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“So far as new trusts are concerned... it continues the current special treatment for ‘interest-in-possession’ trusts created on intestacy and straightforward interest in possession trusts created by will; and for ‘accumulation and maintenance trusts’ to trusts created on the death of a parent where beneficiaries will take the trust assets at age 18.”
Although the right hon. Gentleman may argue—incorrectly, in my view—that the Government are attacking specific groups, he is wrong about the recently bereaved.
Mr. Redwood: Although the Government have moved somewhat to protect vulnerable groups in specific circumstances, the protection is not comprehensive. There will be hard cases and difficulties if all we do today is accept the Government amendments. The simplest way to protect vulnerable people is not to proceed in that direction. We therefore revert to the fundamental questions: what is the purpose of the provisions? How much money is at stake? Are the Government sure that they will capture a few rich people who use the current system unreasonably, in their view, while not capturing many others? We have learned that those others perhaps include the hon. Member for Falmouth and Camborne (Julia Goldsworthy), who imprudently took out a life protection policy without knowing what her tax position would be. Wallowing in ignorance in that way, with one’s money at risk under the very measure that one is trying to amend or improve, is not a good advert for Liberal Democrat advice on financial planning. Obviously, the hon. Lady has a lot to learn in all sorts of ways as she trains on the job of speaking to the difficult set of clauses and schedules before us.
Those on the Treasury Bench find themselves in some difficulty over these measures. I do not think that they have a great deal of enthusiasm for the job in hand; I do not see them leaping to their feet to say that this is the best thing that they have ever done. I do not suppose that they will include in their leaflets to their
constituents the fact that they are proud to have done considerable damage to the trust regime for those who are divorcing. Nor am I sure that that will be the leading subject in their election leaflets when we get to the next general election. They will not be saying, “I have great news, o electors! The Labour party has managed to make your divorce even more painful and to secure even more money for the Treasury rather than for you.”
Dawn Primarolo: May I say how much I am looking forward to seeing the right hon. Gentleman’s next newsletter, in which he explains this issue to his constituents? If he believes what the hon. Member for Chipping Barnet (Mrs. Villiers) has said, but it turns out not to be true, he will have to issue a subsequent newsletter.
Mr. Redwood: I am always extremely careful to check the accuracy of the information that I put out to my constituents, and I am pleased to say that, so far, I have not had to send out any corrections. I will endeavour to be equally careful in the future. However, I will not find myself in the position of having to put out an apology or an explanation of why my party has backed a silly scheme that messes around with the complex tax regime on trusts in such a way that it might capture the vulnerable as well as those—whom the Government have still to name—who are apparently more worthy targets for increased taxation.
It gives me great pleasure to support the noble work of my hon. Friend the Member for Chipping Barnet (Mrs. Villiers) in trying to chip away at the undesirable consequences of this clause and schedule. I am not sure that I am in sympathy with the hon. Member for Falmouth and Camborne, however, whose remarks were as tedious as they were opaque. I look forward to the Government having third thoughts on this matter. I enjoyed their second thoughts, which were certainly better than their first thoughts. When in doubt, Ministers should not legislate, not proceed, not pass “Go”, and not collect our £200. They should think again, ditch the clause and the schedule, then we would all be much better off. We could then put something in our newsletter about which we all agreed, namely, that it was a good idea that, on this occasion, the Government had thought better of legislating.
Mr. Dunne: I am extremely honoured to follow that highly entertaining and thought-provoking contribution from my right hon. Friend the Member for Wokingham (Mr. Redwood). I rise to discuss some of the issues on schedule 20 that were picked up in Committee, and I should like to start with the Government’s two-and-a-half-year consultation period on the modernisation of the trust regime, during which the age reduction for accumulation and maintenance trusts from 25 to 18, as proposed in the schedule, was not raised.
Rob Marris: I am trying to cast my mind back to the Committee proceedings. Will the hon. Gentleman tell the House whether he has an interest to declare?
