Clause 208 - Settled excluded property: effect of certain arrangements

Finance Bill – in a Public Bill Committee at 11:30 am on 26th June 2012.

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

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Education)

I shall deal with the clause very briefly, you will be relieved to hear, Mr Bone.

I note the Minister’s written ministerial statement on the clause, which was issued on 21 June. The provision seeks to extend the applicability of inheritance tax to  settled property outside the UK that has been acquired via a conversion of UK assets without giving rise to a transfer of value, which are currently exempt.

The Minister has specifically made provision that the new rules will not be retrospectively applied, which might be a welcome notice for some Members, but I would be grateful if, while explaining this clause and the written ministerial statement, he explained why that specific measure has also been included.

Photo of David Gauke David Gauke The Exchequer Secretary

As we have heard, clause 208 closes a complex avoidance scheme involving the acquisition of interests in offshore trusts to avoid inheritance tax charges. The clause ensures that UK assets used to acquire such interests are charged to inheritance tax in the same way as if they had been transferred to a UK trust, bringing such trusts within the scope of inheritance tax.

HMRC has found an avoidance scheme that exploits the special rule on settled overseas assets. Promoters of the scheme set up offshore trusts that are funded with overseas assets. Interests in those trusts are then sold to wealthy UK-domiciled individuals. Complex arrangements convert UK assets, which would otherwise be chargeable to inheritance tax, into excluded property, avoiding the inheritance tax charge that normally arises when UK assets are put into trust. Any loans taken out to fund the arrangements also reduce the value of a person’s estate for inheritance tax purposes. An individual can, therefore, escape inheritance tax charges on assets in offshore trusts and reduce the value of their estate.

Clause 208 amends the rules on settled excluded property, whereby a UK-domiciled individual enters into arrangements through which they acquire an interest in excluded property and, in doing so, reduce the value of their estate. Assets settled in an offshore trust will cease to be treated as excluded property. UK assets used to acquire a settled interest will be treated as if the person had transferred them directly to a UK trust. An inheritance tax charge will apply to the transfer equal to the reduction in the value of the estate. Inheritance tax charges will also rise if the assets are held in the trust for more than 10 years, or when the assets are taken out of the trust. The changes will target only individuals or trustees entering into such arrangements; they will not affect most individuals or businesses. This measure was announced at the Budget and the changes in clause 208 will take effect from 21 March 2012.

The provisions apply to new schemes entered into on or after that date and to existing arrangements entered into before 21 March 2012, but only in relation to IHT charges arising on or after that date. The hon. Member for Newcastle upon Tyne North raised the amendments. Clause 208 may not deter some variants of the scheme and may also inadvertently apply to some arrangements not made for tax avoidance purposes.

As announced last week, amendments to clause 208 will therefore be introduced on Report. The amendments will aim to ensure that the new provisions effectively stop potential variants of the scheme involving acquisition of interests in settled property, target the intended schemes correctly and do not affect existing arrangements. The amendments will also revise the date that the changes in clause 208 take effect to 20 June 2012.

The reason for that is that we have received feedback that suggests that the provisions in clause 208 may inadvertently apply to some existing arrangements not made for tax avoidance purposes. The amendments will correctly target the provisions. The clause closes a particularly contrived avoidance scheme involving offshore trusts that seeks to avoid IHT charges.

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Education) 11:45 am, 26th June 2012

I apologise for interrupting the Minister’s flow. I seek clarification on his comment about shifting the date. I understand that the original date was 20 or 21 March. Will the Minister confirm that? Given that he is moving on to say that these are particularly contrived tax avoidance measures, has there been a calculation of the loss to the Exchequer in that interim period?

Photo of David Gauke David Gauke The Exchequer Secretary

This is a particularly contrived scheme. The difficulty with the original provisions is that, on the basis of feedback that we received from interested parties, there was a concern about inadvertently having an impact on arrangements that were not driven by tax avoidance and were not part of these contrived arrangements.

