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Mr. Redwood: Will the Paymaster General give way?
Dawn Primarolo: I just want to introduce the new clause, after which the right hon. Gentleman will of course want to speak. I shall be happy to respond to his points.
I remind the House that we are talking about the inheritance tax rules that were introduced in 1986, under the previous Conservative Government, and about the ways that people try to get around them.
The schemes could be used for all sorts of assets at all levels of wealth. They could allow married couples to remove the family home from inheritance charge on death, yet to continue to live in it during their lifetimes. That aspect has received much attention in the press, and among some of those who market these schemes.
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However, the schemes could be used equally well to shelter all sorts of other assets, including—notably—financial assets wrapped up in the form of an insurance bond. As for the amounts involved, the sums become a little more complicated if the couple's total wealth is significantly more than £1 million or so. Although executing one of these schemes at that level would not necessarily remove a couple from inheritance tax forever, it would remain a very attractive proposition.
The Government are not stopping, as some have suggested, an innocent piece of self-help for couples with modest homes who might be taken into inheritance tax by inflation in property prices. Even if that were true, tolerating tax avoidance would not be a sensible way to deal with the issue of house prices. In reality, however, the potential avoidance goes much wider, as I said. It goes all the way up the scale of wealth, undermining all the revenue from those who pay inheritance tax and account for the lion's share of the total yield. That is not fair to the wider body of taxpayers, nor to the balance of prospective inheritance tax payers, who cannot afford this sort of avoidance, or who do not engage in it.
Following on from the Court of Appeal ruling, it is essential that we stop now any possible future loss to the Exchequer. That is what the clause seeks to achieve, operational from 20 June.
Mr. Howard Flight (Arundel and South Downs): As happened with new clause 6, the Government are introducing this significant piece of legislation on Report. No doubt they will give the excuse that they wanted to hear the ruling in the Eversden case, but I submit that, had they wished to make changes as radical as the ones that they propose, they could easily have addressed the matter in the body of the Bill.
The use of defeasible life interest trusts in relation to homes has not been a matter of tax avoidance, as the Paymaster General suggested. It has failed her own test, which she set out in Committee, regarding the difference between accepted tax planning and tax avoidance. It has been widely known about, and the law has provided for inheritance tax gifts with reservations to be made.
Therefore, the new clause introduces what is, essentially, a new tax. The Paymaster General may be concerned that what has been used purely to protect the family could be used in other areas, but so far the scheme has been used solely in respect of family homes. Indeed, her own comments highlighted the problems described to me by constituents.
As we warned in the debate on last year's Finance Bill, the problem is based in particular in the rise in home values in the south of England. The Government have done and said nothing to deal with the knock-on problems that that creates for inheritance tax. I suggest that it is very much part of British culture for people to want to be able to hand on to their children the house that they own, or the value that they have built up in it. In the south of England in particular, there are a growing number of reasonably ordinary properties whose value is in excess of the inheritance tax threshold. The number has been estimated at between 1.5 million and 2 million properties. To date, the specific defeasible life interest trust has been used by people to gift their home to their children while retaining a right for the surviving spouse to live there until death. That is hardly a wicked thing to do; most families presented with the problem would want to do that.
Mr. Bercow : Given the need to make this debate on new clause 7 intelligible to the wider public, does my hon. Friend agree that the Paymaster General has a basic responsibility to tell us in broad terms the sort of revenue to the Exchequer that the new clause would deliver?
Mr. Flight: Yes, but she advised the press that the measure was designed to protect a significant part of the £2.4 billion per annum inheritance tax revenue. I suspect that it will do no such thing. One of our concerns, of which the Paymaster General will be aware, is that a likely reaction to not being able to achieve what most people want—what more and more couples who manage to stay together and bring up their children want—is a boost to the equity release market, in which
older people can sell all or part of their homes and retain the right to stay in them, thus releasing the cash value from their homes and then donating the cash released to their children.There are inherent dangers in such schemes, which the Government are unwilling to regulate. With so many people's pensions wrecked by the actions of the Government, many people are looking to those schemes for a source of income in old age.
