Finance Bill

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Schedule 4

Inheritance tax: transfer of nil-rate band etc
Mr. Gauke: I beg to move amendment No. 62, in schedule 4, page 131, line 39, leave out from beginning to end of line 7 on page 132 and insert—
‘(3) Where a claim is made under this section, the nil-rate band maximum at the relevant time is to be treated for the relevant purposes as increased by the relevant percentage specified in subsection (4) below (but subject to subsection (5) and section 8C below).
(3A) For the purposes of subsection (3) above—
(a) where the claim specifies that it is made in relation to the death of the survivor (“a death claim”)—
(i) “the relevant time” is the time of the survivor’s death, and
(ii) “the relevant purposes” are the purposes of the change to tax or additional tax on or by reason of the death of the survivor;
(b) where the claim specifies that it is made in relation to an immediately chargeable lifetime transfer (meaning a chargeable transfer which is not made on death and which was not a potential exempt transfer) (“a lifetime claim”)—
(i) “the relevant time” is the date on which that chargeable transfer was made, and
(ii) “the relevant purposes” are the purposes of the charge to tax on that chargeable transfer (not being additional tax payable by reason of the death of the survivor).
(4) For the purposes of subsection (3) above, but subject to subsection (4A) below, “the relevant percentage” is—

E is the amount by which M is greater than VT in the case of the deceased person; and
NRBM is the nil-rate band maximum at the relevant time.
(4A) Where a claim has been made under this section in relation to an immediately chargeable lifetime transfer (“the spent transfer”) and the survivor’s death did not occur within 7 years after the date on which that chargeable transfer was made (“the spent transfer date”), then for the purpose of all claims under this section in relation to occasions (whether immediately chargeable lifetime transfers or the death of the survivor) on or after the seventh anniversary of the spent transfer date the adjustment specified in subsection (4B) below shall be made for the purpose of calculating the relevant percentage under subsection (4) above.
(4B) Subject to subsection (4C) below, E for the purpose of the formula in subsection (4) above shall be reduced by R per cent of itself where—

PNRB is the amount which would have been survivor’s nil-rate band maximum at the time of the spent transfer if no claim had been made under this section in relation to the spent transfer;
TNRB is the survivor’s nil-rate band maximum as computed in the light of the claim made under this section in relation to the spent transfer; and
ELT is the amount by which the value transferred by the spent transfer, added to the value transferred by any chargeable transfers made by the survivor within 7 years before the spent transfer, exceeded PNRB.
(4C) Where an adjustment was made under subsection (4A) above in calculating the relevant percentage in relation to the spent transfer, the adjustment specified in subsection (4B) above shall be made in relation to the amount to which E was adjusted on that occasion; and this subsection shall apply cumulatively where lifetime claims have been made in relation to successive spent transfers each of which has given rise to an adjustment under subsection (4B) above.’.
The Chairman: With this it will be convenient to discuss the following amendments: No. 61, in schedule 4, page 131, line 41, leave out ‘on’ and insert
‘or additional tax on or by reason of’.
No. 63, in schedule 4, page 132, line 28, leave out from beginning to ‘(if’ in line 30 and insert—
‘(a) in the case of a lifetime claim,
(i) by the survivor within the period of two years from the end of the month in which a lifetime transfer was made, or such longer period as an officer of Revenue and Customs may in the particular case allow, or
(ii) (if no such claim is made and the survivor dies before the end of that period) by the personal representatives of the survivor within the permitted period;
(b) in the case of a death claim,
(i) by the personal representatives of the survivor within the survivor within the permitted period, or
(ii) ’.
Mr. Gauke: I shall start with amendment No. 61. Traditionally, and in the majority of cases, an inheritance tax charge is triggered by the death of an individual. At that point, there will be a charge on the estate under section 4 of the Inheritance Tax Act 1984. However, there are other circumstances in which a charge may be triggered, such as in the event of a lifetime transfer—a potentially exempt transfer that turns out not to be exempt because it happens within seven years of the death. Let us consider circumstances in which person A makes a gift in, say, 2005, dies two years later and can no longer benefit from the provisions of potentially exempt transfers. In assessing the tax payable, it is necessary to look back at those gifts.
I should be grateful if the Minister confirmed my understanding of the arrangements. Is it the intention that the transferable nil-rate band will be available for both the estate on death and for any lifetime gifts? The Law Society has expressed concern that the drafting of the proposals is not as clear as it could be. I draw attention, in particular, to the provision that states:
“for the purposes of the charge to tax on the death of the survivor”.
It is possible to construe that as relating simply to the charge triggered by death in relation to the estate, not the lifetime transfer. I have acknowledged that such interest has been shown by the Law Society, and its proposed clarification when referring to the purposes of the charge to tax on the death of the survivor is to state
“or additional tax on or by reason of”
the death of the survivor, thus unambiguously incorporating the lifetime transfer. It would be unfair if the transferable nil-rate band should not extend to a gift made by the surviving spouse in his or her lifetime, and I do not believe that the Government intend that it should not.