I do not have the information about costs that the hon. Lady seeks, but I will write to her. We made an assessment that there was a danger with the original position of inadvertently affecting some innocent arrangements. We did not want to do that, which is why we have made the announced changes. That will get us to the place we want to be: closing down a contrived avoidance scheme, preventing people from using an offshore trust to avoid IHT charges in particular circumstances by reducing the value of a person’s estate. That very much supports the Government’s aims in our anti-avoidance strategy to protect revenue.

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Education)

I appreciate that the Minister is not able to provide the specific figure relating to the interim period that I requested. Can he indicate the overall saving or increase to the Exchequer from that measure? I would be grateful if he could clarify that now.

Photo of David Gauke David Gauke The Exchequer Secretary

On further reflection, I may be able to help the hon. Lady and the Committee on that point. The purpose of the clause is more to protect revenues than produce additional yield. By that, I mean that the yield—the additional sums we will receive as a consequence of the clause—is likely to be negligible. However, there is a concern that the scheme could grow considerably if we do not take action and that, as a consequence, revenue may be reduced more significantly. Consequently, a delay from 21 March to 20 June is likely to have a negligible impact on yield, but none the less will still protect revenue for future years. I hope that provides some clarification.

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Education)

That does provide clarification and some reassurance. However, I would be grateful if the Minister could confirm when the scheme first came to the attention of Her Majesty’s Revenue and Customs and the Department, and thereby give some clarity about how long the scheme may have been in existence and the revenue therefore left unprotected.

Photo of David Gauke David Gauke The Exchequer Secretary

The hon. Lady raises a fair point about when the scheme first came to light. It might help the Committee to point out a degree of context. There were  similar schemes in 2005 and 2009 and action was taken then. This particular scheme came to HMRC’s attention in August last year, but we think that the actual cost to the Exchequer so far has been negligible and the risk is in relation to revenue. As a consequence, now is the right time to act, although we have taken into account some of the representations that we have received, ensuring that the measure is properly targeted.

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Education)

The Minister will understand and realise that this is exactly the sort of tax avoidance that the public are particularly concerned about. Members of the Committee and of the public will be concerned that, after the scheme came to the attention of HMRC and the Treasury, it took 10 months to take the correct legal preventative measures to close it down and ensure that revenue was not lost. Will the Minister comment on why it has taken so long to get the legislation right? He says that the loss to the Revenue is negligible, but can he provide a figure—if not today, then in writing—to provide reassurance to Committee members and the public that this sort of avoidance is not slipping through the net?

Photo of David Gauke David Gauke The Exchequer Secretary

On the wider point, HMRC is active in closing down these schemes. There has been a lot of publicity about such schemes in recent days and in many of those cases HMRC has taken strong action. Often, that can be dealt with through litigation. In some cases there is a need for further legislation. In the past year or so we have taken legislative measures regarding seven schemes. In this case, it was a particularly complex arrangement and it was not until January this year that HMRC felt that it fully understood the way in which the scheme would work. The evidence that HMRC has seen is that there are only a very small number of cases where people have made use of the scheme, but other intelligence shows that promoters’ marketing material and tax planning conferences have identified the potential for the scheme to expand rapidly. That is something that we want to address.

This is a particularly complex and contrived arrangement but we need to ensure that the legislation targets it effectively and avoids affecting innocent arrangements. It has taken a little time to get this right—I fully accept that. It highlights one of the tensions in the tax system. Where there are particular exemptions for a tax designed to avoid an unfairness in the system, that can be exploited by some scheme promoters in a way that Parliament never intended. As the hon. Member for Newcastle upon Tyne North pointed out, this is exactly such a case.

We do not believe that the cost of the delay in sorting this matter out is insignificant, but the measure will protect millions of pounds of revenue over the next five years. It is therefore still a worthwhile step, and I hope that the clause stands part of the Bill.

Question put and agreed to.

Clause 208 accordingly ordered to stand part of the Bill.