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Clause 111
Question proposed, That the clause stand part of the Bill.
Mr. Flight: With your indulgence, Sir Michael, I wish to make some reference to our amendment No. 8 to schedule 21, which covers the same territory as the clause.
The combination of clause 111 and its supporting schedule removes, from 10 December last, the availability of gift holdover relief on any transfers into settlor-interested trusts and makes consequential amendments to the penalties regime and information powers. We fear that, in certain circumstances, that could result in a double inheritance tax and capital gains tax charge. We also seek confirmation that the provisions will not in any way affect charities. Although we are reasonably satisfied that that is the case, it has been suggested to us that it could happen in some circumstances.
Under gift holdover relief, the settlor may have to pay capital gains tax if the asset being transferred has gained in value during his ownership, as a transfer into a trust is a deemed disposal for capital gains tax. A settlor-interested trust is one in which the settlor making the transfer will continue to have some interest and to derive some benefit—for example, income—from the assets, and in which the tax position should be entirely transparent. Arguably, the tax should therefore fall when the settlor's trustee disposes of the asset, not when the asset is moved into the trust. That restriction of gift relief has been presented as an anti-avoidance measure because people have been entering into tax-planning arrangements using a combination of settlor-interested trusts and gift reliefs to exploit the changes introduced by the Government to the definition of business assets for taper relief purposes.
We have objected before to the unfairness of the Government's definitions, under which, for example, a person who has owned a newly qualified business asset for only two years will qualify for full business asset taper relief, reducing their capital gains tax to 10 per cent., whereas another taxpayer who has held a similar asset for six years, since the introduction of taper relief in 1998, could find themselves not qualifying for taper relief on the first proportion of the gain between 1998 and 2000 and suffer a capital gains tax charge of 16.67
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per cent., despite the fact that they have held the asset longer. I recollect many such debates in Committees on previous Finance Bills. A similar change in definition will take effect from 6 April this year.
1.45 pm
Not surprisingly, such inconsistency has led to the use of settlor-interested trusts to reset the taper relief clock and thereby redress the inequality created by the Government's time definitions for taper relief. Logically, if gift relief is to be restricted, the taper relief should be amended along the lines that we have previously suggested.
The double tax issue could now arise where the transfer is to a settlor-interested discretionary trust where no beneficiary has an absolute right to income. Under current legislation, there is an immediate charge to inheritance tax on any transfer into a discretionary trust unless the transfer qualifies for an inheritance tax exemption—for example, a business or agricultural asset. The accounting profession has anticipated a restriction to gift relief for transfers to trusts used for avoidance, but the expectation was that gift relief would be stopped where an immediate inheritance tax charge arose—in other words, that there would be either an inheritance tax charge or a capital gains tax charge. However, the clause and the schedule could result in both charges being levied in circumstances in which no reliefs are available. I see that the Paymaster General is shaking her head, so I hope that she will be able to assure me that that is not the case.
The schedule requires clarification in respect of the notification obligations—are they via self-assessment or stand-alone?—and there are some detailed points that are worth focusing on. Sub-paragraph (7), on page 382, refers to
"a person in receipt of"
certain benefits. Our amendment No. 8 would extend that to people who qualify for such benefits even if they are not claiming them, because not every disabled person claims benefits.
New paragraph 169C, on page 380, refers to the possibility of a revocation of a section 260 or section 165 claim. Can the election be revoked? If so, what is the time limit for so doing? Does the normal limit of five years and 10 months obtain? Does a revocation need to be entered into by both parties, in the same way as a claim?
New paragraph 169F uses the concept of derived property, which was debated in the West v. Trennery case. Should not it be made clear that the property referred to is property within the settlement under consideration, not property passing from one trust to another?
The Second Deputy Chairman of Ways and Means (Sir Michael Lord):
Order. The hon. Gentleman is straying into different parts of the Bill. Does he intend not to refer to those parts again; and will he be reasonably brief? We are debating clause 111 stand part.
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Mr. Flight: Thank you, Sir Michael. I endeavoured to make it clear at the beginning of my speech that the clause and the schedule are interrelated. I want to make sense of the two together by pointing to issues that could do with a little clarification. I confirm that I shall not want to speak when we focus separately on the schedule.