Stephen Hesford (Wirral, West) (Lab): The hon. Gentleman posed the example of a person who makes a gift in 2005, whose death two years later ensures that it does not qualify for the saving provisions. Is it not the case that all that has happened there is that the saving provisions have not applied and that therefore there is a death and an associated inheritance tax situation to deal with? There are not two situations, there is just one: the individual does not benefit from the rules that they tried to benefit from because they died too soon.
Mr. Gauke: I am grateful to the hon. Gentleman—I think. He may help me to explain my point. In the case of a gift that does not benefit from the transferable nil-rate band, it is possible, although I do not want to press this interpretation too hard, that the benefit gained from the transferable nil-rate band would only apply with regard to the estate on death, and not with regard to a lifetime gift. I do not think that that is the Government’s intention.
Stephen Hesford: It will all just come back into the pot.
Mr. Gauke: No, I do not think that it does. If there is an ambiguity, it is that the element of the estate that was given away in the lifetime of the surviving spouse may be liable for inheritance tax, where as if the nil-rate band of the deceased spouse had been included, that would not be the case. That is the concern that I am raising.
A slightly more complex but related arrangement exists with regard to amendments Nos. 62 and 63. Those of us who served on the 2006 Finance Bill will recall lengthy debates and considerable controversy regarding the Government’s proposals on trusts and their concern that trusts were being used as an avoidance mechanism for inheritance tax. As a consequence of the Finance Act 2006, establishing a trust in certain circumstances may trigger an immediate liability for inheritance tax, which is a slightly different arrangement from that for an ordinary lifetime gift. The concern raised by the Law Society, which I do not think is a matter of ambiguity or clarification as the schedule does not currently address it, is that in creating a trust for one of her children, for example, the surviving spouse would immediately face a liability for inheritance tax and would not be able to make use of the transferable nil-rate band against the lifetime chargeable transfer made by the survivor.
Amendment No. 62 is a lengthy one and I am sure that the Financial Secretary and you, Sir Nicholas, will be pleased to know that I do not intend to go through it line by line. I have described the essential purpose of amendments Nos. 62 and 63 because the concern appears to be legitimate. I would be grateful for clarification from the Financial Secretary on those amendments.
Jane Kennedy: I confess that I do not have a great deal of sympathy with the amendments. Where lifetime transfers occur within seven years of someone’s death, they are counted as part of the death estate for inheritance tax purposes. Amendment No. 61 seeks to clarify that any transferred nil-rate band can be set against the whole estate, including those transfers made within seven years of death, and not only the part left behind at the point someone dies. I would like to reassure the Committee that amendment No. 61 is unnecessary. As drafted, the Bill refers to the transferred nil-rate band applying to
“the charge to tax on the death of the survivor”
and that is already sufficient to encompass lifetime transfers on which an inheritance tax charge subsequently crystallises on death.
Amendments Nos. 62 and 63 relate to the situations in which transfers of assets during someone’s lifetime give rise to an immediate inheritance tax charge. The Bill allows unused nil-rate band from a first death to be transferred for use by the estate of the surviving spouse on their death—the hon. Gentleman used the example of a widow seeking to make provision for her children. The amendments would allow unused nil-rate band from a deceased spouse to be transferred to the survivor during their lifetime, in order to reduce the immediate inheritance tax charge triggered if assets exceeding the current nil-rate band were transferred into trust. We do not believe that that change is either necessary or appropriate.
In developing this measure, we have focused on providing a simple mechanism for ordinary married couples and civil partners to be sure that their heirs will benefit from both partners’ individual inheritance tax nil-rate bands. The Bill seeks to obviate the need for the planning that would otherwise be required to exploit fully the nil-rate band of the first partner to die. Allowing any unused nil-rate band to be transferred when the surviving spouse dies achieves that intent. We do not believe that it is right to extend the measure to reduce lifetime inheritance tax charges. The inheritance tax charges on transfers into trust are designed to ensure that assets held in trust bear a fair share of inheritance tax.
We wish to reassure ordinary families that if a married couple own property in excess of the nil-rate band, they can be sure that both of their individual nil-rate bands will ultimately be taken into account, without the need for complex legal and financial planning. However, we are not minded to go further and provide relief to those who can afford to transfer more than £300,000 into trust while they are still alive. I fully accept that there are many reasons why someone might want to transfer assets into trust, but I believe that the current rules provide a generous enough exemption for such transfers, and that the changes the amendments seek are unnecessary.
The amendments also appear to contain some technical deficiencies—I appreciate that the Law Society may have been behind them, but we do not think that they work as they are perhaps intended to. In particular, they do not make the consequential changes to the commencement provision required for the transfer of unused nil-rate band to be effective before the surviving spouse dies. I therefore hope that the hon. Gentleman will not press his amendment to a Division. If he does, I shall invite my hon. Friends to resist it.
12.45 pm
Mr. Gauke: With regard to amendment No. 61, if the Financial Secretary is saying that it is the Government’s intention that lifetime gifts, should they not be potentially exempt transfers, will benefit from the proposal, then we welcome that clarification. The drafting produced by the Law Society is clearer than in the Bill, but if we have clarification that should be sufficient.
