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John Bercow:
I am very grateful to my hon. Friend, and I look forward to supporting the amendments and
new clauses that she and my other hon. Friends on the Front Bench have rightly tabled. At the outset of her remarks, she said that the Chancellor had “slipped out” these proposals. It may be that the right hon. Gentleman expatiated eloquently and at length on these matters in his Budget speech, but I do not recall him doing so. Will my hon. Friend refresh my memory as to the correct chronology of events?
Mrs. Villiers: My hon. Friend is correct. The Chancellor did not choose to refer in his Budget speech to these radical proposals, which have been called the most significant changes to inheritance tax for a generation.
I also welcome Government amendment No. 89, which effectively puts into effect our amendments Nos. 54 and 55 and removes serious technical obstacles that would have prevented trustees from making appointments under trusts set up in discretionary wills. I am grateful for the sympathetic approach to the matter adopted by the Paymaster General in Committee, which has been confirmed in the Government amendment. However, some very serious problems in respect of schedule 20, and the Chancellor’s proposed new inheritance tax charges on trusts, remain unsolved.
New clause 2 and the other Opposition amendments in the group focus on four main areas: technical issues relating to trusts for young people; disability; life insurance, and trusts arising from relationship breakdown.
First, amendment No. 56 would correct an anomaly in proposed new section 71D, which was introduced in Committee and which reduces the harsh impact of schedule 20 in relation to existing accumulation and maintenance trusts. The proposed new section introduces a new taxation scheme allowing trustees to opt into a regime under which inheritance tax at 4.2 per cent. is paid if a vesting age of 25 is retained. However, if a beneficiary under such a trust has obtained an interest in possession since Budget day, it seems that the new taxation rating cannot apply because the trust entered the relevant property regime before steps could be taken to comply with proposed new section 71D. Thus, there is no opportunity to convert into a form of trust that would satisfy the new rules.
If the Paymaster General will not accept our amendments, I hope that she will at least clarify the matter. In Committee, she maintained that proposed new section 71D had been tabled merely to clarify what had always been the Government’s intention. If that is so, it seems very unfair to penalise people who are victims of the Government’s admitted failure to make their intentions clear on publication of the Bill.
Amendment No. 58 is also technical in nature, but would make an important change to provisions in respect of the bereaved minor trust. That is an important part of the Government’s new framework, and the amendment deals with the circumstances that arise when a will leaves property on trust to a spouse for life, with the remainder going to children on trust, vesting when they reach 25. That arrangement will attract the full force of the new schedule 20 charges, unless it can be varied to comply with the requirements of proposed new sections 71A and 71D. Trustees may
wish to do that, but proposed new section 71A(2)(a) means that a change made by trustees will not enable them to opt into the bereaved minor trust regime. That is because such trusts apparently can arise only under a will and, in the circumstances that I have outlined, the trusts arise as a result of the exercise of the trustees’ powers—that is, not directly under the will.
Amendment No. 58 would ensure that a change by trustees in that situation will suffice to bring the trust under the proposed new section 71A regime. If it is not adopted, many thousands of wills, perhaps more, will still need to be reviewed. I hope that, at the very least, the Paymaster General will give the House clarification on that point.
Turning to the more substantive issues, rather than the technical one, our amendments would broaden the definition of disability in section 89 of the Inheritance Tax Act 1984. Section 89 has received little attention up to now, because plenty of more useful and more flexible trusts could be set up for vulnerable people outside the scope of section 89. Now that the majority of such trusts will be hit by the new inheritance tax charges under schedule 20, the section 89 carve-out has suddenly grown significantly in importance.
Some problems in respect of trusts for disabled people have been solved by amendments tabled by the Government in Committee and the retreat continues with their amendment No. 92, which will be considered this afternoon and is to all intents and purposes identical to Opposition amendment No. 12. As drafted, the Bill would impose a double tax hit on the death of a disabled beneficiary under an interest in possession trust. Both inheritance tax and capital gains tax would be payable, which would leave disabled beneficiaries facing a higher tax bill than they would have done before Budget day. I am relieved that the Government have had second thoughts about imposing that extra tax hit on vulnerable people, despite the Paymaster General’s rejection of my amendment on that matter in Committee.
Similarly, I welcome the Government’s acceptance of the point made in Opposition amendment No. 52—that it would be unacceptable to leave a disabled beneficiary struggling with the administrative problems caused by the related settlement regime of IHTA section 80 when others are exempted. Unless the Bill is amended on that point, people setting up trusts for a disabled spouse will be in a more disadvantaged position than those leaving a life-interest trust in their will to a non-disabled spouse.
Even with the solution of those problems, however, significant difficulties will still arise in relation to the impact of schedule 20 on trusts for vulnerable and disabled people—some of the most disadvantaged communities in our society. Robin Williamson of the Low Incomes Tax Reform Group put it more articulately than I possibly could. He said:
“On Budget day...this year...the Government proposed—without prior consultation—the most far-reaching changes to inheritance tax in a generation. Their intention seems to be to exclude trusts for disabled people from the scope of the new tax charges to be levied on most other types of trust. But the definition of disabled person used for this purpose, substantially unaltered for more than 20 years, is so narrowly framed as to leave many disabled beneficiaries of trusts out in the cold.
