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Mrs. Villiers: Will the Paymaster General give way?

Dawn Primarolo: If I can explain what the provision does, it might help in dealing with the misunderstandings. In respect of money put in trust during a person's lifetime, charges apply on assets over the IHT threshold—currently £285,000—at 20 per cent. on entry. So assets over the value of the threshold get charged at 20 per cent. on entry, and
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at 6 per cent. every 10 years after that. The only exemption for trusts created during life is that applying to trusts for disabled people, an issue to which we will return.

Where money is put into trust on a person's death, the IHT is due on the estate, as is normal, unless spouse relief or some other exemption applies. If a trust is then set up, it is exempt from charges if it is for a disabled person; if it is an accumulation and maintenance trust set up by a partner for their bereaved child, who will take the assets outright at the age of 18; or if it is an interest in possession trust for the benefit of one person with outright ownership of the assets, passing to another person when the trust ends. That is a very straightforward arrangement and it is in line with existing trust arrangements.

Mr. Gauke: Will the Paymaster General give way?

Dawn Primarolo: Perhaps the hon. Gentleman will allow me to make at least some headway on the reasons why the new clauses and amendments, including his own, are unacceptable. Having done so, I will of course give way to him.

All the new clauses and amendments before us are unnecessary, because what is asserted will happen will not, in fact. Ever since Budget day, when the Government announced that we planned to change the IHT rules for trusts, there has been enormous misunderstanding, which has continued today. Bearing that in mind, let me remind the Committee what spouse relief is about and what impact our proposals in clause 157 and schedule 20 will have on such relief.

Spouse relief is an inheritance tax exemption on transfers from one spouse to another. So if property starts in the ownership of one spouse and ends up in the ownership—I stress, ownership—of the other, the situation is straightforward: the transfer is exempt from IHT. That means that the bequest rules apply if a gift from one spouse to another is made when both spouses are still living, so let us be clear: our proposals in clause 157 and schedule 20 have no relevance at all to such cases. For the vast majority of people with straightforward affairs, all that they need to know about the IHT proposals is that spouse relief exists and that a transfer can be made to their spouse. The potential overlap between spouse relief and our proposals only arises, therefore, in cases where partners want to use trusts on or after Budget day to make a less than straightforward gift or bequest.

Mr. Gauke: Will the Paymaster General give way on that point?

Dawn Primarolo: No; please let me make some progress on these points.

Transferring assets into trusts is very different from making an outright gift; some people have tried to argue that they amount to the same thing, but they do not. The recipient of an outright gift can do with it as they please, with or without the consent of the person who made the gift—they are the absolute owner. However, if a person places money in a trust, it must be used by the trustees in accordance with that person's wishes. It is the fact that control can continue long after the settlor's death that makes the difference.
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5.45 pm

Inheritance tax rules for interest in possession trusts have conferred the same exemptions that would apply if putting assets into trusts were identical to making an outright gift. The result has been that interest in possession trusts can be—and regularly is—used as a highly flexible money box and a long-term shelter from inheritance tax liabilities. That usually requires the settlor to get rid of assets in his lifetime but, where the spouse relief is available, it is possible for the settlor to hold on to his assets until death and completely wipe out any inheritance tax liability, in both the present and the future—all without giving the surviving spouse or civil partner any influence whatsoever over the assets in their name.

Of course, some cases are not avoidance-driven, and a number of exemptions provide appropriate protection for the people involved. First, spouse relief will continue where an interest in possession trust is set up in a person's will to give a life interest to a bereaved spouse or civil partner provided that, when such interest ends, the assets are taken outright by someone else. No further flexible power is necessary in the trust, because it has delivered its objective.

Mr. Gauke: Will the Paymaster General give way on that point?

Dawn Primarolo: I want to make three points. Opposition Members continually claim that various eventualities will not be covered or that different outcomes will arise. When I tell them that they are wrong, they want to ask other questions. Let us deal first with what is on the table.

Secondly, spouse relief will continue if a person dies without a will and their assets are passed to a bereaved spouse or civil partner, whether or not a trust is created under the intestacy rules. Thirdly, the rules will continue to provide for post-death changes where people die with an out-of-date will. If that will provides for a trust that would not qualify for spouse relief under our new rules, the interested parties will have the opportunity that they have always had to put things right. That is another answer to the question about retrospection.