Mr. Redwood: I detected a moral judgment in the Paymaster General's statement. How does my hon. Friend think the morality of such schemes compares with the morality of using offshore trusts in the creative and perfectly legal way that a number of former and present Government Ministers have done? As one who thinks that to be perfectly reasonable, I ask my hon. Friend how he feels the relative moral charge sheet rests from the Government's point of view.
Mr. Flight: My right hon. Friend has made his point. The middle England vote that the Labour party has been keen to retain is largely made up of citizens who believe that it is natural to want to hand on their house or its value to their children. That is much more straightforward than some of the fancy antics that certain past Labour Ministers got up to.
New clause 7 will turn out to have unintended consequences, and the Bill is full of many such examples. I referred earlier to the fact that it is extremely unlikely to achieve the bolstering of inheritance tax revenues that the Paymaster General is expecting.
The Paymaster General's letter refers to the fact that the Government are pursuing an application for leave to appeal to the Lords on the question of how gifts already made should be taxed. In other words, the Government are hoping to introduce retrospection; there would be no point in pursuing such an appeal were that not so. Specifically, the Government are seeking to get a ruling that the gifts of family homes made by older people who have entered into defeasible trusts will be brought back within the inheritance tax net.
Such an initiative will be seen by ordinary middle-class voters as a means of picking on them as they carry out a straightforward action in the interests of their children, which they feel entitled to do. I have to suggest to the Government that it is reasonably unlikely that they will win, but there seems to be an element of spite in seeking to introduce a retrospective element to this new tax.
We are not going to burn up yet more time that we do not have on a vote that we know we cannot win, but we leave the Government to reap their own bitter harvest of the growing hostility of home owners in middle England, arising from a measure that will be seen as spiteful and which will not be effective in raising inheritance tax revenue. It is understood that there is a case for preventing the use of such trusts in wider financial affairs, but the Government's approach to the fundamental wish of people to hand on their family home goes against the family and against British instincts.
Mr. David Laws (Yeovil): My hon. Friend the Member for Torridge and West Devon (Mr. Burnett)
anticipated this debate in Committee on 17 June when he asked the Paymaster General whether she would introduce proposals at any stage on inheritance tax, to which she replied:
- "I will certainly keep him informed of developments in due course."
- "is a tax levied on those who do not have sufficient money or assets to avoid it legitimately."—[Official Report, Standing Committee B, 17 June 2003; c. 613.]
We welcome the fact that the Government are addressing some of those loopholes in the new clause, as those steps ensure that inheritance tax does not simply become a tax that falls on those who are not wealthy enough to afford good tax advice, but ensure that the purpose of inheritance tax is maintained and that the tax that we anticipate collecting is collected as far as possible.
The hon. Member for Arundel and South Downs (Mr. Flight) raised a number of legitimate issues in relation to inheritance tax, but did not state whether the Conservative party's former desire to abolish it altogether still holds. He raised a number of issues that flow from the avoidance of inheritance tax, and not least from the increase in property prices in the last few years.
Before the 1997 election the debate—in my case, it was not conducted from within this House—was about a proposal by the then Prime Minister to abolish inheritance tax. At that time, the then Chancellor of the Exchequer was keen to emphasise that inheritance tax and capital gains tax were minority taxes paid by a small proportion of the population. I suspect that we were talking about tens of thousands of people in 1997. The criticism from the Labour party at the time was that the abolition of such taxes would simply benefit a small number of people.
I suspect that the Paymaster General is aware that concern about inheritance tax is now rising among a much broader proportion of the population and it may be that, in future, she will wish to address that concern in an amendment, a new clause or in a future Finance Bill. Property prices over the past few years have increased to such an extent that people who could by no means be considered wealthy have been caught in the inheritance tax net.
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