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

With this it will be convenient to discuss the following:

That schedule 1 be the First schedule to the Bill.

Clause 12 stand part.

Clause 13 stand part.

Clause 14 stand part.

Clause 11 and schedule 1 make reforms to the inheritance tax treatment of relevant property trusts. With your permission, Mr Howarth, my remarks will also cover clauses 12 to 14, which rectify anomalies in some areas of the trust legislation to provide more certainty and clarity. The changes being made will tackle individuals avoiding inheritance tax through the use of multiple trusts. They will also simplify the calculation of inheritance tax on trusts by removing the need to include certain categories of assets. The Government are making the changes to ensure that there is fairness in the tax system and to reduce the administrative burden on trustees and practitioners.

Let me give some background to the changes. The current rules allow individuals to achieve a tax advantage by creating several trusts on different days. Those trusts are often set up with the intention that significant funds will be added to each at a later time, and all on the same day. Those trusts are not related for inheritance tax purposes if they are set up on different days, and where the funds are subsequently added to each trust on the same day, the additions are not related either. The result is that each trust is able to use a full nil-rate band, which creates an advantage with ongoing inheritance tax charges. For example, an individual might create three trusts on  separate days, with £100 as the fund for each of the trusts. They could then leave legacies in their wills, so that a third of their estate passed into each of the three trusts. Each trust would be able to use a full nil-rate band, which means that up to £975,000 could be held between the three trusts, minimising any future inheritance tax charges that arise. While some may consider that a legitimate use of existing rules, many respondents to the Government’s consultation agreed that it is right that aggressive tax planning through the use of multiple trusts should be tackled.

We also believe that it is right to simplify the tax system where we can and reduce the burden on those tasked with administering it. The calculation of inheritance tax charges on trusts is dependent on a number of different factors and historical information, which results in complex calculations, but quite often the amount of tax due does not justify the time spent by trustees and practitioners. The changes made by the clause will remove the need for some of the historical information and reduce the complexity.

Certain anti-avoidance measures in the legislation are there to protect inheritance tax revenues, but we recognise that sometimes the provisions do not operate as they were intended. Clauses 12 to 14 correct those anomalies.

The changes made by clause 11 and schedule 1 ensure that where property is added to two or more relevant property trusts on the same day, the value of the property trust added to each trust and the initial value of relevant property settled in the trust will be aggregated and brought into account when calculating the rate of tax for the purpose of inheritance tax charges. Aggregating the value of property in trusts that are not related increases the capital value used to calculate the rate of tax. That removes the advantage that arises through the use of multiple nil-rate bands. Individuals will still be able to create as many trusts as they like, but the changes mean that there is effectively only one nil-rate band available every seven years, and we believe that this is fair.

The clause and the schedule also remove the requirement to include the historical value of excluded property in the calculation. That simplifies the trust charge calculations. The changes will apply to all charges arising on or after the date of Royal Assent. However, to prevent forestalling, they will also apply to relevant property trusts created before 10 December 2014, the date that draft legislation was published, where there are additions to more than one relevant property trust on the same day.

Clause 12 amends the inheritance tax legislation relating to claims for conditional exemption from inheritance tax for heritage properties. Currently, a claim must be made before the approaching 10-year anniversary charge. The clause amends that requirement, so that trustees can make a claim for exemption within two years of the 10-year anniversary charge arising. The change puts trustees dealing with a claim for exemption on the same footing as trustees and individuals subject to other inheritance charges. Again, that will be effective from the date of Royal Assent.

Clause 13 corrects an unintended effect of the changes made to inheritance tax legislation in 2006. For the benefit of hon. Members, the term “non-qualifying interest in possession” is used to describe a trust created after the 2006 inheritance tax changes, where a beneficiary has a present right to enjoy the income of the trust.  An unintended effect of the 2006 inheritance tax changes allowed those types of trust to escape all inheritance tax charges because the assets held in trust were neither part of the beneficiary’s estate, nor were they comprised in a relevant property trust.

The clause, which will apply on the day after the date of Royal Assent, means that assets held in a non-qualifying interest in possession trust are treated as being comprised in a relevant property trust. As a result, those assets will be subject to inheritance tax charges. To prevent the change in the legislation from triggering an immediate creation of a relevant property trust, the commencement of the relevant property trust is aligned with the ending of the current interest in possession.

Clause 14 resolves an anomaly in the inheritance tax legislation. It ensures that in specific circumstances, the effect of a disposal of property, known as an appointment, can be read back into the will, and the spouse or civil partner exemption from inheritance tax can be given. That change will apply where a death occurs on or after 10 December 2014 and an appointment is made within three months of the date of death, from property settled by will and in favour of the deceased’s surviving spouse or civil partner.

In conclusion, these provisions ensure that it will no longer be possible for individuals to create multiple trusts and use multiple nil-rate bands in order to avoid inheritance tax. They ensure fairness in the tax system and protect inheritance tax revenues from those who seek to exploit the rules in order to gain an advantage. Furthermore, the amendments simplify the trust calculations, and provide greater certainty for trustees and practitioners as a result of the removal of certain anomalies in the legislation.

