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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 Governments 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
estates6 per cent., or 34,000that 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 possessionIIPfor a disabled person to qualify as a disabled persons 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 1984IHTAthat 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 persons
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 Oppositions 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 Governments amendments address the core concerns in this area, and I hope that she will support them.
Government amendment No. 82 is a minor correction to the transitional serial interest rules which provides for disabled persons 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
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 amendmentsNos. 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:
The provisions of Schedule 20 shall not operate so as to discourage, impede or prevent the use of trusts which are set up
for those purposes. That begs 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.
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 chargesnot 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. Ladys 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 persons 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.
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:
some groups representing the disabled questioned whether this
the definition
was too narrow, suggesting that, amongst other things, the definition used in the Disability Discrimination Act 1995 should be used instead.
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 inthis 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, Barnardos, 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 Childrens Bureau, Children in Scotland, and the Childrens 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 Parkinsons 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.
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 capacitythat is the definitionso 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?
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:
The proposals to restrict eligibility to those mentioned in paragraph 2 above
where it refers to the definition in question
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 governments proposal of fairness.
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 organisationssome of themdid 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 againespecially as the Opposition go on so much about certaintyon 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
fundamentally undermine the Governments 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 membersto provide security for families for the futureand 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 Governments 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 they cannot adopt the Oppositions
amendments because the Mental Capacity Act 2005 has not yet come into
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 into 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 dont 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 prospectboth financially and emotionallyof going back to court to have their divorce settlements varied to try to resist the Governments 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 divorceI acknowledge thatsuch 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 Governments 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.
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