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Helen Goodman (Bishop Auckland) (Lab): Can the hon. Lady explain what sort of family reasons those would be?

Mrs. Villiers: Certainly. I will come to that in a moment.
 
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Flexibility is built into modern trusts to help people deal with the complexity of family life in modern Britain and provide responsibly for the future of their families. The Law Society survey to which I referred earlier reported one of its members as saying:

"I prepare at least one will every week of my working life—the majority of my clients who have set up life interest trusts in their will do so to protect children from a first marriage whilst looking after the second spouse or as protection for the children of the same marriage—all this talk of tax evasion is nonsense. The traditional family set-up is no more—trusts have evolved in line with this—it is a shame that the Government has sought to undermine this."

Typical everyday instances where people set up flexible trusts include, as the quote suggests, the need to provide both for a spouse from a second marriage and for the children of a first marriage. A trust can be an invaluable aid in achieving the difficult task of mediating between the interests of step-parents and stepchildren. Trusts are also used to provide for children when a surviving spouse is young and likely to remarry and possibly have children from a subsequent marriage, or to enable trustees to continue to look after the interests of a spouse when old age may mean that mental capacity is affected, or when people are not confident enough that they can foretell all the family circumstances that will apply in a few years. One must remember that wills may be made well in advance of death and in the expectation that they will hold good and provide the right answer for many years to come.

Helen Goodman: Can the hon. Lady explain why a person would want to set up a trust, rather than changing their will if, for example, they got married again or had more children? I do not see the need for a complicated trust device with special rules.

Mrs. Villiers: The trust allows the testator to split the property between his second spouse and his children in a way that he believes is sensible and balances their interests. The typical arrangement is for the second spouse to be given access to the income from the property and the right to live in a property, but for the capital to be preserved and passed on to the children on death.

The legislation ignores the realities of modern family life. Trusts provide an invaluable prop for those who are juggling the competing and sometimes conflicting interests of different family members—a prop that the Government wish to kick away. As Stephen Pallister of solicitors Charles Russell pointed out:

"Thinking of the numerous and obvious reasons why a spouse might leave their estate for the other on death—health, financial difficulties, unstable personality, second marriage and wanting to preserve the capital for the children of a first marriage, etc.—this is a gross mistake by the Government."

Even if people are prepared to sacrifice the flexibility that I have mentioned to avoid the new charges, there are further flaws in the Government's argument that there is no problem with their proposal because people can change their wills or trusts to prevent the new charges from applying. The first problem is that the power to vary the trust is exactly the type of flexibility that the Government seek to outlaw through the restrictive conditions on receiving the spousal exemption, so it seems odd that they are defending their actions by encouraging people to use the system that they propose effectively to outlaw.
 
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Secondly, many variations can be carried out only by going to court—for example, where children are involved—which may not give people permission to vary the trust. The costs of a High Court hearing in the chancery division are prohibitive and will not be justifiable in most of the cases covered by the new rules. Furthermore, there must be a question mark over how well the courts will cope with the significant burden of hearing so many cases.

Frankly, it is not easy to see exactly what tax problem the Revenue is targeting with its proposals. It has indicated informally that its concern is a situation in which the surviving spouse gives up their life interest and distributes all assets to the trust for the next generation. If that is the Revenue's concern, then it is attacking the wrong target. It is not the flexibility in the trusts that allows people to reduce their tax bill in the situation that I have outlined, but the use of the potentially exempt transfer system, which exempts the transfer of the life interest from inheritance tax, if the spouse survives for seven years after they have given up the life interest.

Mrs. Sharon Hodgson (Gateshead, East and Washington, West) (Lab): Is it not the case that setting up trusts is just a way for a few wealthy individuals to avoid paying inheritance tax?

Mrs. Villiers: As I have said, setting up a trust does not provide inheritance tax advantages. People set up trusts in order to look after their families.

Rather than clobbering all flexible trusts, why not retain the current, long-established rules for trust taxation, which have worked well, but provide that if a spouse's life interest terminates during their lifetime and the assets pass to a continuing flexible trust, then it automatically gives rise to a chargeable transfer, in which case the potentially exempt transfer regime does not apply? That would achieve the result that the Revenue wants more effectively, and it would do so without inflicting the collateral damage of infringing on people's freedom to provide prudently for the future of their families in the way in which they want to and of requiring 1 million wills to be rewritten. We are prepared to work with the Government and expert groups to draft a targeted amendment along those lines.

The Paymaster General (Dawn Primarolo): The hon. Lady has acknowledged that any transfer to a spouse is exempt. Will she explain why somebody would set up a trust during their lifetime to transfer assets that are exempt from inheritance tax to their spouse?

