Mr. Flight: I understand the Minister's point, and we are agreed on the mischief that needs to be blocked, but the other side of that coin, as I set out, is that there are perfectly bona fides situations where a property is provided, to which these measures would unfairly apply.
Dawn Primarolo: I was coming to that. This schedule has not changed the way in which capital gains tax and inheritance tax laws interact. There may be a charge to both inheritance tax and capital gains tax if within a seven-year period the person who has made the transfer of values that are immediately chargeable to IHT exceeds the IHT-exempt amount. CGT is due where the gain is chargeable within the rules. The effect of gifts relief is to transfer the CGT liability in respect of a chargeable gain from the transferor to the transferee, whose adjusted acquisition cost for CGT purposes reflects the fact that no CGT or a reduced amount thereof is paid in respect of the transfer. Any inheritance tax paid on the transfer is therefore allowed as a deduction in computing the transferee's gain, and none of these provisions has changed. The measure prevents people from exploiting
Column Number: 354the interaction of the gifts relief and the private residence relief rules to realise a gain on residential property tax-free.
The hon. Gentleman also made the point that, for instance, people with a family home that came from a discretionary trust some years ago will either have to move to avoid the CGT on the sale of their home or face a tax bill like no-one else in the country. I am trying to make the point that the current rules are not disturbed. We are dealing specifically with the interaction of the gifts relief and the residential relief, at which point no tax is paid to the Exchequer. We are now seeing a considerable number of schemes exploiting this arrangement, and it is necessary that the Government move to defend that revenue.
I am sure the hon. Gentleman would agree that the tax rules are quite clear, and where a person puts in arrangements to avoid the tax charge that is clearly to be levied against the property, it is not unreasonable for the Government to move to ensure that the rules operate as they should, and to prevent that exploitation from occurring. That is precisely what we are doing in schedule 22. I hope, therefore, that he will not press his amendments to the vote, but if he does, I will ask my hon. Friends to oppose them.
Mr. Flight: As I said a moment ago, we share a perception of what the perceived mischief is, and I felt I described it rather more simply and clearly. We are not opposed to measures to block up such mischief. Our concerns are that the measures being taken could fall unfairly on bona fides situations, although I was pleased to hear the Paymaster General's confirmation on the interaction between IHT and CGT.
I shall first ask the Paymaster General for a clarification that she will be aware has been generally sought. In paragraph 6 of schedule 22, new section 226A of the Taxation of Chargeable Gains Act 1992 allows private residence relief to continue if the hold-over claim under section 260 of that Act is revoked. In the previous paragraph, section 260 does not contain a specific right to revoke the election. Is there any time limit during which such a revocation can be made, or does the normal five years and 10 months apply? Does a revocation need to be entered into by both parties in the same way as a claim?
The Chartered Institute of Taxation has also argued that the route being employed by the Government to address the mischief is inappropriate and that it would have been better and simpler to have legislated so that main residence relief is not available on the hold-over gain. The institute is also concerned that there is an element of retrospection in the arrangements and believes that it should contain a more suitable set of commencement and transitional provisions and that taxpayers should, at least, be able to undo the effect of the earlier election and pay whatever tax would have been due if it had not been made. The institute also suggested that there should be a backstop date—for example, April 1997—with the new provisions applying only after that date.
The Paymaster General has, in general, not convinced me that bona fides situations will not be
Column Number: 355unfairly disadvantaged. I broadly accept that amendment No. 1 may not work, but it is an attempt to simplify the drafting. She argues that amendment No. 30 would leave the door open to continuing exploitation, and I will take her word that neither amendment satisfactorily addresses the fundamental issues that we and others are concerned about. However, I would like to hear a clearer defence, if it exists, to show that bona fides situations are not disadvantaged by the proposed measures.
Dawn Primarolo: The hon. Gentleman asked about time limits for revocation, whether both parties need to be involved, and how the gift hold-over claim can be revoked. If a claim was made within a tax return and the window for amending that return has closed, the person who made the gift cannot undo the position and is stuck with the consequences of the decision to make that arrangement in the first place to seek to avoid the tax. Likewise, if a claim was outside a return and the window for amending it has passed because it is more than 12 months from the date that the claim was made, the person cannot undo the position and is again stuck with the consequences of that decision.
