So if a person gives away 10% of the smallest component of their estate, they would be eligible for the reduced tax on the remainder of that one component, but would still be charged the full rate of inheritance tax on the other, potentially larger, components. I see some furrowed brows in front of me. The provision seems more complex than necessary and restricts the discretion of the individual who would like to give. That complexity also risks diluting the attractiveness of the incentive.

Was that the Government’s intention? Will the Minister explain why the measure has been designed in that way? Did she consider applying the reduction across the whole of a non-exempt estate? Compared with what would have been given otherwise, how much new giving  do the Government expect as a result of this rather convoluted proposal? Does she have an estimate? Unless the Government expect a large increase in charitable giving to occur, this is just another tax break for existing charity donors, which is the exact opposite of the recently abandoned policy.

Will the Minister please clarify those points? Will she also clarify the following? If beneficiaries will not receive more as a result of the plan, why do the Government expect large-scale charitable giving to increase? Did the Government intend the measure to be a tax break for people who already give large amounts to charity, to encourage them to give more? Are the Government aware that there is a risk that the measure will be seen as a tax break exclusively for the wealthy? That does not necessarily sit in line with their current deficit-reduction strategy, which they have claimed will ask the wealthiest to pay the most.

Photo of Julie Hilling Julie Hilling Labour, Bolton West

I must apologise for an attack of hay fever, which makes speaking a little difficult. Anything that the Government do to encourage charitable giving has to be good, particularly when the community, voluntary and charitable sector across the piece has suffered so hugely from the cuts to Government Departments. My local charities have suffered because they have lost money from Government grants, local authority grants and health grants. It is a very tough time for charities; anything that encourages giving is a good thing. This measure is not about avoiding tax, but about building a better civic society. It is going back to the days when the philanthropy of entrepreneurs at the end of the 19th century did so much to build civil society, the charitable and voluntary sector. We can look at the model villages that were built and all the initiatives that took place. Anything that encourages the new entrepreneurs to give to charity must be a good thing.

It is interesting that the measure is talked about as supporting the big society agenda. This week the Archbishop of Canterbury said that the big society is

“aspirational waffle designed to conceal a deeply damaging withdrawal of the state from its responsibilities to the vulnerable”.

Does the Minister think that the measure will go any way to repair some of the damage done by the state withdrawing from the community and voluntary sector?

It gives a confused message to people thinking of donating when a clause, now withdrawn, capping donations to charities is put alongside one that seems to give money to charities. It sends a confused message to wealthy entrepreneurs and people who want to engage in philanthropy.

As my hon. Friend the Member for Newcastle upon Tyne North said, this seems an extremely complicated way to assess the tax take. I have just done some sums around the worked example that we were given. Not only do the tax man and beneficiaries lose money, but the balance of money lost does not go to the charities. There is a loss somewhere in the calculations. I do not know where the money goes, but it does not seem to go to anybody in these worked examples. It is not the most simple and straightforward measure. We know that the most straightforward taxes are the ones that people are most likely to opt into. If taxes are too complicated, people are less likely to opt in. If it is not clear and transparent to people who want to give to charity how  the beneficiaries’ take will be reduced, they are less likely to go ahead. I think that the Minister should look again at how the calculations are worked out.

I agree with my hon. Friend that, obviously, anything to increase charitable giving is a good thing, but we need to be clear about the message.

Photo of Chloe Smith Chloe Smith The Economic Secretary to the Treasury 11:30 am, 26th June 2012

It is a pleasure to serve under your chairmanship, Mr Bone.

To answer hon. Members’ questions, I will start with both a measure of context and an explanation of exactly what the clause does. The clause and schedule 32 introduce a new incentive to encourage people to provide more for charities in their will. Their estate will benefit from a lower rate of inheritance tax if more than 10% of it is left to charity.

The main point of context here is that the measure is only one—we discussed another last week—that the Government have introduced to support philanthropy and charitable giving at all life stages and in all walks of life, which is significant. Last week we discussed the gifts of pre-eminent objects scheme, which, importantly, encourages large-scale giving during the donor’s lifetime. Only last week, I introduced into the Commons the scheme that will enable charities to claim gift-aid style payments on bucket donations, which is another important example at the other end of the scale of how the Government intend to support philanthropy and encourage giving.

Photo of Ian Swales Ian Swales Liberal Democrat, Redcar

Does my hon. Friend the Minister feel that any clarification is needed on when a charity is a charity? We all assume in such discussions that we are thinking about Cancer Research UK, and so on. How does she feel, for example, about foreign charities that are outside the reach of the Charity Commission, or about family-controlled trusts? Does she feel that the legislation has any room to be more specific about the scope of what is meant by a charity?

Photo of Chloe Smith Chloe Smith The Economic Secretary to the Treasury

My hon. Friend asks an excellent question, which relates more broadly than only to the clause under discussion. We might wish to apply such stringency to any piece of legislation that seeks to encourage charitable giving.

