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“trusts are very often set up for reasons that are nothing whatever to do with tax...they are widely used to prevent families’ assets from being squandered...to protect individuals from themselves or others”
and to maintain family harmony.
The Government have failed to produce any empirical evidence of the widespread use of trusts for avoidance purposes, apart from bare assertions and a couple of theoretical examples. Nor have they responded to the direct request of the Treasury Committee to provide evidence for their assertion that only a minority of a minority of 100,000 discretionary trusts would be affected by schedule 20.
The Government may have U-turned on a number of hugely important points, but schedule 20 still imposes new taxes on thrift, prudence and responsible behaviour, on the sick and the dying, on divorce, and on the mentally ill and disabled.
I close by quoting an e-mail that I received just a few days ago that illustrates the high human cost of this whole debacle. It reads:
“My father was seriously ill earlier this year. His will is in favour of his 6 grandchildren and contains a trust with the age set at 25...Because of the Finance Bill, I had to arrange for his solicitor and both executors”—
“so he could say whether he wanted them to maintain 25 or pay the penalty or revert to 18. So there he was lying in bed coughing up a lung, 88 years old...terrified of dying, and I had to explain all this. He cried for a couple of days after from distress. How many others I wonder have had to do”—
Julia Goldsworthy (Falmouth and Camborne) (LD): The Government have been at great pains throughout the Committee stage to point out that there are some areas where there is abuse of the trust system in relation to inheritance tax, and their proposals would close those loopholes. In their efforts to do so, where we have felt that there is a case to be made, we have supported them. However, the initial publication of the Bill raised huge concerns about the number of people who would be affected by the changes. In particular, concerns were raised about the treatment of spouse exemption, and fundamental concerns were raised about how the assumptions behind the spouse exemption had changed—instead of spouse exemption from IHT being automatic, it initially appeared that it would apply only if certain criteria were fulfilled.
Government amendments at Committee stage dealt with the issue explicitly and the fears of many people were allayed. However, had the Government taken the time before the Bill’s publication to consult, they might have avoided so many people fearing that their arrangements would have to be changed and that they would be affected by the Government’s new proposals, when in fact that was not the case. However, as the hon. Member for Chipping Barnet (Mrs. Villiers) has pointed out, there are still areas of considerable uncertainty, where trusts are used not to avoid IHT, but to make satisfactory family arrangements, particularly in difficult family circumstances.
It is those issues that many of the latest Government and Opposition amendments seek to address. One need only look at the amendment paper to see how many amendments have been tabled, not only in Committee but at this very late Report stage—60 Government amendments and many more Opposition amendments—and still there is a great deal of uncertainty in many areas. Some of the broad issues have been outlined in new clause 2.
Dawn Primarolo: There are not 60 Government amendments in this group, although I do not think that that was what the hon. Lady meant to say. Secondly, in every Finance Bill Ministers say in Committee that they will go away and look at something, and if they think that there is a case, they may table amendments. In fact, we have tabled an amendment on a matter that the hon. Lady raised—is she suggesting that I should not have done so?
Julia Goldsworthy: Of course I am not suggesting that those amendments should not have been tabled. However, it is unprecedented that we have this many amendments, which would significantly alter the sense of the measure. Great uncertainty has been expressed by many professional bodies.
Government amendment No. 70 deals with an issue that I raised in Committee on the part of schedule 20 that deals with trusts for bereaved minors. In Committee, I raised concerns about the Bill as it then stood, which allowed favourable treatment in respect of inheritance tax for bereaved minors, but only if the trusts in question were set up by a parent. Government amendments made in Committee resulted in the measure being extended to include step-parents. However, minors whose legal guardians were not their parents or step-parents would have been very vulnerable because they would not be provided for under the measures. The amendment deals with that problem. It extends the provisions to all those who have parental responsibility under the Children Act 1989 for England and Wales, the Children (Scotland) Act 1995 for Scotland, and the Children (Northern Ireland) Order 1995 for Northern Ireland. Although the conclusion on this has probably not been reached in the most efficient manner, the result is a vast improvement on the original proposal, so we will support it.
I now come to Opposition amendments relating to bereaved minors. My understanding of amendment No. 58 is that it would create a situation in which the trustees of the will of a parent of a bereaved minor could set up a trust for the benefit of the minor. I support the amendment, as it offers further safeguards for those very vulnerable young people.
There are several Government and official Opposition amendments that address questions that remained following debates in Committee on transitional serial interest, but fundamentally the Government amendments do the job. Government amendments Nos. 74 and 75 set out that serial interest can be extended beyond 2008, but only when the spouse succeeds upon death. That was the only real area in which spouse exemption remained in some doubt. There would be some existing pre-22 March
2006 life interest trusts for one spouse to provide for the other spouse to take a successive life interest after their death. If the schedule were left as originally drafted, it would have overwritten that spouse exemption if the life interest was passed on after 2008.
I want to raise a question with the Paymaster General about the difference between the Government and Opposition amendments. Opposition amendment No. 59 would extend the scope laid out by the Government amendment to outside death by also applying to situations in life. Why did the Government decide to make the provision applicable only on death, but not in life?