Mr. Dunne:
I am most grateful to the hon. Gentleman for that reminder. I declared my interest at almost every sitting of the Committee, and I am happy to do so again today. I am a settlor of an accumulation
and maintenance trust for the benefit of my children, which gives me a certain amount of authority on this subject, unlike the Government, who appear to have entered into these arrangements without any understanding of their implications—as we have heard, they are now into the third set of major revisions—and without any consultation with the industry on the extent of the supposed mischief or abuse that the measures were designed to prevent. The Paymaster General was challenged repeatedly in Committee to provide evidence of the abuse, but was able to come up with only one or two astonishingly tortuous examples. When challenged by my right hon. Friend the Member for Wokingham, she could provide no information on the scale of the abuse, but I hope that she will now have been briefed on how widespread it is.
Dawn Primarolo: The hon. Gentleman is not fairly reflecting what happened in Committee. The Committee asked for examples, and I gave examples. Conservative Members do not like the examples that I gave, and consider them theoretical. Amazingly, that does not stop them advancing a theoretical case to attack the Bill. I gave the hon. Gentleman the evidence: I specified the types of tax planning. He does not agree with me, and that is fair enough, but I did supply the evidence.
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Mr. Dunne: The Paymaster General is obviously somewhat irritated by my accusation that she failed to give proper evidence. What she did give were two theoretical examples. On several other occasions, she listed organisations that had substantiated the case she was making, but in this instance she did not mention any, presumably because there was none.
That takes me to the point that I wanted to make about the age issue. The Government are trying to introduce a blanket change in the age limit below which children can benefit outright from the accumulation of maintenance trusts, without taking account of the individual circumstances of many of those children. Given that people become adults at the age of 18, I might be using the word “children” rather loosely. We are talking about young people under 25.
It is not unheard of for people to acknowledge that the financial sophistication of those under 25 is not what one might hope to see in more mature adults. Most commercial industries that must contend with those aged between 18 and 25 in a financial context impose certain constraints. Most mortgage lenders, for instance, have their own policies on the granting of mortgages to young people, but many require a parental guarantee. Those aged between 18 and 25 are likely to pay higher motor insurance premiums, because they are perceived to be a greater financial risk to the insurance companies. Many car rental companies will not allow people under 25 to hire cars, or, if they do, will impose a surcharge.
In March this year one of the Government’s own regulatory agencies, the Financial Services Authority, undertook research in an attempt to establish how sophisticated young people were in financial matters. It concluded that
“whilst the need to plan ahead is perhaps greatest in early adulthood, financial capability in terms of planning ahead clearly improves with age”.
Those aged between 18 and 20 scored 27 out of 100 in terms of financial capability, while those between 20 and 29 scored 40. One of the Government’s own regulatory agencies has acknowledged that people under the age of 25 are not as well adjusted to the business of dealing with their financial affairs as older people.
I wholeheartedly agree with my right hon. Friend the Member for Wokingham. The schedule has been dreamt up by the Government for reasons that were not thought through properly, hence the plethora of amendments with which we are regularly having to deal. In my view, the logic stems from the Government’s resentment that people may be in a position to control the distribution of their money during their lifetimes. What they are doing is meddlesome and interfering, and it is characteristic of their approach.
There is a specific illogicality in the Government’s actions. The Paymaster General has tried to claim that they are simply bringing the inheritance tax regime relating to trusts of this kind into line with those relating to others. That might be so in a very narrow sense, but the Government are also throwing the system completely out of kilter with the existing inheritance tax regime relating to gifts. Clearly, someone who places assets in a trust—often for sound practical reasons—will no longer be able to benefit from the potentially exempt transfer regime, and must therefore subject those assets to potential inheritance tax charges that did not exist before. That is not tidying up, but creating an additional layer of complexity.
