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Mr. David Gauke (South-West Hertfordshire) (Con): I had hoped that we might find a few areas of consensus on this issue. There is clearly a range of views on inheritance tax, but I disagree with the hon. Member for Rhondda (Chris Bryant), who suggested that the new clause is an attack on the principle of IHT. Not all my colleagues will agree, but I think that there is a role for inheritance tax in our system. It may not apply to many people in the Rhondda, but it does to a lot of people in South-West Hertfordshire. The rate may also be open to question, but I do not disagree with the basic idea of inheritance tax.
In addition, the saloon bar wisdom is that wealthy people get around paying inheritance tax by using trusts. I see nothing wrong with trying to address genuine tax evasion; wealthy people should not be able to evade the tax when ordinary people in South-West Hertfordshire, Falmouth and Camborne or anywhere else are stuck with the liability.
As my hon. Friend the Member for Chipping Barnet (Mrs. Villiers) said, the Government have expressed the view that, essentially, trusts should be tax-neutral, and I support that. As she also noted, the Revenue's policy in reforming the income and capital tax treatment of trusts has been to create
"a tax system for trusts that does not provide artificial incentives to set up a trust but, equally, avoids artificial obstacles to using trusts where they would bring significant non-tax benefits."
I see nothing wrong with that. Since 1894, when estate duty was introduced, certain types of trust have been equated with outright ownership, and taxed accordingly.
Perhaps the Paymaster General will correct me if I am wrong, but I believe that there is a consensus about the value of the spousal exemption. As my hon. Friend the Member for Chipping Barnet said, it was introduced in its current form in 1975, but in some form or other it dates back to 1896. The need for the exemption is easy to understand; in most cases, an inheritance leads to a windfall, but a death usually results in a fall in income and an element of hardship for the surviving spouse.
In addition, there is usually a shared family home. Given the emotional concerns that follow a loss, it would be unduly harsh for a spouse to have to sell a house to pay an inheritance tax bill. Clearly, the particular circumstances of spouses need to be considered, and the Civil Partnership Act 2004 has extended the number of people in that category. We need to ask a couple of questions about the Bill. Does it continue to apply to tax trusts in the same way as to outright gifts, and does the spousal exemption continue to apply?
The Government might argue that the spousal exemption will apply in respect of immediate post-death interests, but the professional advice that I have seen maintains that that will not work because, in practice, it is almost impossible to meet the conditions. Moreover, it is held to be
"nigh on impossible for one spouse to leave their estate in trust for the other and obtain the spouse exemption."
As my hon. Friend the Member for Chipping Barnet pointed out, there are specific conditions in the draft proposals in respect of inheritance tax that make it very difficult for most trusts to work and still obtain the spousal exemption under the immediate post-death interest definition. Condition 3 requires that the surviving spouse interest can be ended only during her lifetime with her consent. Consequently, a will that states that the surviving spouse has a right to live in a house until remarriage, when the assets pass to the children—the experts say that that is fairly common—will breach that condition and will not be able to benefit from the spousal exemption.
Condition 4 states that, on termination of a surviving spouse's interest, a person will become entitled to the capital outright. However, if the trustees have the right to defer a child's absolute entitlement—again, that is fairly common—then that condition is breached and the spousal exemption is not available.
The immediate post-death interest conditions prohibit flexibility, the need for which was questioned earlier. Again, my hon. Friend the Member for Chipping Barnet dealt with that very well. Complex family arrangements are best dealt with through flexibility. We have heard about the case of a widowed second wife, where there are children from the first marriage, which even the hon. Member for Rhondda acknowledged was an issue. There also cases such as that of a young widow who is expected to remarry and have more children; a widow and children with special
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needs; a childless marriage where both spouses want their assets to go to their respective nephews and nieces; where a property is complex and may impose management demands best performed by trustees rather than the widow; or where a testator has less than full confidence about the distribution of the property.
