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As we have heard, there was consultation two years ago about the definition of a disabled person. It appears that the Government are insisting on continuing to rely on the definition in the Mental Health Act 1983. An alternative definition is available but we hear that they do not want to rely on it because it is in legislation that has not yet come into force. I am
at a loss to understand why one should not use such a definition. The point of a definition is to define something; the context does not matter particularly. If the definition works, why not use it? But if the definition in the Mental Health Act and the alternative definition are inappropriate, why not use a new one?
There is widespread concern that the proposed law with regard to disabled persons and trusts is inadequate. I am grateful to a constituent who informed me of the submission made on that point by the Low Incomes Tax Reform Group, which stated that the definition in
“the Mental Health Act 1983 is inadequate to deal with people who have partial, fluctuating or diminishing mental capacity—people with a diagnosis of Alzheimer’s or Parkinson’s disease, for example, or of schizophrenia.”
I have heard nothing this afternoon to suggest that the Government’s approach is justifiable. They have made a series of U-turns and backed down on a series of points, but they should still concede some important points, and this is one of them. Perhaps the Paymaster General will make a forceful argument—no doubt, she will be forceful, but whether she will be persuasive is another matter—but the Government should table further amendment, as they have done on many occasions.
Most importantly, will the Government refrain from the cheap shot of putting out a policy that involves no understanding of how trusts work in practice and does nothing but cause uncertainty and create legal fees? The Government’s policy does nothing to address tax avoidance, but it encourages their Back Benchers to fly the class-warrior flag. That is poor government, and the Government have rightly had to back down.
Mr. Newmark: I will try to be brief and, rather than rehashing the points that we made in Committee, I merely wish to seek clarification from the Paymaster General on several points that she made, particularly with respect to amendment No. 5. In Committee, she admitted:
“For people who find it difficult or impossible to cope with the demands of owning assets outright, a trust will often be the most practical way for substantial assets to be held.”
However, what about people who find it difficult or impossible to cope with the demand of owning assets because of drugs, alcohol or gambling—the very point raised by my hon. Friend the Member for Chipping Barnet (Mrs. Villiers)?
The Paymaster General made three technical and non-substantive objections to amendment No. 5, which deals with the definition of disability—a point made by my hon. Friend the Member for South-West Hertfordshire (Mr. Gauke). The first was that the new definition would conflict with trusts already in existence. The second was that the Mental Capacity Act 2005 is not yet in force. The third was that it applies only to England and Wales. Can the Paymaster General confirm whether she objects to the wider definition of vulnerability itself, or is she merely shying away from the technical difficulties?
“While I sympathise with the desire to keep the tax code up to date with developments in non-tax legislation, I do not consider that those particular changes would really improve matters.”
Is she acknowledging that matters need improving? If so, how does the legislation improve the situation faced by vulnerable people?
The Paymaster General further said:
“I can see the desired effect of the changes proposed by the hon. Member for Chipping Barnet, the route she suggests would be a difficult one to take at this point.”—[ Official Report, Standing Committee A, 13 June 2006; c. 613-15.]
If the Paymaster General can see the desired effect, why can she not see another route? I look forward to her response to those questions.
Rob Marris: I am prompted to make some brief remarks by the many remarks made by Opposition Members. First, I reject the calumny that the Opposition have projected on to Labour Members that, somehow, we are not aware that trusts are often used for non-tax avoidance purposes. We are aware of that and I say that as someone who was a practising solicitor and who, on occasion, drew up trusts——although not for many years——and they were not for tax avoidance purposes. Many Labour Members recognise that, and I will not be tarred with the brush of being some kind of class warrior on this issue.
Correspondingly, it behoves Opposition Members to recognise more forcefully than many of them have done in Committee and today that, on occasion, trusts are used for tax avoidance and that, from our perspective, trusts are abused in that way. It is understandable that individuals will try to minimise their tax bills in any tax regime. It is also understandable that a Government, particularly a Labour Government, will occasionally seek to clamp down on that. That is part of what schedule 20, which is the principal point now under debate, attempted to do.
