I beg to move amendment 13, in clause 21, page 32, line 44, at end insert—

‘( ) In paragraph 16 of Schedule 32 to FA 2004 (benefit crystallisation event 7: defined benefits lump sum death benefit is a “relevant lump sum death benefit”)—

(a) in the first sentence, in paragraph (a), after “benefit” insert “, other than one—

(i) paid by a registered pension scheme in respect of a member of the scheme who had not reached the age of 75 at the date of the member’s death, but

(ii) not paid before the end of the relevant two-year period”, and

(b) in the second sentence, for “sub-paragraph” substitute “paragraphs (a)(ii) and”.”

With this it will be convenient to discuss clauses 21 and 22 stand part.

It is a great pleasure to serve under your chairmanship again, Sir Roger. I add my words of welcome to the hon. Member for Wolverhampton South West. As he said, we crossed swords in Finance Bills many years ago and I am delighted to see him back. I know that he will be an assiduous and thoughtful scrutiniser of the Bill and I am delighted to see him in place following his overdue promotion to the Front Bench. I also welcome the hon. Member for Leeds East to his Front-Bench position, as well as the hon. Member for St Helens North to the important role of Opposition Whip—although I note that the hon. Member for Scunthorpe is still present to provide any necessary words of guidance. Given his additional Front-Bench duties, that is to be commended. He clearly cannot keep away from Finance Bill debates—an attribute that both I and the hon. Member for Wolverhampton South West appear to share.

Clauses 21 and 22 will reduce the 45% tax on lump sums payable from a pension of individuals who die aged 75 or over to the marginal rate of income tax. These changes will ensure that individuals receiving taxable pension death benefits are taxed in the same way regardless of whether they receive the funds as a lump sum or as a stream of income. April this year marked the introduction of the Government’s radical reforms to private pensions. The historic changes included the removal of the 55% tax charge that used to apply to pensions passed on at death. Under our reforms, lump sums payable from the pension of someone who has died before age 75 are now tax-free. That was not previously the case: the recipient of the lump sum had to pay the 55% tax if the pension had been accessed. We also reformed who can take a pension death benefit.

Individuals can now nominate anyone they want to draw down the money as pension, paying tax at their marginal rate. However, for 2015-16, individuals receiving the money as a lump sum from the pension of someone who has died aged 75 or over pay tax at a special rate of 45%. These clauses meet the Government’s commitment to reduce that special rate to the recipient’s marginal rate from April 2016. That will align the income tax treatment of individuals who take the money as a lump sum with those who receive it as a stream of income.

Around 320,000 people retire each year with defined contribution pension savings. Their beneficiaries could now potentially benefit. Clause 21 removes the 45% tax charge that applies when certain lump sum death benefits are paid to individuals, and clause 22 applies the marginal rate of income tax instead. The 45% tax charge will remain in place where the lump sum death benefit is not paid directly to an individual.

For individuals who have such a payment made to them through a trust, clause 21 ensures that when the money is paid out, the individual will be able to reclaim any excess tax paid. That means that they will ultimately pay tax at their marginal rate, as though they had received it directly. For many people receiving these lump sum death benefits, clauses 21 and 22 will therefore mean a reduction in the tax payable. However, we must of course safeguard the Exchequer. These clauses will therefore ensure that people who leave the UK for a short period, receive the lump-sum death benefit and then return here will not escape UK tax charges, nor will they be able to escape UK tax charges because the member transferred their pension savings overseas in  the five tax years before they died. UK tax charges will still apply in such cases, to make sure that people pay the right amount of tax.

Government amendment 13 removes potential unfair outcomes for individuals who have a defined benefit, lump-sum death benefit paid to them by removing the test against the lifetime allowance where the lump sum is subject to another tax charge. That means that any such lump-sum death benefit will be subject to one tax charge only.

Clauses 21 and 22 will make the tax system fairer and ensure that individuals who receive death benefit payments from the pension of someone who dies aged 75 or over are taxed in the same way, regardless of whether the death benefit is paid as a lump sum or a stream of income.

I knew that we would hit the buffers sooner or later, but I thank the Minister for his kind words. To get it out the way, it will not surprise him to know that we support amendment 13, because taxation should not happen twice. Perhaps he might tell me at some point whether this was another difficulty spotted by Mrs Gauke, who has been known to grace this Committee in the past with her insights and specialties.

Mr Gauke indicated dissent.

The Minister says it was not.

I am uneasy, however, about clauses 21 and 22, which are twins. As I understand it—I may have misunderstood—an individual who as a beneficiary would previously have been paying tax at 45% on a windfall will in future be paying tax at their marginal rate, whether 20% or 40%. I am uneasy about that for two reasons. First, we have historically tended to impose taxes on death calculated on the estate rather than on the recipient. The inheritance tax, as you may remember, Sir Roger, became the capital transfer tax and then went back to being inheritance tax again, which is where we are now—although they are commonly called death duties. The tax payable back then was calculated on the value of the estate and the thresholds, allowances and so on relating to that. These clauses change that—perhaps the change was made in the past and I am not aware of it, which I readily concede might be the case—and tax payable will now be calculated on the tax rate of the individual beneficiary or recipient.

Secondly, this is money that has been taxed at 45%. It is a windfall. It is money that had tax relief when paid into the pension scheme and it had tax relief while that pension scheme was accumulating its funds. It now gets not tax relief, but a lowered tax rate than has hitherto been the case, dropping from 45% to 20% or 40% due to these two clauses. I am uneasy about that. My fears may be allayed if the Minister or his colleagues can clarify the matter further, but it may be that I will ask my hon. Friends to vote against these two clauses.

I am sorry that we seem to have hit the buffers quite so quickly when things were so consensual. First, there is a well-established distinction between the inheritance tax regime and the treatment of lump-sum death benefits. For example, if a spouse dies and leaves his or her estate to the surviving spouse, there is an  exemption and no tax is paid. There is no equivalent provision in terms of the tax on lump-sum death benefits. I take the hon. Gentleman’s point, but I disagree with it. His argument does not go very far in terms of a direct analogy between the inheritance tax regime and lump-sum death benefits.

The hon. Gentleman argues that pensions are taxed on the basis of what tax professionals describe as EET—that is, exempt, exempt and then taxed. It is worth pointing out that under this regime, although pension savings are still taxed at the final stage, they are taxed at the marginal rate of the recipient. That does not mean that these sums essentially go completely untaxed—which I think is at the heart of the hon. Gentleman’s concern. More fundamentally, however, I would argue that we want a savings regime that encourages people to save for their pensions and a regime with a charge of 55%—as it was not that long ago—could be seen as punitive. In the circumstances that apply in this case, it is not unreasonable that there should be consistency in the tax treatment of these pension funds, regardless of whether payments are made as a lump sum or a stream of income.

I do not know whether I have succeeded in persuading the hon. Gentleman of the case for this, but I would argue that these provisions make our tax system fairer. They ensure that individuals receiving taxable pension death benefits are taxed in the same way, regardless of whether they receive the funds as a lump sum or as a stream of income. I therefore hope that clauses 21 and 22 can stand part of the Bill.

Amendment 13 agreed to.

Clause 21, as amended, ordered to stand part of the Bill.

Clause 22 ordered to stand part of the Bill.