|Previous Section||Index||Home Page|
New clause 5 addresses an anomalyindeed, I might call it an injusticethat 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.
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 interestthe right to continue living in the housewas retained when the gift was made.
Under the scheme, the house, rather than being given away, was sold to a trustlet us call it trust oneat 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 implicationsthe individual had simply
6 Jul 2005 : Column 344
swapped assets in the form of a house for an IOU. Then came the clever bitthe 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 transferif 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 estatespeople' housesto 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 peopleit 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.
|Next Section||Index||Home Page|