In this case, as with all our other charitable measures and legislation, avoidance, abuse and fraud are examined extremely carefully. I assure my hon. Friend that that has been the case with these provisions, and as in examples elsewhere, guards against avoidance, abuse and fraud have been included. I can also assure him that measures to combat potential fraud run very clearly through the Small Charitable Donations Bill, for example, which is perhaps what inspired him to get up and speak. Her Majesty’s Revenue and Customs and the Charity Commission would expect, in many cases, to apply similar definitions to achieve the same objective of getting money to genuine charitable causes.

Photo of Grahame Morris Grahame Morris Labour, Easington

To follow on from the point made by the hon. Member for Redcar, can the Minister be more specific? If I may push her a little further, does the scope of the clause or her assurance specifically rule out the overseas trusts and family trusts that the hon. Gentleman referred to?

Photo of Chloe Smith Chloe Smith The Economic Secretary to the Treasury

If I may, I will come to that question in due course. I have a number of technical points that I need to address about what the clause does and some of the protections around it, but I will return to the hon. Gentleman’s point.

Continuing with the broad background, IHT—inheritance tax—is currently charged at a single rate of 40% on the net value of an estate above the inheritance tax threshold, after deducting all available reliefs and exemptions. Gifts made to charity and charitable legacies are already exempt from inheritance tax. The intention behind this measure is that reducing the inheritance tax rate to 36% on chargeable estate assets will provide an additional incentive for individuals to leave charitable legacies or to increase the amount that they already leave to charity.

Let me answer at least two of the questions from the hon. Member for Newcastle upon Tyne North. She asked whether the provision was a tax measure for large-scale giving. My answer is yes. This Government wish to encourage giving, as I laid out in our objectives. The Government are keen to help the charitable sector and I can tell the hon. Lady that the additional revenue for charities is expected to build up gradually over the period to 2016-17 to an estimated £95 million. That clearly answers her question about whether the clause brings additional benefit.

The changes were consulted upon over the summer and broadly welcomed. Even though a relatively small proportion of estates pay inheritance tax, it is encouraging that respondents felt that the incentive would encourage charitable legacies from a broad range of estates. It would also provide an opportunity for charities and advisers to discuss charitable legacies with people who are, or are considering making a will.

Respondents were also keen to see a balance between simplicity, so as not to discourage potential donors—a point made by others this morning—and flexibility, for example, to maximise the chances of charitable legacies from more complex estates. So the provisions in schedule 32, which have been amended since that exposure as part of the draft Bill, provide some additional flexibility. I believe those provisions achieve that balance.

Schedule 32 sets out conditions to be met for an estate to qualify for the lower inheritance tax rate. The provisions take account of the different classes of assets that are charged for inheritance tax when someone dies; assets they might own outright or jointly and, indeed, in interest in trusts. If the amount left to charity from one or more parts of the estate is at least 10%, after taking account of any reliefs and exemptions made due, those parts will be eligible for the lower inheritance tax rate of 36%. To answer a question from the hon. Member for Newcastle upon Tyne North, to provide a greater encouragement for charitable legacies, there is an option for various parts of the estate to be merged. So a larger legacy from one part of the estate can be offset against a smaller legacy from another part to achieve the reduced inheritance tax rate from the estate as a whole, if the overall legacy is at least 10% of the estate. She asks how I or the Government reached that conclusion. It is absolutely clear that the intention is to encourage that a legacy should be 10% or more of the estate. That incentive and intention clearly come through that part of the Bill.

Schedule 32 also amends the provisions relating to the instruments of variation, which allow assets left in a will to be redirected to other beneficiaries. Unlike wills, these are not public documents and charities do not have access to them, so schedule 32 provides that charities must be notified of the instrument if a redirection is made to charity. For clarity, the changes set out in the schedule and clause will apply to deaths on or after 6 April 2012.

Let me answer a few more of the questions that were posed. On overseas trusts in particular, the gift will qualify if it is a charitable legacy that already qualifies for charitable exemption from inheritance tax. I can confirm that legacies are valid only if they are given to charities that are or would be charities under the law of England and Wales. So they must meet the public benefit test that the Charity Commission for England and Wales would apply. In line with my comments at the beginning, it is also important to say that this Government are keen to encourage giving at all stages of life and from all walks of life. There is a simple way to check if a charity is eligible and that is to ring HMRC or the Charity Commission, though I shall not read out the telephone number into the record.

Photo of Ian Swales Ian Swales Liberal Democrat, Redcar

Is the Minister saying that only charities registered with the Charity Commission will qualify?

Photo of Chloe Smith Chloe Smith The Economic Secretary to the Treasury

As I said, legacies are valid only if they are given to charities that are or would be charities under the law of England and Wales. I believe that answers my hon. Friend’s question.

Let me sum up the measures before the Committee, the intention of which is clear. The measures introduce a lower rate of inheritance tax where 10% or more of a deceased person’s net estate is left to charity. There is a clear incentive to encourage more people to leave bequests to charity in their will or to increase their existing charitable legacies. That sits against a background in which the Government are keen to help the charitable sector. The Government listen to the charitable sector and make amendments where necessary, as I have laid out in the context of clause 207 and schedule 32. We expect charities to receive additional benefits of up to £95 million.

Question put and agreed to.

Clause 207 accordingly ordered to stand part of the Bill.

Schedule 32 agreed to.