| Previous Section | Index | Home Page |
Mr. Redwood: I realise that the regime was introduced last year with our agreement; indeed, I welcomed it at the time and thought it an excellent idea. My understanding was that the whole idea was to charge less tax on companies and therefore, from the Treasury's point of view, to lose revenue. My worry this afternoon is that the Government seem to be trying to reverse that. They appear to regret the fact that they lost revenue through a measure that I thought was introduced as a tax relief. My suspicion is that what they are really seeking to do in due course is to scrap the whole thing, which I would regret deeply.
Dawn Primarolo: I can assure the right hon. Gentleman that that is not the case. If he looks at the legislation he will discover the specific intended use of the 4 per cent. annual deduction, which, as I explained in my opening remarks, is being abused. We are therefore seeking to prevent that by introducing anti-avoidance measures.
Mr. John Bercow (Buckingham): Will the Paymaster General give way?
Dawn Primarolo: If I may, I shall first answer the questions from the hon. Member for Eddisbury (Mr. O'Brien). Perhaps I did not hear him correctly, but my understanding from what he said is that the Opposition will not be dividing the House on this issue.
Mr. Stephen O'Brien indicated assent.
Dawn Primarolo: I thank the hon. Gentleman. His first question was why the proposal has been introduced now and not in the original Bill. Regrettably, I was not able to table the new clause in time: the Revenue has only recently received the relevant information, which requires us to act immediately. As he knows—we have discussed this issue before—it was the practice of the previous Government and of other Governments that
anti-avoidance legislation becomes effective from the date of its announcement, and that is the practice of this Government.I know that the hon. Gentleman shares my view about the importance of the issue of retrospection. Whatever the view of schemes introduced before 20 June, there is no retrospection in this proposal. It deals immediately with what we understand to be the perceived problem with the arrangements, in terms of exploiting an aspect of this legislation. This House never intended that the arrangements be used in this way, and I am grateful to him for his support on this issue.
Mr. Bercow: I am very grateful to the Paymaster General for giving way. She is bringing a certain world-weary cynicism to today's exchanges, and I can tell that she is very taxed by, and disappointed by, the incidents of abuse that she believes she has identified. However, for the edification of the House and in order to satisfy the legitimate curiosity of my constituents in Market Hill, Buckingham, this weekend, would she care to identify three examples of especially grave abuse that the new clause is designed to tackle?
Mr. Deputy Speaker (Sir Alan Haselhurst): Order. I should point out to the hon. Gentleman that there was probably a shorter way of putting that point.
Dawn Primarolo: I can do better than that—I can explain to the hon. Gentleman, so that he can explain to his constituents, why the new provisions are needed and the otherwise potential loss to the Treasury, to which I referred in my opening remarks. He will surely agree with me that it is better to prevent loss of revenue through speedy action than to sustain such loss in the first place. The provisions are needed because of the way in which the aims of two parts of the legislation seek to be achieved. The provision on the related party is clear and effective where it applies. It gives certainty to the meaning of the law—a meaning that all of us understood, and therefore agreed with, in passing this legislation last year.
However, there are a variety of possible schemes, as I said. I am sure that the hon. Member for Buckingham (Mr. Bercow) is not suggesting that I wait until they are in action. They are designed to refresh old assets, as they are politely called in the trade. The purpose of the legislation was to operate forwards from last year, not backwards from the date of the legislation. Some fresh old assets—if such a term could be used—will not need to use the related-party mismatch. To deal with those, and also to close the door on schemes that have yet to be designed—that is, to anticipate subsequent exploitation—we also need the general cover provided by the wider anti-avoidance rule.
The House is rightly sensitive about the use of wider anti-avoidance rules, and it expects Ministers to be sensitive about that as well, but the rules are needed in this case. By virtue of its less mechanistic approach of testing the main object of the scheme, the provision can apply in a wider range of circumstances. In simple cases, it is easier to test for the group relationship than to examine the various possible objectives of transactions.
From that, I am sure that it is immediately obvious to the hon. Member for Buckingham how much mischief could be made with regard to those two rules, and that he will be able to think up many examples for himself. I commend the new clause to the House.
Clause read a Second time, and added to the Bill.
New Clause 7
Inheritance Tax: Gifts with Reservation
'(1) Section 102 of the Finance Act 1986 (c. 41) (gifts with reservation) is amended as follows.
(2) In subsection (5) (section not to apply where disposal is an exempt transfer by virtue of any of the provisions of the Inheritance Tax Act 1984 specified in the paragraphs of that subsection) at the end of paragraph (a) (section 18: transfers between spouses) insert ", except as provided by subsections (5A) and (5B) below".
(3) After subsection (5) insert—
"(5A) Subsection (5)(a) above does not prevent this section from applying if or, as the case may be, to the extent that—
(a) the property becomes settled property by virtue of the gift,
(b) by reason of the donor's spouse ("the relevant beneficiary") becoming beneficially entitled to an interest in possession in the settled property, the disposal is or, as the case may be, is to any extent an exempt transfer by virtue of section 18 of the 1984 Act in consequence of the operation of section 49 of that Act (treatment of interests in possession),
(c) at some time after the disposal, but before the death of the donor, the relevant beneficiary's interest in possession comes to an end, and
(d) on the occasion on which that interest comes to an end, the relevant beneficiary does not become beneficially entitled to the settled property or to another interest in possession in the settled property.
(5B) If or, as the case may be, to the extent that this section applies by virtue of subsection (5A) above, it has effect as if the disposal by way of gift had been made immediately after the relevant beneficiary's interest in possession came to an end.
(5C) For the purposes of subsections (5A) and (5B) above—
(a) section 51(1)(b) of the 1984 Act (disposal of interest in possession treated as coming to end of interest) applies as it applies for the purposes of Chapter 2 of Part 3 of that Act; and
(b) references to any property or to an interest in any property include references to part of any property or interest.".
(4) The amendments made by this section have effect in relation to disposals made on or after 20th June 2003.'.
Brought up, and read the First time.
Dawn Primarolo : I beg to move, That the clause be read a Second time.
This new clause introduces the changes announced on 20 June to the inheritance tax rules on lifetime gifts. The changes come in response to a recent Court of Appeal decision in the Eversden case. Everyone who has commented on the case has noted the wide-ranging tax-avoidance opportunities that it opens up. Almost all have gone on to say that they were too good to last and were bound to be tackled by early countervailing legislation. I agree with that assessment, and the Government have introduced this clause to achieve it.
I shall set out the relevant factors briefly. The Court of Appeal confirmed that married wealth owners could make what are called gifts with reservations. They are permanently free of the normal tax consequences, so long as the gifts are made to a trust and the trust initially provides an interest in possession to the donor's spouse. That means that married couples could remove assets from their inheritance estates, effectively without limit, by making lifetime gifts into the trust in the way that I have described, without losing any effective ownership. They could do so by using schemes where the interest for the donor's spouse is quite blatantly inserted purely to get the desired tax effect and is predestined to disappear after the shortest decent interval once it has served its purpose.
The schemes were of wide appeal, at least among the minority of people wealthy enough to have prospects of paying inheritance tax. The only essential requirement was that the donor should be married and have the prospect of wealth at death of more than £250,000.
| Next Section
| Index | Home Page |