I support what my hon. Friend the Member for Chipping Barnet (Mrs. Villiers) said about the definitions of disability. On a couple of occasions, we discussed in Committee the means of ensuring that the Bill provides an appropriate definition to cover people who are experiencing either partial or fluctuating capacity or who have a progressive illness. We discussed individual illnesses and conditions at some length.
Although the Government have made some movement, they have still failed to address the matter adequately. The issue of the settlor who is able to benefit from the exemptions for disability has been dealt with poorly. The provisions do not cover individuals who become disabled or people who are in a position of parental authority. That amounts to a glaring omission, which I hope the Paymaster General will reflect on and seek to put right. I am thinking particularly of people who are made wards and where courts or insurance companies, neither of which are in a position of parental responsibility, are making provisions to set up trusts.
In conclusion, it appears that the Government are seeking to deal with an abuse that they have failed to prove. They are seeking to impose constraints on individuals and how they organise their financial affairs, which shows their mistrust of people. I wholeheartedly endorse the suggestion of my right hon. Friend the Member for Wokingham that the Government should scrap the schedule in its entirety.
Stewart Hosie (Dundee, East) (SNP):
There was a great deal of uncertainty when the Bill was published
and when it began its progress in Committee. The large number of amendments that were supported by hon. Members of all parties is testament to that, and some of the uncertainty remains. I hope that it will be fixed by the Government amendments and others as we progress. I am particularly pleased with Government amendment No. 70, which brings those with parental responsibility into play in the same way that birth parents are in respect of trusts. We discussed that issue in Committee and I am delighted that the Government have taken it into account.
I shall not re-summarise all the briefing notes that others have mentioned—we have all read them anyway—but I shall make one or two specific points. It is important to discuss vulnerable people and I am not at all convinced that the definition of such people is sufficient. It is too narrow and some vulnerable people clearly fall outside the specified disability living allowance category. I would like to bring to the House’s attention a letter from a small solicitor firm, J W Hughes and Co. from Llandudno, which was given to me by my hon. Friend the Member for Meirionnydd Nant Conwy (Mr. Llwyd). The letter makes that very point—that some vulnerable people fall outwith that definition. The concern was expressed by a small county lawyer with no political axe to grind.
It is interesting that other lawyers have approached me about other issues. Even as the amendments were being progressed and more information was emerging about the shape of the Bill, there remained a great deal of concern about the number of wills that would have to be changed as a result of insurance and other policies being written into trusts in the wills. Another local solicitor—a small, county solicitor based near my constituency—advised me that his business has some 18,000 to 19,000 wills under management and that in his best assessment about 40 or 50 per cent. of them would need to be changed. Unfortunately, it is not certain which 40 or 50 per cent. will require it. It may be based on a misunderstanding that the changes will impact only on trusts and funds that breach the inheritance tax threshold. None the less, I ask the Paymaster General to concentrate on the issue of vulnerable people and how they will be looked after under the new regime. She should also focus on the inheritance tax threshold with particular regard to the great fears of many people and many law firms about the potential for hundreds, thousands or millions of wills having to be changed.
Mr. David Gauke (South-West Hertfordshire) (Con): In the continuing debate about these matters, and especially in respect of the definition of a disabled person, the Paymaster General has made great play of the fact that a consultation process was held two years ago and that a particular answer was reached. I shall return to that in a moment, but we are discussing the question of trusts today, a matter that was debated at some length in Committee. It is therefore somewhat ironic that the right hon. Lady should praise the role played by consultation, given that the Government have produced a set of proposals in respect of trusts without engaging in any consultation at all.
The proposals have been rushed out, but the Government have not asked legal professionals or accountants how trusts work in reality. They have
failed to understand how insurance companies draft policies, or how lawyers draft wills. The hon. Member for Wolverhampton, South-West (Rob Marris) quoted from the explanatory notes, but they were drafted before the Government came up with the various amendments that they have tabled to schedule 20.
