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Session 2003 - 04
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Standing Committee Debates
Finance Bill

Finance Bill

Standing Committee A

Thursday 20 May 2004

(Morning)

[Mr. John McWilliam in the Chair]

Finance Bill

(except clauses 4, 5, 20, 28, 57 to 77, 86, 111 and 282 to 289, and schedules 1, 3, 11, 12, 21 and 37 to 39)

Schedule 15

Charge to income tax on benefits received by former owner of property

9.30 am

Amendment proposed: No. 149, in

    schedule 15, page 348, leave out lines 2 to 8 and insert—

    '20 (1) This paragraph applies where—

    (a) a person (''the chargeable person'') would (apart from this paragraph) be chargeable under paragraph 3 (land) or paragraph 6 (chattels) for any year of assessment (''the initial year'') by reference to any property (''the relevant property''), and

    (b) he has not been chargeable under the paragraph in question by reference to the relevant property in respect of any previous year of assessment.'—[Dawn Primarolo.]

The Chairman: With this it will be convenient to discuss the following:

Amendment No. 62, in

    schedule 15, page 348, line 4, leave out

    'the year of assessment 2005–06'

    and insert

    'any year of assessment following the year of assessment 2004–05 (''the relevant year'')'.

    [R] Relevant registered interest declared.

Amendment No. 63, in

    schedule 15, page 348, line 8, leave out 'that' and insert 'the relevant'.

Amendment No. 64, in

    schedule 15, page 348, line 11, leave out

    'the year of assessment 2005–06'

    and insert 'the relevant year'.

Government amendment No. 150.

Amendment No. 65, in

    schedule 15, page 348, leave out lines 13 to 19 and insert—

    '(b) the property shall subject to the provisions of paragraph 6 of Schedule 20 of the 1986 Act be treated for the purposes of Part 5 of the 1986 Act (in relation to the chargeable person) as property subject to a reservation;

    (c) and for as long as the property is so treated section 102(3) and (4) of that Act shall apply; and

    (i) no other person or persons shall for the purposes of the Inheritance Tax Act 1984 be treated as beneficially entitled to the property and the property shall not be treated as ''relevant property'' under the provisions of section 58 of that Act; and

    (ii) on the death of the chargeable person the property shall be deemed for the purposes of the Taxation of Chargeable Gains Act 1992 to be disposed of and immediately reacquired by the person or persons then competent to dispose of the property and no chargeable gain shall accrue on that disposal;

    (iii) the provisions of the Taxation of Chargeable Gains Act 1992 shall apply on any disposal of the property as if

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    the person disposing of the property was the chargeable person.'.

Amendment No. 102, in

    schedule 15, page 348, line 23, at end insert—

    '(4) An election made under this paragraph shall not be valid and the chargeable person shall be treated as the settlor of the property under the provisions of Schedule 4 of IHTA 1984 if—

    (a) within two years of death of the chargeable person the relevant property is transferred to a maintenance fund; and

    (b) a direction is given in respect of the property under the provisions of paragraph 1(1) of Schedule 4 of IHTA 1984.

Government amendment No. 151.

Amendment No. 66, in

    schedule 15, page 348, line 26, leave out

    'the year of assessment 2005–06'

    and insert

    'any year of assessment following the year of assessment 2004–05 (''the relevant year'').'.

Amendment No. 68, in

    schedule 15, page 348, leave out lines 29 to 36 and insert—

    '(a) the property shall subject to the provisions of paragraph 6 of Schedule 20 of the 1986 Act be treated for the purposes of Part 5 of the 1986 Act (in relation to the chargeable person) as property subject to a reservation.

    (b) and for as long as the property is so treated section 102(3) and (4) of that Act shall apply; and

    (i) no other person or persons shall for the purposes of the Inheritance Tax Act 1984 be treated as beneficially entitled to the property and the property shall not be treated as ''relevant property'' under the provisions of section 58 of that Act; and

    (ii) on the death of the chargeable person the property shall be deemed for the purposes of the Taxation and Chargeable Gains Act 1992 to be disposed of and immediately reacquired by the person or persons then competent to dispose of the property and no chargeable gain shall accrue on that disposal;

    (iii) the provisions of the Taxation of Chargeable Gains Act 1992 shall apply on any disposal of the property as if the person disposing of the property was the chargeable person'.

Amendment No. 67, in

    schedule 15, page 348, line 30, leave out

    'the year of assessment 2005–06'

    and insert 'the relevant year'.

Government amendments Nos. 152 to 154.

Amendment No. 69, in

    schedule 15, page 348, line 46, leave out '2007' and insert

    'following the end of the relevant year'.

Government amendment No. 155.