We are back to a point that we have discussed before about those who undertake such tax planning in the full knowledge that it is designed to avoid paying tax even when legislation clearly says that tax is liable on the gain. They enter into those arrangements by choice, so they cannot say, ''I made that choice and I might have got away with it, but I am not going to now, so I want to revisit my choice with hindsight and make different arrangements.'' If we cater for that, we would be saying to those who seek, through tax planning, to avoid tax for which they are clearly liable, ''If you don't manage it on the first go, don't worry, we'll let you take another run at it by undoing the arrangements that you originally put in place and seeing if there's something else you can do to avoid it, or you can play by the rules.''
The hon. Gentleman has made this point in various ways during debates on the Bill, and I have responded in various ways. If people seek to avoid payment of tax that tax legislation says is clearly liable, they must take responsibility for their choices.
On revocation, it is clear that the tax legislation does not intend that people should seek gifts relief and then trigger residence relief as if the property was their prime property, the one that they occupy. I know that the hon. Gentleman understands that. It is right that we should make such changes, and frankly it is high time that people understood that consequences flow from their choices and that the tax system is not static but can change. I am reminded of the point that my hon. Friend the Member for Wolverhampton, South-West (Rob Marris) made on clause 162 of the 2003 Finance Bill about those who had entered into 25-year mortgages with mortgage relief. Mortgage relief was progressively reduced over time by the Conservative Government and this Government. No one argued that people should carry on receiving it or that they
Column Number: 356should be able to revisit financial arrangements that they had made earlier. We all make choices.
I am very firm on this point and will continue to echo it through the stages of the Bill. The clear message to those who want to tax plan is that you can tax plan, but if we change the system, you are stuck with your choices. That is perfectly reasonable; that is life.
The hon. Member for Arundel and South Downs asked whether both parties would be subject to a revocation. That would be the case only if both parties were required to make the claim—it would not automatically have to be both parties. However, that will not be the case for gifts to trust. Trustees of settlements make gifts relief claims only if they are the party making the disposal.
The hon. Gentleman's final point was about claims being revoked. We have made no changes to the claims rules. Gifts relief is given if the transferor makes a claim, and the normal rules relating to withdrawal of that claim apply. That is still the case. Thus, a claim cannot be withdrawn or amended after it has become final, except in certain exceptional circumstances, which are provided for. Otherwise, it may be withdrawn at any time, and people can vary their claims as long as they are not final. Again, he well knows that that principle operates throughout the tax system for final claims, and that it is entirely reasonable.
The hon. Gentleman's arguments have not convinced me. The purpose of certain arrangements is to avoid tax. The purpose of schedule 22 is to block such opportunities. People take advice when they enter the schemes. They know full well what they are doing and that there will be consequences if any Government of the day move to ensure that the tax system operates properly. I believe that the hon. Gentleman, were he ever in the position of a Treasury Minister faced with such prospects, would make exactly the same decisions as I have, because it is the fair way to proceed.
The Chairman: Before I call the hon. Gentleman. I hope that the Committee does not think that I am feeling very lax this morning, but the Paymaster General's use of ''you'' in that context is entirely consistent with the fact that, unfortunately, Chairmen of Finance Bills are also covered by the legislation with which we are dealing.
Mr. Flight: The Paymaster General thinks she is being very clever by finding a route to make measures retrospective that are technically only retroactive. I have a long letter from leading counsel and as a result I have written to the Joint Committee on Human Rights about clause 84 and schedule 15. It has been a long-established practice of this House not to enact retrospective legislation. There is a very subtle difference that the Paymaster General ignores between dealing with changing the rules on tax going forward and finding a method of retrospectively impacting on an individual.
If all the Paymaster General's moral preaching is correct, I very much hope that the Government will pass legislation as a result of which the £1 million saved by the Labour party on a clever bit of VAT
Column Number: 357avoidance, to which I have referred twice, will be made retrospective. Oh no, we have not had that; we have not had a dickie bird about that. Of course, all bodies, including the Labour party and lots of its Members of Parliament perform the tax planning that is available to them within the law; it is only human nature. I strongly object to the tone of the Paymaster General's comments.
The Government's measures are contrary to British traditions, and we will see what the Joint Committee has to say about the presentation of what is retrospective as retroactive. It is a clever way round the established rules on the difference between retrospection and retroaction.
Government and Opposition Members agree on what the mischief is, we support prevention and accept that there has been an exploitation of the interaction of IHT and CGT. The disagreements are twofold: first, we disagree on the retrospective nature; and secondly, as I said earlier, we are concerned that bona fides situations will end up liable to tax charges.
Neither of our amendments is worth putting to the vote, but we cannot support the schedule for the reasons that I have outlined.
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