Mr. Newmark: I totally understand what the hon. Gentleman has said. In the same way that we should, and do, acknowledge some of the points that he raised—there are people who try to abuse the system through trusts—I ask Labour Members to acknowledge many of the valuable points that the Opposition have made, particularly with respect to the definition of disability, which at this stage is vague and woolly. We are simply trying to tighten things up on some of those points.
Rob Marris: Some of the points made by the Opposition have been valid and have been accepted by the Government. I wait with great interest to hear what my right hon. Friend the Paymaster General says about disability. The definition of disability, as I understand it, is not woolly. The hon. Member for Braintree (Mr. Newmark) may disagree with it. I quite understand that. He said that he disagreed with it. But it is not woolly. It may not be the right definition from his point of view, but it is precise.
The right hon. Member for Wokingham (Mr. Redwood) kindly accepted an intervention in which I read from the explanatory notes. My point was that that was, in a sense, a statement of aim by the Government as to what they hoped to achieve with schedule 20. Because it was an intervention, I did not carry on and read a large part of what followed, but
with your indulgence Mr. Deputy Speaker, I will now read a little more from the explanatory notes to clause 157 and schedule 20. After the piece that I read out, which ended at “assets at age 18”, the notes state:
“Trusts for ‘disabled persons’ will also continue to enjoy special treatment.”
That was a statement of aim by the Government. There were problems and the Government listened to some of those criticisms—hence the Government amendments before us today, which I hope that my right hon. Friend the Paymaster General will explain.
I have had the pleasure of serving on five Finance Bill Standing Committees in my time in Parliament—there are hon. Members, and particularly right hon. Members, who have served on a great many more—and I suspect that a similar kind of procedure, on occasions, unfolded when the Conservatives were in government. Whether in the explanatory notes, or a Budget statement, or a Budget press release, there was a statement of what a particular series of measures embodied in a Finance Bill were intended to achieve. Then experts came along—whether it was Mrs. Gauke or the Chartered Institute of Taxation—and said, “Leaving aside for a minute whether we agree with that statement of purpose or aim, what you have put in your Finance Bill does not embody that and will not get you where you say that you wish to go.”
In terms of the debate in Committee and here today on where the Government wish to go with these trusts and the change in the tax regimes for them, the Government have listened. On some of the more technical aspects, they have said: “We set out clearly where we wished to go. We set out the clauses and the schedule in the Finance Bill by which we wished to achieve that goal. We have not technically always got it right. We have listened to those technical criticisms and we have tabled amendments that are in front of the House this evening—they are likely, in the nature of things to be passed—that will deal with those technical deficiencies.” I see that as a positive endorsement of the parliamentary process and of the way in which the Treasury and its Ministers listen—perhaps more than some right hon. and hon. Members give them credit for—to arguments and proposals made both by outside organisations and, within debate, by Members on both sides of the House. I applaud what the Government have done. They have listened.
As I understand the Government amendments—I am not a huge expert on them—they will get the Government much closer to the goal that they and I have. That goal is to clamp down on tax avoidance in certain areas, but still allow “special treatment”—to use the words from the explanatory notes—in the particular areas to which the explanatory notes refer. Those are sensitive areas in human terms and judging from the debate, all hon. Members broadly support them. I am talking about looking after individuals who have disabilities, whether or not they are minors, following the death of those who care for them and about broadening the definition of those who care for them, and also about looking after those, whether or not they have disabilities, who are minors when they are bereaved. I applaud what the Government have tried to do. As far as I can tell, they have got it right.
Dawn Primarolo:
I am not going to try to persuade or convince the hon. Member for South-West
Hertfordshire (Mr. Gauke), because he has told me clearly in previous debates that he absolutely disagrees with the principles that I assert and prefers to side with the advisers who have provided support to the Opposition in these debates. He will forgive me if I do not rise to that challenge, as I think that I will be wasting my time.
