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Mr. Burnett: I am very grateful to the Paymaster General for giving way; she is always very courteous in these debates. Will she elaborate a little on the steps taken to wash out gains when assets are in a trust? I am sorry about the length of this intervention, Sir Michael, but the right hon. Lady and I debated at length Upstairs the other day the new UK-New Zealand double tax treaty, and we referred to capital gains tax avoidance at some length during that debate. Is that part and parcel of what the Government have in mind with the anti-avoidance provisions, or is it something else? What mischief is she is trying to overcome?
Dawn Primarolo:
I have explained how the mischief operates in terms of capital gains tax. Perhaps it will satisfy the hon. Gentleman if I elaborate on what the measure does not apply to. One of the interesting challenges for a tax Minister is whether we have to descend to being tax planners as well, to challenge our own tax system, but I shall not be tempted down that
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route. In order properly to represent the Government and the best interests of the taxpayer, I confine my work as a Treasury Minister to ensuring that mischief does not happen; I do not advise on any mischief that might happen in future.
The hon. Gentleman said that we were using a sledgehammer to crack a nut, and asked whether the measure would unfairly hurt honest taxpayers. That is a perfectly reasonable question. Government policy is to stop people reducing their tax bills by using a settlor-interested trust. The fact that tax advisers have found such schemes a useful way of increasing business asset taper relief is no reason to leave it undisturbed. We should have that discussion when we consider the hon. Gentleman's amendment.
2 pm
The Government's position on the taper relief and the reforms from the 2002 Finance Bill represent a point that I have addressed several times in Committee over the years. I am happy to explain again why the Government have not backdated taper relief rules, and I am sure that we will explore that when we come to the amendment. That is a better point at which to do so in terms of what is and is not allowed.
Mr. Flight: I thank the Minister for kindly giving way. For the sake of clarification, will she confirm that, however we define it, the mischief is essentially that which I set out, which is the use of settlor trusts to change the acquisition date for the purpose of taper relief, or are there other mischiefs of which I am not aware?
Dawn Primarolo: There are other mischiefs. I am trying, Sir Michael, not to drift into the debate that we should rightly have on amendment No. 42, but that is what has happened. Shares in UK companies are gifted to a trust in which the donor is a beneficiary and tax is deferred, as I explained in my opening remarks. The trust sells the shares to another company, but, at the same time, the donor's beneficiary interest in the trust is sold tax free to a non-resident company and the trustee creates a loss to match the gains. It is claimed that the rules interact so that the original donor does not pay any tax on the gains and the trustees do not pay any of the deferred tax. The availability of the gift relief on the initial gift to the trust is the foundation on which the whole scheme is built.
There has been no change in Government policy on business taper relief reform. Business asset taper relief supports enterprise. We have had this discussion at length many times in the House and the matter has been discussed during consideration of two Finance Bills. Government policy is that taper relief changes should not be backdated because that would reward past decisions rather than incentivise future behaviour. That is one of the issues that relates to the clause and the subject of the amendment tabled by the hon. Member for Torridge and West Devon (Mr. Burnett). Perhaps we should come to that, but it is not the only issue.
People are disposing of assets to others. It is right that that disposal is a chargeable event. By deferring tax, the gifts relief rules recognise the fact that some people may
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not receive any money on giving the asset away. The hon. Gentleman is more familiar with that provision than I am, because he has operated it. The deferral is the cancellation of the liability, which is not acceptable.
Mr. Burnett: On a point of curiosity, I wonder whether the Inland Revenue challenges such avoidance.
Dawn Primarolo: Sir Michael, may I ask the hon. Gentleman which one of the avoidances covered by the clause he is referring to? I beg your pardon, Mr. McWilliam, I have promoted you. I hope it will come soon.
The Temporary Chairman (Mr. John McWilliam): It is about time.
Dawn Primarolo: I could not have put it better myself.
In terms of the role of the Inland Revenue, and as a Minister who is enthusiastic in defending its work in ensuring that the tax system operates properly, I should say to the hon. Gentleman that when mischief is seen, the Revenue will challenge it. We are drifting away from the debate on the clause, but, as the hon. Gentleman well knows, tax planning schemes can sometimes have already taken effect by the time they become visible. However, that is a debate for another day.
The hon. Member for Arundel and South Downs (Mr. Flight) asked about charities, and he is particularly worried about whether people will be discouraged from gifting assets to charities or museums. He should not be worried about that. There is no change to rules for gifts of assets to charities and other special bodies. We have also excluded gifts to trusts set up for the preservation of historic buildings, which may have been the issue that he wanted to touch on.
The hon. Gentleman—like, I think, the hon. Member for Torridge and West Devon—touched on the question of the interaction with inheritance tax, or IHT. The position in respect of inheritance tax is unchanged. People will still be entitled to inheritance tax relief for business property transfers into settlor-interested trusts and, where appropriate, to the inheritance tax nil rate band. None of those schemes in practice involves inheritance tax liability. That may well be because of the business property IHT relief, the IHT nil band rate or the fact that a transfer by an individual to a trust in respect of which he is the person entitled to the income is not a chargeable transfer. That is one reason why most cases will not be caught by the provision. May I leave the issue regarding the taper clock on shares until we consider the relevant amendment, because we need to explore it?
Finally, may I deal with the question asked by the hon. Member for Arundel and South Downs about revocation of claims? This is a claim, not an election, so I am advised that sections 165 and 260 are claims-based sections and the normal rules relating to the withdrawal of claims apply. Thus, a claim cannot be withdrawn or amended after it has become final.
Within the time limit for amending the claim, it may be withdrawn at any time. If a claim is made within a
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return and the window for amending that return is closed, the settlor cannot undo the position, so they are stuck with the consequences of the decisions they made when they made the claim. Likewise, if a claim is made outside a return and the window for amending the claim has passed—12 months from the date when the claim was made, for example—the settlor cannot undo the position. Again, he is stuck with the consequences of his decision to make the claim.
The hon. Gentleman made a point about both parties making a claim. Trustees of settlements make gift relief claims only where they are the party making the disposal. I hope that that clarifies the position with regard to revocations.
Mr. Flight: May I return to the previous point, on which the hon. Member for Torridge and West Devon and I expressed a concern that a discretionary trust could have both an inheritance tax and a capital gains tax liability when agriculture or business exemptions did not apply? Is that the Paymaster General's understanding? If so, will the Government propose a way to stop such double taxation arising?
Dawn Primarolo: I know that the Opposition often attack the Government for looking for revenue at every point, but I assure the hon. Gentleman that we are not venturing into double taxation. There would be a huge outcry were we to ask people to pay tax twice on the same income or the same assets. If he wants me to do so, I will get my officials to draft a detailed reply. As a matter of principle, he and I may disagree on many points in this Finance Bill, as in previous ones, but we will not disagree on the fact that double taxation is not acceptable. I therefore commend the clause to the House.
Question put and agreed to.
Clause 111 ordered to stand part of the Bill.
Schedule 21
Mr. Flight: I beg to move amendment No. 8, in schedule 21, page 382, line 10, at end insert
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