Previous Section Index Home Page

5.45 pm

Government amendment No. 82 is a minor correction to the transitional serial interest rules which provide for disabled person’s interests created for the settlor or their spouse to be disregarded when charging other trusts created by the same settlor. Opposition amendment No. 57 covers similar ground, but I am advised that there is a technical reason why it fails to hit the right target. Given the technicality of the subject, I hope the hon. Lady will agree that her amendment is not necessary. I assure the House that my officials will be happy to discuss the details with interested parties if necessary. The matter was debated at some length in Committee, and the hon. Lady and I agreed that it needed further consideration. I hope she will acknowledge that that has taken place.

Government amendment No. 70 deals with who should be able to set up a trust for a bereaved minor. That returns to the point that the hon. Members for Falmouth and Camborne (Julia Goldsworthy) and for Dundee, East (Stewart Hosie) raised in Committee regarding legal guardians being able to set up trusts for bereaved minors. As I mentioned then, people other than parents can still set up such trusts. All that schedule 20 does is apply tax charges to amounts in excess of the £285,000 which is the current inheritance tax threshold. I asked my officials to consider whether a wider definition of “parent” could safely be put within the scope of schedule 20, and to examine the technical and legal difficulties associated with guardianships and the various definitions.

Government amendment No. 70 deals with that point. It extends the meaning of “parent” for these
4 July 2006 : Column 696
purposes to cover individuals who, immediately before they died, had parental responsibility for a child under the relevant legislation for England, Wales and Northern Ireland. For Scotland, the amendment refers to parental responsibilities under Scottish law. I am informed that the amendment provides the security that will allow the provision to operate. That means that anyone with parental responsibility will be able to create trusts that are exempt from IHT charges in the event of their death, in exactly the same way as parents can. I hope that hon. Members will welcome the change. I am grateful to those who raised the matter and debated it in such a constructive way in Committee.

Government amendments Nos. 90 to 96 deal with consequential changes to the capital gains tax regime. Amendment No. 93 alters a Taxation of Chargeable Gains Act 1992 reference, and amendment No. 96 extends holdover relief to property leaving age 18-to-25 trusts when the beneficiary attains or is under the age of 18.

Government amendments Nos. 88 and 89 make a small change to the way in which the new rules interact with section 144 of the Inheritance Tax Act. Amendment No. 89 allows a two-year period in which a will can effectively be rewritten to cover deaths that took place before Budget day, but where the rewriting takes place after Budget day. Amendment No. 88 is a straightforward drafting correction. In Committee the hon. Member for Chipping Barnet tabled amendments with a similar intention. She will recall that I noted at the time that the Opposition amendments were technically deficient, but I undertook to give the matter further consideration. I have done that. The hon. Lady has returned to the same point in her amendments Nos. 54 and 55, but I hope she will accept that the Government amendments deal with the point.

New clause 2, the consequential amendments and the Opposition amendments to schedule 20 are simply not necessary. New clause 2 seems to be intended to carve out special IHT treatment for trusts that are set up on divorce in relation to life insurance protection policies and for some disabled people. It starts by saying:

for those purposes. That prompts the question of who would judge whether the test was satisfied. There is no justification for special treatment for life insurance protection policies. The Government are not denying that insurance is important, we are merely saying that this particular asset does not require special provision in the tax regime for trusts.

Secondly, on relationship breakdown settlements, I can only repeat what I have said on previous occasions. HMRC is advised that trusts are rarely used in divorce cases, and their use is certainly not necessary. There has been some discussion of that this afternoon. Where they are used, the balance will often have been tipped by the additional IHT advantages that a trust can bring. I referred at the beginning of my remarks to the importance of tax neutrality as one of the issues that the Government were addressing here in relation to trusts.

4 July 2006 : Column 697

Mrs. Villiers: Will the right hon. Lady acknowledge that if schedule 20 is agreed to, there will be an additional tax charge in divorce cases where a spouse is given the right to live in a house until the children finish their education, because either there will be a new IHT charge, if it is a trust, or there will be a new income tax or capital gains tax, if another mechanism is used?

Dawn Primarolo: We have crossed this ground before. The answer is no, because a charge against the property is often used to give protection in this situation. The hon. Lady puts the case for life policies in trust on the basis that they could give rapid access to cash with no need for probate, but I absolutely disagree with her because that can still be obtained by using trusts, in particular a bare trust.

Mrs. Villiers: On life insurance trusts, does the right hon. Lady stand by the statement made clearly in the guidelines issued by the Treasury on 7 April, and by the then Chief Secretary on Second Reading, that no life insurance policies written in trust before 22 March will be affected by schedule 20 charges—not one?

Dawn Primarolo: We covered that in Committee as well. I have made the position on insurance policies quite clear and the statements to the House have been correct.