While the rest of government forges ahead in its understanding of disability issues, with the Disability Discrimination Acts 1995 and 2005 ushering in a new age of inclusion, the tax system clings obstinately to ancient precedents. The final opportunity to put these matters right comes when the Finance Bill receives its third reading on Tuesday and Wednesday 4 and 5 July. We urge the Government to reconsider, otherwise this once-in-a-generation opportunity to bring the tax definition of disabled person up-to-date and into line with the rest of Government thinking on disability will have been missed.”
John Bercow: So that the issue is fully intelligible to those of us who were not privileged to sit on the Standing Committee, and to others outside this place who are very interested in this point, will my hon. Friend explain precisely what is the rather narrow definition that the Government have hitherto insisted on using?
Mrs. Villiers: Yes, I shall explore that point in a moment.
In a joint statement, the organisations Mind, the Society of Trust and Estate Practitioners, the Parkinson’s Disease Society, the Chartered Institute of Taxation, the Institute of Chartered Accountants, the Law Society, the Low Incomes Tax Reform Group and the National Autistic Society said:
“We are not seeking favoured treatment, but to prevent vulnerable trust beneficiaries from incurring a tax penalty that they would not have incurred before Budget day. There are so many inconsistencies in the definition in section 89 that we firmly take the view that the legislation cannot go forward as currently drafted without causing severe prejudice to the interests of vulnerable trust beneficiaries, and discrimination between different classes of beneficiary, some of whom may qualify as a “disabled person” under the definition and some of whom will not.”
Turning to the point made by my hon. Friend the Member for Buckingham (John Bercow), the current section 89 definition covers two groups: people who, by reason of mental disorder within the meaning of the Mental Health Act 1983, are incapable of administering their property or managing their own affairs and people who are claiming attendance allowance or the highest or middle rate care component of disability living allowance.
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The Opposition seek to broaden both categories of the definition. In accordance with the representations made by Mind and other concerned groups, we propose to add a reference to the Mental Capacity Act 2005, so that it is sufficient if the beneficiary falls within the definition of incapacity contained in the Mental Health Act 1983 or the 2005 Act.
The problem that we seek to address with the new clause and these amendments was highlighted by James Kessler, QC, when he said:
“The definition of disabled is extremely narrow...the large majority of mentally vulnerable people will not be included. No relief is given for those with partial mental capacity... No relief is available to those who are aged or infirm or incapacitated whose disability is less than the grievous state required for relief.”
Sir Nicholas Winterton (Macclesfield) (Con):
I seek to broaden the debate very slightly. I fully agree with the argument being advanced by my hon. Friend from the shadow Treasury team, but is it not utterly wrong
that there should be prejudice in the Government against the cascading down of wealth from one generation to the next, particularly against those who are seeking to hand on by way of a trust to those who are disabled, either physically or mentally, or to those who have looked after their elderly parents, thus sacrificing their own career? Their future is prejudiced because of the measure that the Government want to introduce—that is, it is unfair. Does my hon. Friend agree?
Mrs. Villiers: It is certainly enormously important that parents who wish to provide for a disabled child for the rest of their child’s life are not prevented or inhibited from or penalised for setting up a trust for that purpose. It seems to be the most worthwhile thing in the world for people to want to provide security for their disabled children. That is what the Opposition seek to do in our new clause and amendments this afternoon.
The Paymaster General (Dawn Primarolo): Perhaps the hon. Lady would explain to the hon. Member for Macclesfield (Sir Nicholas Winterton) that the Government carried out a consultation exercise on this very issue two years ago and that, overwhelmingly, all the organisations consulted said that they want to stick with the provisions of the Mental Health Act 1983. Would she also explain to the hon. Gentleman that we are talking about inheritance tax avoidance, not about planning for disabled children?
Mrs. Villiers: On the second point, the Paymaster General and the Government repeatedly say that schedule 20 is all about preventing the super-rich from sheltering their wealth from inheritance tax, but they adduce no evidence that trusts are used in that way. It is almost impossible to see how trusts can be used in that way, because they are taxed in the same way as an outright gift. The reality is that schedule 20 will hit a vast number of arrangements that have nothing at all to do with taxation. The fact that someone might wish to save their money and put it into a trust to provide after their death for their disabled child seems to have nothing whatsoever to do with inheritance tax.
I am glad that the Paymaster General referred to the consultation that the Government carried out, but she failed to mention that the consultation on the definition is two years old.
Dawn Primarolo: I just said that.
Mrs. Villiers: I am sorry—a slight omission—but certainly no mention was made of the fact that the consultation was carried out in the context of an income tax provision, which did not have nearly the same significance as section 89. Furthermore, again, I quote the QC to whom I referred earlier:
“Until now the tax reliefs for disabled persons have been almost entirely irrelevant because the value and importance of the reliefs have been trivial. The reliefs have not been significantly used because they are more trouble than they are worth. Thus it does not matter that the definition of disabled has been drawn extremely narrowly.”