Mrs. Villiers: The problem in relation to the creation of lifetime trusts is not nearly as serious as the problem in relation to the creation of trusts on death, because the creation of lifetime trusts is much more unusual. The significant problem concerns the limitations on someone's right to set up a trust on their death.

Dawn Primarolo: As the hon. Lady has acknowledged, there will be no change to the rules on the transfer to the spouse on death of all interest in all
 
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property. Those rules will not be changed at all by these arrangements, so what is the point that she is trying to make?

Mrs. Villiers: The Paymaster General is right that there is no change to the rules on making outright transfers to the spouse. The Government propose to change the rules where trusts are set up for spouses, which is a significant restriction of the spousal exemption. Section 18 of the Inheritance Tax Act 1984 explicitly refers to the ability to set up trusts, and the Paymaster General proposes to limit the ability of people to set up such trusts.

Ann Coffey: Will the hon. Lady explain to the Committee why she feels comfortable in supporting trusts that protect the wealthiest members of our society from paying inheritance tax?

Mrs. Villiers: Trusts protect a wide range of some of the most vulnerable people in our community. If Members do not believe me, they should think back to my quotations from the Law Society—from people who are working on the ground managing people's arrangements for their wills. It is probably in the interests of lawyers for the proposals to go through, because everyone will have to go to them to get their wills changed, yet they care so passionately about the ordinary, middle-income, hardworking, prudent people whom they represent that they are campaigning against the changes in order to enable them to continue to be able to set up the trusts they wish.

Mr. Philip Dunne (Ludlow) (Con): I am sure that my hon. Friend is aware that for the past six or seven years every solicitor practising family law who has been asked to draw up a will has recommended to their clients that in the event that they have children or have been divorced, or both, it is in their interests that their will is written into a trust, irrespective of the value of assets in their estate. Moreover, given that average house prices are approaching the point whereby several years hence the majority of estates are likely to fall within the inheritance tax net, we are talking not about the rich but about householders.

Mrs. Villiers: I am grateful to my hon. Friend. For many years, it has been a standard part of more or less every will drafted for a family to include a trust because those arrangements make sense in balancing the different interests of different family members.

While I am broadly sympathetic to the objectives of the Liberal Democrat amendments, I prefer the approach taken in new clause 1 and amendment (c). I appreciate the importance of safeguarding the interests of civil partners, but new clause 1 and amendment (c) already cover that when read in conjunction with the existing legislation.

On new clause 2, I agree that postponement of the measures to give time for consultation and reflection would be very welcome. Amendment (a) and new clause 2 refer to life assurance. On Second Reading, the Chief Secretary said that life assurance policies are not affected by the Bill. If that is the Government's aim, I am not convinced that they have yet achieved it. Although
 
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reassurance on the point was rushed into the explanatory notes at the last minute, Kevin Martin, president of the Law Society, later disclosed:

"The Revenue has confirmed to us that the Finance Bill does indeed contain nothing on this. There is no specific exclusion for life policy trusts as has been widely claimed. Millions of wills and life policy trusts may be caught."

The Revenue's assurances on life policies seem to be based on the view that premium payments are not additions to the trust because they are made pursuant to the terms of the policy contract. That contested view of the legal position is scant comfort for the policyholders who could be hit with the new IHT charges. Skandia Life has said that as many as 4.5 million people could be    affected. In any event, life policies settled on accumulation and maintenance trusts would still be affected. The problem has not been solved, and I hope that the Government will consider taking appropriate measures to tackle it in the Bill.

I urge the Government to accept new clause 1 and amendment (c) and reverse their decision to impose new inheritance tax charges on trusts for spouses and civil partners. I urge them to scrap all the penal new inheritance tax charges that they are proposing. First, no proper consultation has taken place on these new taxes. The Chancellor left them out of his Budget speech and the Revenue failed to mention them in the entirety of a detailed two-year consultation process that it carried out on the taxation of trusts. Secondly, these taxes are retrospective. They apply to existing wills and trusts, many of which will be expensive, difficult and in some cases impossible to amend. Thirdly, no effective assessment has been made of their impact. Upwards of 1 million wills of ordinary working people may need to be reviewed and rewritten, with all the huge costs that that would entail. Finally, they would amount to a tax on prudent families and impact harshly on thousands of ordinary, hardworking people whose only crime is to provide responsibly for their families and to plan for an uncertain future.

If these harsh new tax proposals are anything to go by, the future that middle England faces in Brown's Britain is more uncertain and grim than ever.

4 pm

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