On the hon. Lady’s final point with regard to trusts for disabled persons, the Opposition seek again to operate the rules by reference to the Mental Capacity Act 2005 and to extend eligibility to those entitled to the lower components of disability living allowance. I have explained why the Government consider the existing definition, based on that Act, to be more appropriate, and that was supported by the vast majority of respondents to a recent consultation. It is also easy to administer. I have set out the case for not casting the eligibility criteria so wide as to include people who do not require a privileged trust to manage their financial affairs.

Let me deal first with the Mental Capacity Act. First, it is not yet in force and would mean a delay in the introduction of the provisions for disabled trusts. Opposition Members may think that that is desirable; I do not. In any case, it is a mistake to think that that Act will deliver a ready-made answer to the question that matters for IHT purposes. Capacity under the Act is not an all-or-nothing issue. A person may lack capacity for dealing with some matters while remaining quite capable of dealing with other aspects of their life. Any order under the Act will intervene in the person’s affairs only to tell them what should happen.

The Opposition have also made the point that the consultation on the trust modernisation is not relevant to this point. That consultation dealt specifically with the question of catering for mental as well as physical incapacity, and was deliberately focused on cases where the disabled person faces substantial difficulties in handling their financial affairs. The measure was not intended as a relief for disability, and as such there is no justification for extending the definition.

4 July 2006 : Column 698

Mrs. Villiers: The Paymaster General has repeatedly referred to the consultation that she carried out on the definition of disability. I have the summary of the responses and it says:

the definition—

They did express their concerns.

Dawn Primarolo: Yes, some did, and I shall go on to make the points for the hon. Lady. This is a difficult area of legislation and there is not unanimity among all the groups. I concede that point, and I have always conceded it. We are concerned with the majority. If the Government undertake a consultation and refuse to go with the majority on the basis that some now have a different view, or at the time had a different view, it makes it impossible to deal with any legislation in this area. The Department undertook extensive consultation with charities and groups representing the disabled when arriving at the definition of disability for income tax and capital gains tax purposes.

Julia Goldsworthy: Will the right hon. Lady give way?

Dawn Primarolo: I will give way in a moment.

Those that participated were Contact a Family, the Council for Disabled Children, the Disability Alliance, Mencap, the Thalidomide Trust, Barnardo’s, Scope, the Disability Rights Commissioner and the Family Fund.

Mrs. Villiers: Will the right hon. Lady give way?

Dawn Primarolo: No, I shall finish this point and then I will give way on the disability point.

The Council for Disabled Children represents a long list of organisations, which I do not have time to read into the record because the House needs to move on.

Mrs. Villiers: Will the right hon. Lady give way?

Dawn Primarolo: If the hon. Lady will let me make this point, I will give way to her. I have already said that.

That list includes organisations such as the Association of Directors of Social Services, the Royal College of Nursing, the Parents Autism Campaign for Education, the National Children’s Bureau, Children in Scotland, and the Children’s Trust. It also included the National Autistic Society, which I understand has since developed its view and now has a slightly different view, and is, along with Mind and the Parkinson’s Disease Society, a signatory to a letter saying that its views have moved on. But the rest have not. I have repeatedly asked my officials whether the Department has had formal representations on this matter. Apart from the circular to members of the Committee, I cannot find any reference to these organisations wanting to come back again on this.

4 July 2006 : Column 699

The point here is that this is a difficult area and it will always be. When any Government settle on a definition, they do so after consultation and understanding what the majority have said, and, in fairness, reflecting in their response where a different view was taken and why.

I said that I would give way to the hon. Member for Falmouth and Camborne and then I will give way to the hon. Member for Chipping Barnet.

Julia Goldsworthy: I thank the right hon. Lady for giving way. I wish to make a point about mental health organisations that represent people with fluctuating conditions. In my speech, I mentioned that people with fluctuating conditions might have capacity at some points and that at other points they might not. It is a fluctuating capacity—that is the definition—so although such people might have capacity at certain times, they are likely to become ill again. What representations did the Minister receive in the consultation that she refers to?

6 pm

Dawn Primarolo: We dealt with fluctuating conditions in Committee, and I made it absolutely clear to the hon. Lady then what would happen in such circumstances. If she cannot remember that, I cannot help her, but I will send her the reference.

Mrs. Villiers: The right hon. Lady said that she wished to have evidence of representations having been made to the Treasury on the definition of disability. I refer her to a document I have in my hand, “Response to Inland Revenue proposals: modernising the tax system for trusts” by the Disability Alliance, which is one of the organisations that the Paymaster General recently cited as supporting her definition. It states:

where it refers to the definition in question—

The Disability Alliance has expressed concern, and so have a number of other organisations, as set out in documents that I have in my possession.