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Those are all legitimate, reasonable circumstances that a trust is able to address. The trust is a great intellectual achievement of English law and it seems a great pity to dismiss it as the Government seem to be doing. They seem to have a prejudice against trusts as a method of addressing those issues, which relate not to tax evasion or tax minimisation but to personal circumstances.
Dawn Primarolo: If I were to tell the hon. Gentleman that the Government have made provision for precisely the situation he describes and that a straightforward trust set up for one beneficiary—an ex-spouse or civil partner—which goes to them before passing absolutely to another person on the death of the beneficiary, retains their existing inheritance tax treatment, including the spousal exemption, would all his problems be settled?
Mr. Gauke: The right hon. Lady should not take my word; the advice provided by professional after professional is that what the Government are proposing simply will not work. In nearly every case, there is a degree of flexibility, for which the Government are not providing.
Dawn Primarolo: So the hon. Gentleman is saying that he does not believe me when I say that there is flexibility for a spouse or an ex-partner to receive an interest that is eventually passed wholly to a subsequent beneficiary. I am telling him that clearly, but he would rather believe people outside the Chamber than me and civil servants.
Mr. Gauke: I am inclined to believe specialists who work extensively in the field—[Interruption.] If the civil servants had consulted a little more widely—although that is another issue—we might not have found ourselves in these difficulties.
I think that the Government's great concern is that a widow could receive a life interest, terminate the trust and make a lifetime gift and, if she survived for seven years, benefit from provisions relating to potentially exempt transfers. I should be interested to hear from the Paymaster General about the particular difficulties that she considers exist and where the current spousal exemption is being abused. However, as my hon. Friend the Member for Chipping Barnet rightly pointed out, the Government's proposals are an ineffective way of addressing their concern. Better ways could be found by looking at the potentially exempt transfer route, which would address the matter much better than using such an over-sized sledge hammer to hit that particular nut.
I wait with anticipation to hear whether the Paymaster General will argue that one can always vary a trust on death, thereby resolving many of the problems or injustices. However, such a solution requires both that the trust is one that can be varied and a degree of
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flexibility, which is clearly not something that the Government want to encourage in trusts, although it would be useful in those circumstances. Variation could also be achieved with the consent of the beneficiaries, but that would not be possible if they were minors. In that case, it would be necessary to go to the court, with all the expense that would incur. If the Government chose to use that argument, it would not be persuasive.
The Government say that the provision will affect only a few people and several Labour Members have suggested that it would apply only to a tiny minority of the wealthy. However, over the past few days, I have been bombarded with documents produced by professionals pointing out that they regularly advise the inclusion of a trust in fairly normal wills, and that it is a common, run-of-the-mill device used to protect a family and to address particular family circumstances. As a matter of course, trusts are involved in wills, not for taxation reasons, but because they provide flexibility. The Government appear not to know that, which suggests a lack of consultation, which has marked the process throughout.
Why have the Government done this? Perhaps saloon bar wisdom and the lack of consultation means that they were not aware of the problems that they have caused, but I wonder whether another element is involved, so I want to offer one or two friendly words of warning to the Labour party. The whole approach smacks of a good old go at the toffs, and we have heard one or two comments along the lines this afternoon that just the wealthy and rich are affected, that the policy does not really matter and that it will play quite well perhaps back in the Rhondda.
The Labour party has been extremely successful in the past three elections, and one of the reasons is that the Prime Minister has managed to distance himself from the perception that the Labour party is a bunch of class warriors. Not for the first time, the Chancellor of the Exchequer has waded in and tried to play the class card, just as he did with Laura Spence and Oxford university, when he rushed in and got the facts wrong, did not understand the matter and rather embarrassed himself. I fear that the Government and the Chancellor have done exactly the same thing with this policy. They think that they have made an attack on the very wealthy and the privileged few, when the reality is that large numbers of ordinary people, not the wealthy, will be affected by this policy. The Government have made a misjudgment, and I suggest that they back off; they could start today by accepting the new clause.
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