Concerns have continued to be raised about how narrowly drawn are the restrictions surrounding the eligibility to fall within the proposals for disabled trusts. Although Government amendments Nos. 80 to 85 ensure that disabled life interest trusts will not be affected by the changes made to the inheritance tax treatment of other life interest trusts, concerns remain about how narrowly drawn are the definitions of “disabled”. Liberal Democrat Members have supported a series of Opposition amendments that have tried to draw definitions in more modern terms that reflect more recent legislation on this issue.
As things currently stand, the definitions of disability are out of date, so many people who today are classified as disabled will be excluded under the Bill. Organisations such as Mind have been working with the Low Incomes Tax Reform Group to help to overcome these problems. I understand that the LITRG helped to draft amendments Nos. 5 to 12. The amendments would help to address those concerns, so I will support them. Among such organisations’ primary concerns are individuals with fluctuating conditions, such as manic depression and schizophrenia, and also people with some physical disabilities, such as multiple sclerosis. They were keen to impress that all disabled persons should not be exempt, but that the proposals in their current form would mean that those who could not cope with a large inheritance or gift could still fall outside the regime. They therefore strongly believed—I support them on this—that reference to the Mental Capacity Act 2005 would be better able to capture the issue regarding capacity, because it is able to capture partial capacity. There could be someone with a physical disability. That person may have no problem in managing their financial affairs or vice versa. That is why amendment No. 11 points to a definition of capacity in terms of lacking capacity
“within the meaning of the Mental Capacity Act 2005, in relation to any financial matter”.
The terms of the Act are flexible enough to include definitions of partial capacity.
The amendments allow for greater flexibility in the creation of trusts. At present, only the affected individual can self-settle if they have a condition that they expect will lead to disability. If they are already ill, someone can create a settlement for them. Those who expect to become unwell or have a fluctuating condition have to self-settle. Amendment No. 5 allows for others to set up similar self-settlement trusts. The wider amendments bring in the 2005 Act for a lower level of severity and then will enable someone who expects to be unwell to have a settlement created for them.
Rob Marris: For how long should these trusts last? Given the sort of disability to which the hon. Lady refers, some people will have a disability and then recover. Should the trust then be wound up? What would she say should be the tax situation then?
Julia Goldsworthy: We do not want vulnerable people who may have a partial lack of capacity in financial matters finding themselves falling out of a regime that was designed, in theory, to help to support such people.
In Committee, the mainstay of the Government’s strong position towards these proposals was based on the results of consultation that was carried out two years ago. The Paymaster General has already referred to that consultation. The consultation took place on a different subject in relation to income tax and capital gains tax. It preceded any of the deliberations on the changes that have been set out in the Bill, and pre-dated the 2005 Act.
The organisations that contacted me were at pains to point out that the consultation barely referred to definitions of disability and involved only a few disability organisations, of which none was a mental health organisation. In some areas the consultation has been superseded by the amendments that have been put forward by the Government.
Dawn Primarolo: It would help me enormously if the hon. Lady would list the organisations that approached her. I would then be able to list those that agreed with the definition.
Julia Goldsworthy: I understand that there were representations from Mind. I was provided with further information about the details of the consultation. The representatives were concerned that no mental health organisations were included in the consultation. Will the Government undertake proper consultation on these matters, given that the Bill has created a new situation that was not covered by prior consultation?
Dawn Primarolo: I will put a proposition to the hon. Lady, and I would be grateful if she were to respond to it. The Government consulted two years ago with many organisations, which I shall list. Those organisations agreed with the definition that is currently being used. The hon. Lady has quoted one organisation, and another representative, as saying that they do not agree with the definition. She then asserts that we should provide a definition in a Bill that is not yet law. Why should there be consultation on that basis when we have already undertaken consultation?
Julia Goldsworthy: The 2005 Act is on the statute book. Even if it has not yet been implemented, definitions are clearly stated and are on the statute book. Perhaps the Minister will refer to which mental health organisations took part in the consultation process. If she did so, I would be grateful.
Another key area is that of trusts that are commonly used to sort out family arrangements. That is not as a means of avoiding inheritance tax, but of relationship breakdowns settlements. There is a series of official Opposition amendments on that. Trusts are commonly
in use as a means of settling assets in the context of a financial settlement. A primary reason is to ensure that, for example, children have a roof over their head or are able to remain in a family home. Some of those trusts are established by a court order. What is the basis of withdrawing some of those options for the family? Was there any evidence of inheritance tax avoidance in such cases? What alternatives would the Government propose for families facing these circumstances? Although other measures such as clean break orders, legal charges and other devices are available, what is the rationale for targeting trusts in that area in particular?
4.45 pm
The Law Society has raised the concern that not all the alternative devices will be appropriate for all families:
“For example, the use of clean break orders is only feasible where a couple have sufficient assets to enable an outright division of assets between so as to provide both with a home. For many families, where the only significant asset is the matrimonial home (and whose value is over the inheritance tax threshold, currently £285,000) this is not a realistic option since the sale of the house may not raise sufficient funds to provide a home for both parties.