Amendment No. 70, in

    schedule 15, page 349, line 2, leave out '2007' and insert

    'following the end of the relevant year'.

Government amendment No. 156.

Amendment No. 71, in

    schedule 15, page 349, line 5, leave out '2007' and insert

    'following the end of the relevant year'.

Mr. Howard Flight (Arundel and South Downs) (Con): I welcome you to the Chair, Mr. McWilliam.

The Government amendments in the group go some way towards softening the deadlines for election to

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bring an asset back into the estate for inheritance tax purposes, so that court situations after 2005–06 are covered; otherwise, unfairly, it might not have been possible for people to sort out their affairs. The amendments extend the deadlines for the election from the fixed 2007 date to the filing date for the first income tax year in which the chargeable benefit would otherwise arise. We welcome that change, but it addresses only the issue of the timing of the election, and not other aspects covered by our amendments Nos. 65, 68 and 102.

I bracket together amendments Nos. 62 to 64, 66 and 69 to 71. It makes sense to take them together as they are all, in different ways, included to enable taxpayers to re-order their affairs—as is fair—by making an election under the schedule in relation to any tax year. There are many situations in which a taxpayer might be liable to the new charge as a result of an unexpected change in their circumstances. For example, if one of the joint owners of an affected property moves abroad, the ability to elect to have the property revert to the donor's estate for inheritance tax purposes should surely, in fairness, be available in each tax year—that is, the tax year in which the change of circumstances bites.

Mr. John Burnett (Torridge and West Devon) (LD): I support what the hon. Gentleman says, but has it not always been enshrined in inheritance tax legislation that ''revert to settlor'' should be exempt and available at any time?

Mr. Flight: I thank the hon. Gentleman for his intervention. He knows a great deal more about the law on the matter than I do. I am sure that he is right, and he is in essence reinforcing my point.

If someone elects to have transferred property revert to the estate of the donor for IHT purposes, as the transitional provisions allow, surely, in fairness, the donor should be allowed to pursue or put in place the option that he would have had anyway before making the original transfer—that of transferring a property to a maintenance fund. Why should he not be able to mitigate his tax position thus, especially as he may not have taken the time, or the opportunity, to take out life insurance to cover the IHT liability on his death, believing that he had made a perfectly legal transfer to the next generation? In essence we are saying that, at the very least, the quid pro quo for the retrospection of the arrangements is that one can turn the clock back and have all the options that were available when one made the legal arrangements.

On amendment Nos. 65 and 68, a proviso ensures that having elected to be subject to the gift with reservations rules, the chargeable person will not be liable to inheritance tax charge if he falls within one of the normal exemptions to those rules. There is, first, a provision to avoid double taxation, by ensuring that, following an election, the property in question is also not treated as part of someone else's estate or subject to inheritance tax for discretionary trusts.

Secondly, a provision is included to avoid double taxation by ensuring that, following an election, the

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property would be subject to an uplift for capital gains tax purposes on the death of the chargeable person. It is generally accepted that one should not be subject to both inheritance tax and capital gains tax in relation to the same asset. It is clear that there is an automatic capital gains tax base value uplift on death and that should surely also apply to property that is deemed to have reverted to the taxpayer's estate under the transitional provisions of the schedule. As I understand it, the present situation is that if one elects to pay inheritance tax, one pays it on the value at death. However, the new base cost that the child or other heir takes on is not that value, but the historic value at which the transfer into a trust was originally made. That seems to be unfair and unreasonable.

Thirdly, a provision is included to ensure that the reliefs to which the chargeable person would have been entitled, such as principal private residence relief, taper relief or indexation relief, would apply had they not disposed of the property. In other words, as far as possible the provisions ensure that the chargeable person is not prejudiced by having disposed of the property under one set of tax rules. For cash-flow reasons they are now effectively obliged to opt to pay IHT on the value at death. I can imagine the Paymaster General saying, ''Well, hard luck to old people who are engaged in those schemes. Why should they be returned to a starting again basis?'' That is unreasonable. We have argued extensively, and virtually everyone other than the Paymaster General perceives, that the impact of the changes is retrospective on elderly individuals. Surely, if we are to have the option to pay IHT it should be on the basis of turning the clock back, and one should enjoy the same arrangements as one would have done at that time.

Amendment No. 102 is in essence one that was put to me by the Historic Houses Association. It includes a further sub-paragraph to the effect that if an election had been made under paragraph 20 and within two years of the death of the chargeable person, the relevant property would be transferred to a maintenance fund. The election would not have effect, but the chargeable person would be treated as the settlor of the property for the purposes of schedule 4 of the Inheritance Tax Act 1984.

 
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