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Clause 56 will extend the capital gains tax upper limit provisions that apply on a death of a vulnerable beneficiary and extend the range of vulnerable beneficiary trusts that qualify for special income tax, capital gains tax and inheritance tax treatment. That will enable more vulnerable people to have their property safeguarded for their benefit within a trust, while ensuring that it is not taxed more adversely than if it were owned by the individuals themselves.
Clause 284 will, from 6 April 2014, extend the definition of a disabled person that is used in relation to trusts with a vulnerable beneficiary to include those in receipt of the mobility component of disability living allowance at the higher rate, or the mobility component of the personal independence payment at either the standard or enhanced rate. By way of background, a beneficiary is anyone who benefits from a trust. A vulnerable beneficiary is either a person who is mentally or physically disabled, or someone under 18—a relevant minor—who has lost a parent through death.
Capital gains tax is a tax on the gain in the value of assets, such as shares, buildings or land. A trust may have to pay capital gains tax if assets are sold, given away or exchanged and their value has increased since being put into the trust. The trust will have to pay the tax only if the assets have increased in value above a certain allowance known as the annual exempt amount.
Trustees are responsible for paying any capital gains tax that is due. They can claim a relief, which is calculated in a similar way to income tax relief, in that they work out what they would ordinarily have paid if there were no relief and then work out what the beneficiary would have to pay if the gains arose directly to them as individuals. They can claim the difference between those two amounts as a relief on what they have to pay in capital gains tax. The special capital gains tax treatment does not apply in the tax year when the beneficiary dies.
I have some questions for the Minister. Last year’s Finance Bill made a number of changes to vulnerable beneficiary trusts. I am interested to know why the introduction of a capital gains tax uplift for trust assets on the death of a vulnerable beneficiary was not included in the Finance Act 2013 and is instead being introduced now.
What estimate has the Minister made of the current number of trusts with vulnerable beneficiaries? Do the Government agree with the low incomes tax reform group that the current meaning of “disabled person” could be expanded further to bring more disabled beneficiaries within the scope of the legislation, as we have just discussed in relation to clause 54? For example, it could include those who are vulnerable, yet not eligible; those with fluctuating or early-stage symptoms of mental incapacity; those with addictions; and those in abusive relationships. Will the Government consider consulting on that point?
No doubt the Committee is excited by the fact that we are debating clause 284. That excitement is tempered only by the fact that we are also debating clause 56 and there is a long way between the two. Clauses 56 and 284 both relate to trusts established for a person with a disability, and I am grateful to the Opposition for agreeing that they be debated together. Clause 56 extends the special capital gains tax provisions that apply on the death of the beneficiary of a qualifying disabled person trust. Clause 284 extends the special tax rules more generally by widening the meaning of “disabled person” for tax purposes. That extended definition will also apply, irrespective of whether there is a trust, in determining whether a person qualifies for the capital gains tax private residence relief final period exemption of three years when they sell their former home, which we debated under clause 54 a moment or so ago.
By way of background, I should say that trusts can be a sensible way to manage the property of a person who is unable to manage their own affairs. Such trusts are recognised in the tax system under long-standing rules. In essence, they allow any tax liabilities to be calculated as though they had arisen on the beneficiary rather than on the trustees. The rules, however, are limited to trusts set up for bereaved minors or certain persons with a disability—those who cannot manage their affairs because of a mental disorder, or who are in receipt of welfare payments in respect of their care needs.
Last year, in consequence of the welfare reform changes, we extended the definition of “disabled person” to include those in receipt of the daily living component of the new personal independence payment. However, we were encouraged to go further. Those representing vulnerable members of society argue that the rules should also include trusts established for those who, while able to manage their own affairs, may be at risk of abuse or exploitation if left to manage their own property, a trust being a sensible way to protect their property. The then Economic Secretary to the Treasury, now the Secretary of State for Culture, Media and Sport, assured last year’s Finance Bill Committee that we were more than happy to have further discussions with stakeholders on potential future changes to the rules relating to those trusts and how they could be practically achieved.
After careful consideration, we agree that the rules should be extended. Clause 284 extends the meaning of “disabled person” to include those in receipt of welfare payments in respect of their mobility needs—either the mobility component of disability living allowance at the higher rate or the mobility component of the personal independence payment at the standard or enhanced rate. We were also encouraged to look at a specific anomaly within the capital gains tax provisions that apply on death. The general principle of the death provisions is to take unrealised gains accrued up to the date of death out of the charge to capital gains tax when a person dies, thereby ensuring that the gains are not subject to double taxation under capital gains tax and inheritance tax.
Assets held in a qualifying disabled person trust are not subject to the normal periodic inheritance tax charges that apply to trusts. Instead, they are treated as if they were held outright by the beneficiary. As such, they are potentially subject to inheritance tax when that person dies. It follows, therefore, that the capital gains tax death provisions should also apply to gains accrued in that type of trust. The current rules do ensure that, but in a limited way. They apply only to one form of qualifying disabled person trust, which is those where the beneficiary has what is known as an “interest in possession” in the trust—essentially, an entitlement to the trust income. That restriction is distorting decisions on whether to establish a trust and the most appropriate trust structure to use. I am grateful to the organisations representing those with disabilities or those who care for them; they brought the anomaly to our attention and we are pleased to be able to take action.
The changes made by clause 56 will remove that restriction by extending the death provisions to all forms of qualifying disabled person trusts. They will have effect in relation to deaths occurring on or after 5 December 2013, the date when we announced the change.
The hon. Member for Birmingham, Ladywood asked how many vulnerable beneficiary trusts are likely to be affected. We are unable to assess that accurately because there is no central record. As to vulnerability and the reason why people who do not claim benefits, such as those suffering abuse, are not included in the definition, we have sought to draw a balance between making provision for those most in need and over-complicating the tax system. However, we will of course keep matters under review.
I was asked why the CGT death uplift anomaly was not corrected before now. It is true that it is of long standing. We listened carefully to recent representations about it and decided to act. Last year we focused on changes necessary as a result of welfare reform, but we have used the opportunity this year to address this particular point, and I hope the Committee welcomes that.
Clauses 56 and 284 will make the tax regime for trusts that are established for the benefit of a person with a disability more tax-neutral—that is, nearer to a regime in which tax neither penalises nor encourages their use in preference to the person holding the same property outright.