As I said earlier, we will return to inheritance tax on Report if we can. Clauses 11 to 14 address tax avoidance measures that have previously been allowed in the inheritance tax system and a number of anomalies that have created unintended consequences and loopholes in the inheritance tax regime.

The clauses illustrate the complexity of inheritance tax legislation. That complexity is compounded by the need to continually update and rectify the regime with additional legislation, making the legislation even more difficult to understand and apply. Although we welcome the moves in the Bill that seek to close loopholes, this raises a bigger question about the efficacy of inheritance tax legislation. In the light of that, will the Minister say whether the Government have any further plans to adopt a programme of reform to simplify this tax and make it easier to navigate?

We welcome the fact that clauses 11 to 14 address areas of the legislation that give an unfair advantage to some beneficiaries over others, because that will help to ensure that inheritance tax is applied in a fair manner. Previously, it has been relatively easy for people to avoid paying the correct amount of inheritance tax by placing property into a number of trusts or by increasing the value of property in a trust immediately after an initial amount of property was settled. The clauses and schedule aggregate the value of property in trusts that are not  related, for the purpose of determining the rate at which inheritance tax is charged, when the value of property in those trusts is increased on the same day. The schedule also simplifies some of the rules for calculating the rate of tax for the purposes of the 10-year anniversary and exit charges.

The provisions are welcome as measures to prevent avoidance techniques through the use of multiple trusts settled on the same day. We also welcome the adoption of a system that aggregates property over multiple trusts, rather than splitting the nil rate band to take into account multiple trusts. That would have been an extremely complex system to administer, and aggregating property held in multiple trusts is a much simpler way to resolve the problem. The simplification of rules on exit charges and the 10-year anniversary charge is welcome, but I would like to know whether the Minister is considering any further changes.

We have had a good debate on inheritance tax today, but wider issues with it remain. In particular, it is still extremely complex. Although the Government have introduced many of the measures outlined in previous consultations to make inheritance tax policy more cohesive —for example, multiple trusts, the 10-year anniversary charge declarations, interest in possession and the implementation of an IT strategy to transfer inheritance tax administration online—the tax still lacks simplicity. Each of those issues has added another set of complexities to inheritance tax.

In 2010, the Office of Tax Simplification’s report identified 89 inheritance tax reliefs. It noted the need for a top-down review of inheritance tax in 2011, stating:

“We consider that a more appropriate approach to the inheritance tax reliefs is to consider the scope and operation of inheritance tax with reference to the original and desired policy rationale, and thus to consider individual reliefs in context. In addition, any review of inheritance tax needs to include a review of the taxation of trusts, which are often used to pass family assets between generations.”

Does the Minister have any further plans to enact new measures to simplify the rules and administration of inheritance tax?

At the heart of the clauses, an issue of tax avoidance is addressed. We should encourage planning for the future. Planning what happens to their finances after their death is something that most people should consider. For some people, that has been entwined with navigating the inheritance tax rules to minimise their contribution. People should pay no more and no less than their fair share. Will the Minister provide any details on the measures the Government are taking to ensure that everyone who is eligible pays their share of inheritance tax?

The Minister has taken us through the clauses and how they operate. The correction of the anomaly in clause 12 means that trustees will now have clear guidance about the timeline to submit an application for exemptions. That should make it easier for Her Majesty’s Revenue and Customs to administer the exemption.

Clause 13 corrects an anomaly whereby types of interest in possession escaped all inheritance tax charges because the property was neither part of the beneficiary’s estate nor included within a relevant property trust. That was an unintended effect of the 2006 legislation. Labour welcomes corrections of that type. We welcome  the change, which will ensure that an interest in possession in settled property is treated the same, regardless of the date at which the settlement was created.

Clause 14 provides that where property is left in trust in which no interest in possession subsists and an appointment of that property is made within three months of the date of death, the appointment can be read back into the will. I do not think any of us is an expert in this, but I understand that that corrects an anomaly known as the Frankland trap. Labour welcomes the removal of the anomaly, as the tax will now be applied fairly. It will protect families who could unfairly suffer if they were unaware of the trap.

In view of what we said earlier about our overall views on inheritance tax and clauses 9 and 10, we think that it is right that the tax is applied in the fairest way possible and that anomalies are removed.

I thank the hon. Lady for her remarks. Many people would agree that we should take action where there is aggressive tax planning. The changes will ensure that there is no longer an advantage in creating multiple trusts. It is right that we take action. At the same time, existing trusts will benefit from the simplification aspects, such as the removal of the need to include non-relevant property in the calculation.

The main point made by the hon. Lady relates to a programme of reform to simplify IHT legislation. We will of course continue to simplify the tax system wherever possible. I should use the traditional response of a Treasury Minister in these circumstances, which is to say that all taxes are kept under review, and we will continue to look at inheritance tax. More generally, it is worth pointing out that we have established the Office of Tax Simplification. We are putting it on a statutory footing and strengthening its role and capacity. It has already achieved a great deal in the period it has existed, and I hope that will continue to be the case over the next few years. I am grateful for the support for the clauses.

Question put and agreed to.

Clause 11 accordingly ordered to stand part of the Bill.

Schedule 1 agreed to.

Clauses 12, 13 and 14 ordered to stand part of the Bill.