Mr. Gauke: I have two questions. First, will not the possibility of variation allow people to get around the tax avoidance that the Paymaster General mentioned earlier, and so make these provisions ineffective? Secondly, the right hon. Lady described the conditions under which an immediate post-death interest will apply and inheritance tax is not payable. Does she accept that, in the vast majority of cases, trusts contained in wills will not meet those conditions?

Dawn Primarolo: I accept that people who transfer assets under the spouse exemption provisions do not need a trust to safeguard that exemption. I also accept that the gift provisions do not require a trust to be imposed between donor and recipient, and that assets should be transferred to a recipient when that is the donor's clear intention. Assets should not be held in a halfway house that means that the recipient does not get control and that the state does not get the inheritance tax to which it is entitled. Ending that possibility is precisely what the proposed changes are designed to achieve.
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The new clause and the other amendments would once again make it possible for the wealthy few to use inheritance tax exemptions and rules to get reliefs beyond their entitlement. By the targeted use of changes to the particular types of trust being used in such cases, the Government propose to preserve the rules and make sure that they are used as they were always intended. For that reason, if the hon. Member for Chipping Barnet and her hon. Friends push the new clause to a vote, I shall ask my hon. Friends to oppose it and I look forward to debating the provision in detail in the Standing Committee.

Mrs. Villiers: I shall review briefly some of the comments that have been made. We began with the hon. Member for Rhondda (Chris Bryant) who expressed with passion his support for inheritance tax and his criticism of the exemptions.

We then heard from the hon. Member for Falmouth and Camborne (Julia Goldsworthy) who drew on a theme mentioned by many Opposition Members. She pointed out that the proposed changes could affect as many as a million wills and referred to the 4.5 million people who would probably have to review their life assurance policies. She also mentioned the problems in relation to people who have died since the Budget.

My right hon. Friend the Member for Wokingham (Mr. Redwood) referred to the fact that many people of modest means will be affected by the proposed changes. He pointed out that they are retrospective. I agree with him wholeheartedly, especially because it may not be possible to vary existing trusts. They are affected by the provisions and the courts may refuse variations. It may also be difficult to vary wills, especially when the person who made the will has lost capacity. There will be retrospective effects.

My hon. Friend the Member for South-West Hertfordshire (Mr. Gauke) said that the current rules generally deem trusts to be tax-neutral, so they are treated similarly to outright gifts. He pointed out that the Government's proposals would impose penalties on trusts that do not apply to outright gifts. He referred to the long history of the spouse exemption and to the practical difficulties of meeting the six exacting conditions of the draft proposals. Most tellingly, he drew attention to the suspicion that prejudice must be motivating the Government's approach to trusts and argued for a more targeted solution, rather than taking a sledgehammer to crack a nut.

My hon. Friend the Member for Grantham and Stamford (Mr. Davies) said that it was important to improve the rationality of the proposals. He, too, pointed out that the Bill seems to attack trusts for no good reason. My hon. Friend the Member for Braintree (Mr. Newmark) noted that the provisions would hit the vulnerable. He sought clarity and emphasised the importance of retaining the spousal exemption to prevent double taxation of the single estate of a husband and wife.

The hon. Member for Dundee, East (Stewart Hosie) talked about the impact of the proposals in Scotland, where thousands of people could be affected. He made the good point that the Government have not held proper consultations. My hon. Friend the Member for Ludlow (Mr. Dunne) emphasised the point about
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retrospectivity and said that the proposed changes would affect a wide range of people, giving instances of their impact on divorce.

The proposals on spousal exemption will have a significant impact on a wide range of ordinary, hard-working people. If the Paymaster General is not prepared to take our word for that, she should take the word of the professional organisations to which I referred earlier. They say:

Unless the proposals are amended, in line with our new clause and the many more amendments that we shall table in the Standing Committee, they could leave a million people having to redraft their wills, facing a legal bill of about £275 million. The measure will hit the vulnerable, the young and the bereaved, so I intend to press the new clause to a Division.

Question put, That the clause be read a Second time:—

The Committee divided: Ayes 193, Noes 285.

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