New section 169 refers to a former spouse being requested to supply information.
Dawn Primarolo: I am sorry to interrupt the hon. Gentleman, but I want to be absolutely sure what I shall be replying to. I understand, Sir Michael, that we are discussing only clause 111, and that we shall then move on to the amendments to the schedule. I therefore intended to respond only to the points on the clause. It will be a bit difficult for me to do so if the hon. Gentleman puts all the subjects together.
The Second Deputy Chairman: I think that it would be sensible if we confine our remarks to clause 111 stand part. The hon. Gentleman asked permission to stray gently into amendment No. 8, which I did not stop him doing, but I think that he has probably strayed far enough now. Unless we keep these subjects in reasonable compartments, things can get quite confusing. Perhaps he will now come back to clause 111 stand part.
Mr. Flight: I have very nearly finished. I have two issues relating to the schedule, and I shall raise them when we discuss the schedule.
Will the Minister confirm that the provisions of clause 111 cannot result in a discretionary trust having a double tax liability to both inheritance tax and capital gains tax? If we cannot be persuaded by her answer, we might wish to vote against the clause. However, if our concerns can be addressed, we will accept it.
Mr. Burnett: I am happy to address the clause and not the schedule, although we have tabled amendment No. 42, which applies to schedule 21.
I should like to confine my points to the importance of holdover relief, especially for smaller businesses, and for sole traders and partnerships in particular. In Committee Upstairs, we shall no doubt discuss the inheritance tax changes proposed by the Government, especially on pre-owned assets, and how difficult it will be for taxpayers to alter capital accounts and partnerships if pre-owned asset provisions are introduced. It is important for the flexibility of business and of the economy—particularly in terms of helping smaller businesses—that we do not use a sledgehammer to crack a nut when we make tax changes.
Of course we will support genuine anti-avoidance provisions, but under the clause and schedule settlement legislation could apply a transfer to a settler-interested trust, thereby taxing the income of a trust as the income of a settlor. As has been said, the transfer could well be subject to inheritance tax if the assets were over the nil rate band or if they were not exempt. It is unfair to tax gifts as capital gains tax, because there is no cash arising from the gift with which to pay the tax. In due course, we shall discuss our amendment No. 42. Meanwhile, I look forward to hearing the Paymaster General's response to the matters that I have raised.
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Dawn Primarolo: I should like to respond briefly to the points made in the debate on clause 111 stand part. When we get to the amendments to the schedule, especially those relating to the taper relief, I shall have an opportunity to answer in greater detail the questions that have been asked.
Clause 111 will put an end to certain schemes designed to enable people to avoid capital gains tax by gifting assets into trusts before selling them—washing through gains. What people have been doing, as a first step, is transferring an asset into a trust in which they have an interest. They then claim gifts relief on the transfer so that the gain is held over and there is no tax to pay. The trustees can then use various techniques to ensure that when the asset is eventually sold, no capital gains tax liability arises, even in respect of the earlier held-over gain.
Among other things, the schemes have been used to avoid paying capital gains tax on the sale of second residential properties and on the sale of valuable shares in privately owned companies. The common feature of the schemes, and what I hope the House will agree is objectionable about them, is that without the interposition of the trust, the sale of the asset would attract capital gains tax. Trusts in which the transferor has an interest—known as settlor-interested trusts—are used in these avoidance schemes because they allow the person who is seeking to dispose of an asset without paying capital gains tax to retain an interest in the asset at all times and to benefit from the proceeds of the asset's sale.
This measure counters the avoidance by attacking the schemes at source. It will no longer be possible for people to defer a tax charge by claiming gifts relief when they transfer assets to a trust in which they have, or can obtain, an interest. The measure also restores related anti-avoidance legislation to stop abuse of the capital gains tax relief on gifts of shares to companies that was inadvertently repealed in 2003 by a prospective measure in an earlier Finance Bill. By stopping these avoidance schemes, clause 111 and schedule 21 will prevent people from exploiting the capital gains tax rules to gain an unfair tax advantage.
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