Even more importantly, the Mental Capacity Act 2005 had not been finalised when the consultation was
carried out, so it would have been difficult for the organisations to refer to such matters directly. Although a significant number of charitable organisations were involved in the consultation, only six responded on that issue during the two consultation exercises that were carried out.
A number of influential organisations protested that the definition was too narrow. On this point, the Treasury summary of the responses states:
“There was concern that the definition of vulnerable set out in the discussion papers—which covered disabled people and orphaned children—was too narrow.”
In Committee, the Paymaster General referred to the Disability Alliance as supporting the current section 89 definition. I would therefore like to quote from its response on the consultation, which it publishes on its website. Under the heading “Defining categories of disabled people”, it states:
“The proposals to restrict eligibility to those mentioned in paragraph 2 above appears to be far too restrictive and would exclude many disabled people who are currently defined under social security legislation. In this regard it would not appear to fit in with the government’s proposal of fairness.”
I was only too happy to take up the Minister’s invitation to refer to the consultation.
Mr. Philip Dunne (Ludlow) (Con): The Paymaster General quite rightly points out that the consultation began more than two years ago, but she has failed to acknowledge that no mention was made during that consultation of the main issue before us in relation to the changes in schedule 20—the reduction in age from 25 to 18 for accumulation and maintenance trusts. That was not referred to in the consultation at all. Nor was any evidence given by the Paymaster General in Committee of any systematic abuse. The consultation exercise failed to reveal the issues that the Government are now trying to introduce.
Mrs. Villiers: I agree that it was deeply unfortunate that the Government carried out the two-year consultation and never once mentioned the proposals on inheritance tax that they were seeking to put forward.
Rob Marris (Wolverhampton, South-West) (Lab): Will the hon. Lady indicate whether her amendments are aimed at dealing with trusts for people with disabilities set up inter vivos or on death? Those things are very different in terms of whether one is making provision for a child with a disability. Amendment No. 7 seeks to include the lower rate of disability living allowance as a kind of qualifying gateway. What level of disability is encompassed by the lower rate of DLA definition? Will she give some examples?
Mrs. Villiers: I will come to the second point later. On the first point, the amendments are most important in relation to inter vivos trusts, because at least there are other options open in relation to trusts set up on death. After the Government’s amendments in Committee, it will now be possible to set up life-interest trusts under a will without suffering the tax penalties. The primary advantage to be gained by the Opposition’s amendments is in relation to the establishment of inter vivos trusts, which would obviously otherwise incur the charges.
Rob Marris: I am grateful for that clarification. Perhaps I have misunderstood the hon. Lady, and she can clarify things if I have, but the reply that the Opposition amendments are related to inter vivos trusts suggests that we are talking about a tax dodge, rather than the laudable aim of a parent of a child with a disability—who will have that disability for life and who is likely to outlive their parents—who wants to make provision for that child after the parent is gone. I can see the situation with trusts on death, but the hon. Lady is talking about amendments relating to inter vivos trusts. I hope that she will realise why there appears—certainly prima facie—to be a tax dodge in that scenario.
Mrs. Villiers: I know that the hon. Gentleman is keen to crack down on tax avoidance, but it is harsh to accuse parents who set up trusts to provide for their disabled children of doing that for motives of tax dodging. Let us take, for example, a situation in which the parents of a disabled child are becoming elderly. They may find it difficult to continue to manage the financial affairs as their own capacity starts to diminish. It is an entirely understandable wish on the part of a parent to get things sorted out, set up and finalised well before they die. There is a real social need to sort out and secure the future of one’s children, even before one’s death.
The definition in the 2005 Act is much broader than in the 1983 Act and will more easily cover the people with partial, variable and fluctuating levels of capacity to which I referred earlier in the quote from James Kessler, QC.
Moreover, the definition in the 2005 Act is more up to date—many of the relevant provisions of the 1983 Act are soon to be repealed. That Act is geared towards determining whether compulsory treatment is required. The background to its operation is the question whether someone is a risk to themselves or others—that is, whether they should be sectioned. In contrast, the 2005 Act focuses on whether someone has the capacity to manage their own affairs and considers their ability to make decisions about their own lives. It is much more empowering. It focuses more closely on the situation that we are considering, whereby a disabled person may wish to use a trust to assist them in managing their property. Our amendment is focused specifically on capacity in relation to financial matters.
The key problem is that many people who need trusts to help them to tackle the serious difficulty that they may have in managing their finances fall short of the degree of mental illness required to bring them within in the definition in the 1983 Act. For example, many people who have a diagnosis of manic depression or schizophrenia will not be ill enough to fall within that definition, yet they may be the very people who need trusts most of all. As the charity, Rethink, points out on its website, people with manic conditions often believe that they are richer than they are and go on irrational spending sprees. One family wrote to me about the trust that it had set up for their daughter, whose bipolar disorder, more commonly known as manic depression, leads to such irrational spending. They said:
“We are not wealthy and we imagine our assets are probably about average or less for families that live in this part”—
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