Where assets are transferred from one spouse to another, the spouse exemption does not apply if the transfers take place after decree absolute. Under Schedule 20, the spouse exemption would now not apply before decree absolute where a new trust is created by one spouse for the other. This we believe wrongly penalises the use of trusts on divorce settlements.”
Dawn Primarolo: I have already heard that point from the hon. Member for Chipping Barnet (Mrs. Villiers), who was lobbied by the same people as the hon. Member for Falmouth and Camborne (Julia Goldsworthy). However, there is an alternative, because a charge could be taken on the property, so it is simply not true that it cannot be done. Those who have been unfortunate enough to go through divorce know that the normal procedure, if a clean break cannot be made, is that a charge is taken on the property.
Julia Goldsworthy: I understand from explanations given by the Paymaster General that the intention behind the changes on the use of trusts was to tackle inheritance tax evasion, but I wonder whether she will state the extent of avoidance in that area.
The hon. Member for Chipping Barnet has discussed some of the remaining problems on life insurance. I declare an interest as someone who took out a life insurance policy after the Budget, but before the Finance Bill, because I still do not know how I will be affected. My estate is well below the inheritance tax threshold, but I understand that I may still need to change my affairs, which I have recently set up—there is a still a lot of uncertainty.
On Second Reading, concerns were raised about the number of people affected by the proposals. Again, I ask the Treasury to publish the background work that it undertook before determining whether a regulatory impact assessment was necessary. It has been stated in written answers that it is not “normal procedure” to publish that information, but given the fact that the Treasury Committee asked for it before the Bill was considered in Committee, is there any reason why the Treasury cannot make it available, because many organisations and individuals would benefit from knowing the intended scope of the regulations?
It has not been explained why wholesale changes to the provisions on trusts are required to tackle what the Government have emphasised is still a small number of abuses. Although the key concerns surrounding the spouse exemption have been removed, in other cases normal family arrangements will fall foul of the rules, although there is no evidence of trusts being used to abuse the exemption.
The potentially exempt transfer option remains for those who want to transfer their wealth and escape inheritance tax, provided that such individuals have the liquidity and life expectancy to fulfil the requirements. Given the harshness with which the Government have approached the trust regimes, do they have similar plans for potentially exempt transfers?
The Government have improved the legislation, but there are still plenty of rough edges, despite all the amendments tabled in Committee and on Report. I fear that we will have to revisit the issues and deal with further unintended consequences in future Finance Bills.
Mr. Redwood: Unusually, I find myself in sympathy with amendments tabled by hon. Members on both sides of the House, which is a tribute to the mess that clause 2 and schedule 20 were in before the Bill was considered in Committee.
I am delighted that the Government have seen fit to make modest improvements around the edges, but I hope that they will think again about both the clause and the schedule and realise that the Bill would be better and stronger without either of them, because the existing regime of trusts works okay. It was not full of scandal or the centrepiece of tax evasion and avoidance. The provisions are therefore unnecessary.
“The clause and Schedule align the inheritance tax (IHT) rules for assets held in trust...The IHT treatment for trusts which do not come within the special rules will be aligned with the mainstream IHT rules for trusts. The clause and Schedule provide transitional arrangements for existing trusts.”
We have never had a satisfactory explanation of where that emanated from. Those who wish to be kind to Ministers could say that the provisions are a product of a bureaucratic mind that likes compatibility, tidying and creating symmetry in a complex and evolving tax structure. If that is all that has happened, Ministers should have no hesitation in dumping the provisions immediately. The worst thing that a Minister can do is give in to a bureaucratic request that something should be tidied up, aligned or changed for the sake of it.
The alternative explanation, which we have sometimes heard from the Treasury, is that Ministers believe that they are trying to tackle a problem. They appear to believe that, from time to time, the trust arrangements enable people to avoid paying inheritance tax, which the Government think they should pay. The case would be greatly strengthened if we had more reliable numbers and it would be useful if the Paymaster General could tell us more about how much more missing tax revenue would be captured if the Government amendments were accepted but the others were not. The Government should remember that there are knock-on effects to the proceeds from
capital gains tax, which should also be taken into account. Some of those consequential effects would defer or prevent payment of CGT that would otherwise have fallen due. The position would not be win-win, even on the Government’s basis.
It is strange that a Government renowned for their fascination with the popular mood and the media should choose not only to attack head on children, people who are in mourning and the disabled, but to do so at the same time. It is a rare and infelicitous conjunction in a Minister’s life to be on charges of being unkind to all three categories. Indeed, there is an even more hard-pressed category—children whose parents are recently deceased. One would have thought that they, above all, needed help and support from every adult in the community. However, that does not apply to the Government, who, in their new role of ruthless oppressors of anyone with any money left after all their other taxes, are now trying to squeeze out more from the minors who are in such unfortunate situations.
Rob Marris: Earlier, the right hon. Gentleman quoted the explanatory notes to clause 157. If he read on—I am sure that he did—he would realise that they continued:
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