In essence, the hon. Member for Wolverhampton, South-West said that straightforward interest-in-possession trusts would be unaffected by the Government’s proposals, but the reality turns out to be somewhat different. Under the original wording of schedule 20, a standard will—for example, one in which a person who gets married for a second time seeks to ensure that the second spouse receives an interest in possession but that the capital goes to the children of the first marriage—would indeed have been affected.
As a result, both in Committee and again today, the Government have staged a series of withdrawals from their original position. Their approach deserves very serious criticism, as there is no good reason why the matter could not have been consulted on. The Paymaster General rightly said that, in Committee, she gave examples of potential abuses under the existing law, but Government projections suggest that we are talking about only £15 million in the first year. The amounts involved are not so sizeable, nor the abuses so great, that the Government had to deal with the matter with such enormous urgency. Why was there no consultation, especially when the Government were consulting about trusts in any event?
Indeed, Her Majesty’s Revenue and Customs considered that trusts should be tax neutral. It said that, although trusts should not be used as a way to avoid tax—and I entirely agree with that—it also believed that artificial obstacles should not be raised against their use for that purpose.
Mr. Brooks Newmark (Braintree) (Con): Does my hon. Friend agree that the Government suffer from a cultural problem? They believe that any trust is set up to avoid tax so, rather than going into detail and understanding the nuances of trust, they simply use a rather blunt instrument and say, “Trusts are bad, and therefore we will do anything to shut them down.”
Mr. Gauke: My hon. Friend makes an excellent point. During the Bill’s passage through the House, people have asked repeatedly, “Why would anyone set up a trust? It must be a mechanism for tax avoidance.” They have not appreciated that there are non-tax reasons for setting up a trust.
Moreover, why are the Government suddenly so concerned about trusts? They have been in power for nine years and not done much about them, but trusts have suddenly become a major issue. That leaves me somewhat bewildered, and we have heard no explanation.
I am a member of the Treasury Committee, which asked the Government how they had arrived at their estimate that the new rules on the tax treatment of certain trusts would affect only a minority of the 100,000 discretionary trusts. As yet, we have had no answer.
Mr. Newmark: Will my hon. Friend give way on that point?
Mr. Gauke: I give way again to my colleague on the Treasury Committee.
5.15 pm
Mr. Newmark: I thank my hon. Friend, who raises an important question: why are the Government going to such enormous lengths? I suggest that it is because they are quickly running out of cash, so they are trying to be more and more creative in squeezing money out of every corner and every orifice of the people living in this country.
Mr. Gauke: My hon. Friend may be right, albeit rather inelegantly. I am not entirely sure what the explanation is; perhaps the Paymaster General will enlighten us later.
Mr. Redwood: My hon. Friend is the only person to have supplied a figure. As he rightly reminds us, £15 million was the first year forecast. Has he any thoughts about how much of that £15 million will be given back by the 27 Treasury amendments tabled for that purpose today?
Mr. Gauke: My right hon. Friend the Member for Wokingham (Mr. Redwood) makes an excellent point. The Paymaster General’s response suggests that the original drafting was poor; there was certainly much uncertainty and the amendments could have resolved the matter. However, if the answer is none, why did we go through all these proceedings, when we could have been in the same position originally if the Treasury had taken its time and held consultations? It completely failed to do so.
The Paymaster General said earlier that part of the whole process of dealing with Bills such as this is for the Government to listen to outside advisers and make changes accordingly. I accept that amendments have been made to deal with uncontroversial technical points, but these provisions are more fundamental. The Government changed their policy substantially and produced something out of the blue, and then realised that their proposals would hit people they did not intend to hit. I accept that they did not intend the provisions to be as widespread as they turned out to be in reality. That is not listening to outside advisers—it is a fundamental failure.
The Government produced something that did not work and caused much upset and uncertainty. No doubt, it was a boon to the legal profession as clients charge off to their law firms for further advice, which is not to be welcomed—and I speak as a former lawyer.
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