Dawn Primarolo: The hon. Lady continues to demonstrate her lack of understanding of the complexity of the consultation with regard to definitions of disability, the range of organisations that took part in it, and my acknowledgement that some of those organisations—some of them—did not take the same view as us, and that some organisations have continued to advance their view. Their views are not ignored, but the Government have to take a reasonable decision. Having changed a regime only two years ago on the basis of what the majority wanted, it is not reasonable to change it yet again—especially as the Opposition go on so much about certainty—on the basis of the views of certain individuals.

I have dealt with the amendments in this group. I have explained to the hon. Lady about those of her amendments that I do not accept as they would
4 July 2006 : Column 700
fundamentally undermine the Government’s objectives, and I have also explained about amendments of a similar nature to some of hers that the Government have tabled in order to deal with some of the points that Committee members thought should be looked at further.

What this debate has made clear is that Opposition Members want to strike down inheritance tax. The hon. Lady was not prepared to make a commitment today on whether it will be abolished if her party ever get elected, but she has confirmed that her party is considering abolishing it. It beggars belief that she has the audacity to stand before this House and say that the vulnerable will be attacked, when that is not true, and that the principle in question is being undermined, when that is not true, and then to say that at one fell swoop billions of pounds will be wiped off public expenditure, so that that money cannot be spent on services for such vulnerable people.

I commend the Government amendments to the House, and I call on my hon. Friends to oppose the Opposition amendments if they are pressed to a vote.

Mrs. Villiers: I thank Members for their contributions, and I emphasise that my party is not asking for special tax privileges for trusts. All we are saying is that the Government should not slap punitive new tax charges on trusts, the vast majority of which are set up for completely non tax-related reasons. They are set up to provide for family members—to provide security for families for the future—and we oppose the charges because they are an attack on prudent and responsible behaviour.

The Paymaster General persists with the misleading statement that the Government seek to align the tax treatment of trusts with mainstream treatment. That is simply not true; they seek to bring all trusts within the punitive regime that has existed for many years for discretionary trusts. The tax regime does not currently give special tax privileges for trusts; that is why they are not largely used for tax avoidance. We deny that we are seeking special privileges for trusts; we just wish to oppose the Government’s punitive new charges in this area.

The Paymaster General believed that there was no problem in relation to people changing their wills, and that few people would be affected. In that case, why has she tabled 50 amendments to her own schedule? The Paymaster General seemed to regret that I have made the same speech on a few occasions. The last time I made the speech it seemed to have an impact, because the Government promptly did what I asked them to do three weeks later through amendments in Committee.

The Paymaster General gave a long list of organisations that apparently support her position on the disability consultation, but they patently do not. I have given the House an example of an organisation that she listed but which expressed grave concern about the definition in question. It is my understanding that only six organisations that represent disabled groups responded to the consultation on this point and, as I have told the House, they expressed concerns.

The Paymaster General says that the Government cannot adopt the Opposition’s amendments because the Mental Capacity Act 2005 has not yet come into
4 July 2006 : Column 701
effect. That is no barrier. We can incorporate a provision in that Act, even though it has not yet come into effect. If we incorporate it in the Inheritance Tax Act 1984 as a result of this Finance Bill it can happily take effect from the moment of Royal Assent.

The Paymaster General says that there is no justification for introducing special treatment for life insurance policies. Why then did she table amendments in Committee to give special treatment to life insurance policies? She also refused to answer my question about whether the then Chief Secretary was correct in saying to the House that no life insurance written into trust before Budget day would be affected by the schedule 20 changes. She refused to answer that question because that statement was not true then and is not true now.

The Paymaster General brushed aside my concerns about divorce by saying, “You don’t need trusts in divorce, as plenty of other mechanisms are available.” Frankly, those mechanisms are not available to people whose divorces are already concluded. They might have trusts already, and now, thanks to the Paymaster General, they face the deeply unpleasant prospect—both financially and emotionally—of going back to court to have their divorce settlements varied to try to resist the Government’s attempt to place new tax charges on divorce.

The Paymaster General also refused to be drawn on other alternatives on offer that perform a similar function to a trust in relation to a divorce—I acknowledge that—such as a charge or retaining legal ownership. Both those will involve a new tax charge, whether that is an additional income tax charge or a capital gains tax charge. In either case, unless the Opposition amendments are agreed to, there is the prospect that people who get divorced and wish to allow their spouse to live in a property until their children have completed their education will be paying new taxes, thanks to schedule 20.

We have emphasised throughout the debate the huge value that trusts provide to ordinary hard-working families. The Government’s proposals will hit not just the super-rich, but a whole range of people who have done nothing more criminal or irresponsible than to try to provide financial security for their families’ future, which is why I will press new clause 2 to a Division.

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

Next Section Index Home Page