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Inheritance Tax: Mitigation of Double Charges

After section 104 there is inserted—
"104A (1)      This section provides for the mitigation to the extent specified, of double charges to tax arising in the circumstances specified (in subsection (2)).

(2)   The specified circumstances are—

(a)   an individual ('the deceased') makes a transfer of value to a person ('the transferee') of property which comprises a debt owed to him by another ('the debt'), and

(b)   the transfer is or proves to be a chargeable transfer, and

(c)   the deceased dies on or after 31st July 2005 and within seven years of the transfer of value, and

(d)   at the date of the deceased's death all or part of the debt has been written off, waived or released by the transferee or by any other person and such write off, waiver or release was made otherwise than for full consideration in money or money's worth, and

(e)   that part of the debt which is written off, waived or released was before such event, represented by or was attributable to or its value was derived in part or whole directly or indirectly from, other property being relevant property within the meaning given in paragraph 21 or 22 of Schedule 15 to the Finance Act 2004, and

(f)   the deceased is for the purposes of IHTA 1984 or section 102(3) Finance Act 1986 beneficially entitled immediately before his death to the relevant property or if not so beneficially entitled the relevant property was the subject of a potentially exempt transfer by virtue of section 102(4) of the Finance Act 1986, and

(g)   the relevant property—

(i)   is comprised in the estate of the deceased immediately before his death within the meaning of section 5(1) of the Inheritance Tax Act 1984 and the value attributed to it is transferred by a chargeable transfer under section 4 of that Act, or

(ii)   is property transferred by the potentially chargeable transfer to which sub-paragraph (f) applies, value attributable to which is transferred by a chargeable transfer.

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(3)   Where this section applies, there shall be calculated, separately in accordance with sub-paragraphs (a) and (b), the total tax chargeable as a consequence of the death of the person—

(a)   disregarding so much of the value transferred by the transfer of value of the debt (being the property to which paragraph (2)(a) refers) to the extent that the debt has been written off in accordance with paragraph (2)(d) above, and

(b)   disregarding so much of the value transferred by the transfer of value of the relevant property (being property to which paragraph (2)(g) refers) as is represented by or attributable to the value of that part of the debt which has been written off, waived or released in accordance with sub-paragraph (2)(d).


(a)   Whichever of the two amounts of tax calculated under paragraphs (3)(a) or (b) is the lower amount shall be treated as reduced to nil but subject to sub-paragraph (4)(b) the higher amount shall be payable.

(b)   Where the amount calculated under paragraph (3)(a) is higher than the amount calculated under (3)(b)—

(i)   so much of the tax chargeable on the value transferred by the chargeable transfer to which paragraph (2)(g) refers as is attributable to the amount of that value which falls to be disregarded by virtue of paragraph (ii) shall be treated as a nil amount, and

(ii)   for all the purposes of the 1984 Act so much of the value transferred by the debt to which paragraph (2)(a) refers as is attributable to the property to which paragraph (2)(d) refers shall be disregarded.".'.—[Mr. Philip Hammond.]

Brought up, and read the First time.

Mr. Philip Hammond: I beg to move, That the clause be read a Second time.

New clause 5 addresses an anomaly—indeed, I might call it an injustice—that is estimated to affect about 30,00 people, and which we believe was not intended to arise. We recognise that there may be ways of achieving the relief that the new clause seeks other than amendment of the underlying primary legislation, but this is the route that we have chosen. I hope that I shall be able to secure a commitment from the Paymaster General, if not to accept the new clause as drafted, at least to provide relief from the double charge that I shall describe by whatever means the Revenue finds most appropriate, so that those 30,000 people can get on with their lives with some certainty about their position in relation to inheritance tax.

3 pm

If I might indulge in a little background history, the House will recall the closing of an inheritance tax avoidance scheme involving pre-owned assets in the 2004 Finance Act. The scheme, used by many families, essentially involved disposing of the family home while retaining the right to live in it. It relied on the creation of two trusts to avoid the rule that would make a transfer ineffective for inheritance tax purposes where an interest—the right to continue living in the house—was retained when the gift was made.

Under the scheme, the house, rather than being given away, was sold to a trust—let us call it trust one—at an arm's length price in exchange for an IOU. Because that was an arm's-length market price transaction, it had no inheritance tax implications—the individual had simply
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swapped assets in the form of a house for an IOU. Then came the clever bit—the IOU was gifted to a second trust for the benefit of the donor's children, that being a trust in which the donor had no interest. Thus the gift of the IOU to the second trust became a potentially exempt transfer—if the donor survived seven years from the date of the gift, no inheritance tax would be payable. Of course, the gift of the house to the children's trust would also be a potentially exempt transfer, and if the donor survived seven years, no inheritance tax would be payable, but only if the donor retained no interest in the house. If the donor wanted to live in the house, that route would not work for inheritance tax purposes, and the use of the double trust device allowed the potentially exempt transfer benefit to be obtained while retaining a lifetime interest in the house for occupation.

Let us be clear: that was a convoluted, although legal, piece of tax planning, prompted by the ever-widening net of inheritance tax. That tax was originally intended to capture the estates of the wealthy on death. The threshold has been allowed to reduce in real terms in relation to the value of the principal assets that make up modest estates—people' houses—to the extent that in my constituency and, I am sure, in many other parts of the country, an estate comprised solely of a three-bedroomed former council house will be caught by what has become the greatest stealth tax of all, a tax which, until recently, ordinary people did not have to bother themselves about.

Mr. Charles Walker (Broxbourne) (Con): Does my hon. Friend agree that the tax at the current threshold penalises most people living in the east and south-east who might be on moderate incomes and have moderate homes? Does he believe that the original intention of the tax when introduced was to hit such people?

Mr. Hammond: My hon. Friend makes two very good points. Clearly, it was not the intention of inheritance tax when introduced to hit the estates of modestly-off people—it was a tax at death on the estates of the wealthy, and was originally conceived as a tax on land. Its scope is now far wider than was originally intended, and it has become one of the great stealth taxes, largely because of the rapid increase in house prices.

My hon. Friend makes another excellent point: its incidence is not evenly distributed across the country because of the historic disparity in the rise in house prices and the level of house prices. People on average incomes in parts of the south-east, London and eastern England are likely to be caught by the tax, and people on average earnings in other parts of the country are much less likely to be caught by it, because of the less rapid escalation in the value of their housing assets. That is another aspect of the unfairness of using fiscal drag as a way of expanding the scope of a tax.

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