I will discuss the Government amendments and then answer the substantive points that have been made, particularly about disability and which is the appropriate Act for the schedule to use as its anchor.
5.30 pm
Mr. Gauke: I think that the Paymaster General is referring to our exchange on Second Reading, when she argued that Treasury officials were saying that the original provisions in the Bill would not have a particular effect, and I argued that professional advisers were saying that it would have a particular effect. If I understand her correctly, I think that the Government’s position is now that those professional advisers were right.
Dawn Primarolo: No, the hon. Gentleman is not correct. He wriggles a lot. I fear that he has already made up his mind on which way he might vote, should there be a vote, regardless of what I say.
Dawn Primarolo: It might be sensible if I made a little progress. I will give way to the hon. Lady on substantive points, because she was generous in giving way to me when she made her long opening remarks——remarks which she has made several times now during the Bill’s passage.
Schedule 20 introduces changes to the way in which certain types of trust are treated for tax purposes. In particular, it brings the tax regime for accumulation and maintenance and interest in possession trusts in line with the mainstream inheritance tax regime for discretionary trusts that is already in operation. We have debated this topic at great length on the Floor of the House and in Committee. I do not propose to go over all the ground again, but it is necessary for me to respond to the points that have been made. Before doing so, I reiterate the central point that I have made from the beginning in discussions on this measure. Its purpose is to prevent wealthy individuals from being able to take tax advantage of trusts to avoid inheritance tax. That avoidance is clearly unfair and it is right that the Government should seek to counter it. Some hon. Members have sought to characterise that as an assault on trusts, but it is not. Generous provisions for trusts were in place before the Budget and will continue to be in place. The rules will not catch the large numbers of ordinary families that hon. Members have suggested.
Let me deal with two specific points on consultation and the Treasury Committee.
Mr. David Winnick (Walsall, North) (Lab):
I am sure that all Labour Members are delighted that this step is being taken. Does my right hon. Friend agree that there is something undesirable about the way in which successive generations of the very richest people in this
country have been able to pass their wealth down through the years, indeed the centuries, as a result of all these trust arrangements? This affects the very rich, and why on earth should we start apologising it?
Dawn Primarolo: It is not a matter of apologising for the action that the Government have taken. It is clear that there is a tax regime in place for discretionary trusts and the changes being made are intended to bring two remaining types of trust in line with that. As the consultation document made clear, the Government are asserting that there should not be artificial tax incentives for using trusts—people should not be driven in that direction—although we accept, as I am sure my hon. Friend does, that, in a number of areas, which I will cover, trusts are appropriate structures that many people use to plan their affairs. The Government do not take issue with that in our proposals.
These clauses have a narrow focus, and hon. Members have touched on their revenue implications. I made it clear in Committee that it is not always possible to consult on matters to do with avoidance because there is always a risk of large-scale forestalling, particularly in this area. That was the case under Conservative Governments, as well as under this Government. Appearing before the Lords Economics Affairs Committee on 10 May, a leading member of the accountancy profession said that, in his opinion, there would be large-scale forestalling if there were consultation in this case. The Government have a fine record of consulting on our legislation, including drafts, wherever we can before it is incorporated in a Finance Bill, but there are still some points at which that is not possible, given the worries about forestalling.
Mrs. Villiers: Surely there could be no danger of forestalling when it comes to wills. People are not going to bring forward the date of their own death to forestall the Government’s legislation, so why does this measure retrospectively affect wills?
Dawn Primarolo: That is not worthy of the hon. Lady. She knows full well that we are dealing with the setting up of trusts and the tax advantages that some trusts had. She raised a number of other points, which I will turn to. She knows full well from her time in the European Parliament that there is a real and serious issue about forestalling on matters to do with tax, and any Government, regardless of their political persuasion, have to safeguard against that.
Mrs. Villiers: Will the Paymaster General give way?
Dawn Primarolo: No, I want to make a little progress on the point about consultation and the Treasury Committee.
Another point that continues to be advanced is the number of those who would be caught by the measure. I remind the House that 94 per cent. of estates pay no inheritance tax whatsoever, so the vast majority of people have no chance of paying inheritance tax
whatever their will says. It is only a small percentage of estates—6 per cent., or 34,000—that pay inheritance tax. The persistent allegations about the scale of problems that the measure will cause are unnecessary and untrue.
On the Treasury Committee, I am not going to repeat what I said on the record in Committee about the estimations made by the Treasury of the number of trusts involved because that would be wasting the time of the House. I confirm that the Treasury Committee has, quite properly, received responses on all the matters that it raised in its report in line with the requirement on the number of weeks to be taken.
Mr. Redwood: What is the latest forecast of the extra revenue that will be generated if the measure goes through amended as the Paymaster General would like it to be? Does not this show that we have government by the lawyers, of the lawyers, for the lawyers?
Dawn Primarolo: The forecast in the Budget will remain the same if and when the Government amendments are made. The right hon. Gentleman has a great deal of experience, so he will know that work can be drummed up for lawyers and accountants in many ways including, regrettably, the use of scare tactics.
I shall deal briefly with the Government amendments in this group, which make the technical changes necessary to correct errors in the drafting of the Bill, before turning to the Opposition amendments. Government amendments Nos. 78 to 81 and 83 to 87 make minor technical changes to the operation of the rules for trusts for disabled persons and trusts established by someone who expects to become disabled in future. I hope that they will all be welcomed. Government amendment No. 78 makes provision for an interest in possession—IIP—for a disabled person to qualify as a disabled person’s interest when the property was put into a trust before 22 March 2006 but the disabled person only became beneficially entitled to it on or after that date. Without the amendment, that treatment would be available only to property put into trust on or after 21 March 2006.
Government amendment No. 79 is a drafting amendment to ensure that no inheritance tax arises when someone with a condition that is expected to lead to a disability settles property on themselves. Some Members have asked whether the existing provision risks a double charge, but the amendment makes it completely clear that such a settlement is not treated as a potentially exempt transfer. Government amendment No. 80 extends the rules in schedule 20 that apply when an IIP ends on or after 22 March 2006 to IIPs of which a disabled person is the beneficiary. Government amendment No. 81 deals with the rules in section 59 of the Inheritance Tax Act 1984—IHTA—that exclude a qualifying IIP from the inheritance tax charges on a relevant property. It modifies the definition concerning a company that is beneficially entitled to an IIP to include interests that were previously disabled persons’ interests. Government amendments Nos. 83 to 87 modify section 88 of the IHTA so that special treatment given to pre-22 March 2006 protective trusts
is available, too, to trusts created on or after 22 March 2006, where the underlying interest is a disabled person’s interest.
Schedule 20 makes arrangements for IIP trusts set up before 22 March 2006, and Government amendment No. 75 is the core amendment in a series dealing with the transitional serial interest. It provides that a pre-Budget IIP to which someone becomes entitled on the death of their spouse or civil partner on or after 6 April 2008 will qualify as a transitional serial interest, and thus continue to be treated as owned by the surviving spouse or civil partner for inheritance tax purposes. Government amendments Nos. 71 to 74 restructure the existing provisions dealing with transitional serial interests in the light of that change, while Government amendments Nos. 76 and 77 make consequential changes elsewhere in schedule 20.
The hon. Member for Chipping Barnet (Mrs. Villiers) made a similar point in Committee, although the amendments that she tabled did not address the precise issue that we have tackled. Opposition amendment No. 59 returns to the matter and would enable the benefit under the trust to be passed between spouses and civil partners while they are both living. The Government amendments, however, provide that that can happen only as a result of the death of one partner. The Opposition’s approach is open to exploitation through the use of lifetime transfers, so I cannot accept it. Nevertheless, I hope the hon. Lady will agree that the Government’s amendments address the core concerns in this area, and I hope that she will support them.
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