I note the Financial Secretary’s comments on amendments Nos. 62 and 63, but there is more to be said for them than she gives credit for. There is quite an argument—I put it no stronger than that—for permitting the nil-rate band to be used in such circumstances, although I accept that these proposals do not deal with the priority cases. They do not deal with the joiner to whom she referred, for example. There is an argument for consistency in this matter. We raised a number of concerns in 2006 about the proposals on creating an immediate liability to inheritance tax on trusts. It is not my intention to press this matter to a vote and I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Mr. Gauke: I beg to move amendment No. 44, in schedule 4, page 132, line 25, at end insert—
‘(8) For the purposes of the operation of this section, section 18(2) shall be ignored.’.
The Chairman: With this it will be convenient to discuss the following amendments: No. 45, in schedule 4, page 133, line 44, at end insert—
‘2A (1) Section 18 (transfers between spouses) is amended as follows.
(2) After subsection (4) insert—
“(5) Subsection (2) shall cease to have effect from 6 April 2008.”’.
No. 46, in schedule 4, page 136, line 36, at end insert—
‘(6) Where the deceased person died before 13 March 1975, section 8A applies as if any property then left to the survivor was not charged to estate duty, whether or not it was.’.
Mr. Gauke: Amendments Nos. 44 and 45 address the issue of transfers to spouses who are non-domiciled in the UK. There is a long-standing limit on the transferable nil-rate band for non-domiciled spouses of just £55,000. That has stood since 1994 and has not been reformed. The Bill will reform the law relating to residents and domiciles. There is an argument for looking at the issue in the context of that reform and of the reform making the nil-rate band transferable.
Amendment No. 46 is the most significant of all the amendments that we have tabled on schedule 4. The issue was touched upon by the hon. Member for South-East Cornwall. It is about looking back to when the first death occurred some years ago. It is to be welcomed that, as part of the package, the Government’s approach looks back. The measure is not just about the death of the first spouse after 9 October 2007. It also looks back.
There is a distinction between inheritance tax and capital transfer tax on the one hand and estate duty on the other. Under inheritance tax and capital transfer tax, there was a full spousal exemption so that, when the first spouse dies and leaves his or her estate to his or her spouse, the nil-rate band has not been used at all, because it is entirely exempt from the IHT or capital transfer tax regimes.
With regard to estate duty, the situation is somewhat different, and transitional provisions were made between 1972 and 1975, which complicates matters. Essentially, estate duty was charged on the first death, but the property affected could be left out of the charge on the second death, which is the other way round from the current arrangements. Consequently, on the survivor’s death, the property could be left out of the estate for IHT purposes under the surviving spouse exemption, although that is now of little value, as I understand it, because it has not been indexed. When the deceased spouse leaves his estate to the surviving spouse, the nil-rate band is not used up if the deceased spouse died under the capital transfer tax or the inheritance tax regime, but if he died under the estate duty regime, he has essentially used up his nil-rate band. Consequently, if the first spouse died before 1972—there is also still an issue if he died before 1975—the surviving spouse is not able to benefit from the policy on the transferable nil-rate band.
That is not just a hypothetical case, as there are real examples. Mr. David Jackson raised that matter with his Member of Parliament, my hon. Friend the Member for Beckenham (Mrs. Lait), who wrote to the Financial Secretary on that point and raised the matter during the Budget debate in March. Mr. Jackson’s mother was widowed in 1969 and died in January 2008. In response to Mr. Jackson’s concern that the transferable nil-rate band would not be of benefit to his mother’s estate, the Financial Secretary said that the test is whether the deceased was the survivor of a marriage and whether there was any unused nil-rate band when the earlier death occurred. In those circumstances, Mrs. Jackson was the survivor, but there was no unused nil-rate band.
Another example is that of Dr. William Bain, who died in 1969, widowing his wife Elizabeth, who died in December 2007. Both of their sons have been in contact with hon. Members: Duncan Bain with my hon. Friend the Member for Chichester (Mr. Tyrie); and Edmond Bain with my hon. Friend the Member for Tatton. They have a letter from HMRC stating:
“There was no spouse relief available under Estate Duty Legislation and as such all transfers were chargeable.”
We are talking about a relatively small number of people. My hon. Friend the Member for Runnymede and Weybridge has tabled a parliamentary question asking how many cases there are in which the first spouse died before 1972, with the surviving spouse living in October 2007. I believe that the Treasury does not have an answer to that, in the sense that it does not know, rather than that it has not responded—I am sure that the Financial Secretary will correct me if I am wrong. Such cases do exist, and I have given a couple of examples to show that.
All members of the Committee will be somewhat sympathetic to those circumstances. Life has not dealt those families the best of cards, in the sense that most of the cases will involve wives who were widowed at a relatively young age and who lived on for many years. Having heard the announcement in October 2007, they could be forgiven for thinking that they would be able to benefit from their deceased husband’s nil-rate band. Of course, for technical reasons, there is no nil-rate band.
This is a question of fairness. It is unfortunate that this relatively small group of people appear to have been left out of the Government’s provisions. I am sure that that is unintentional. I hope that the Minister will look at the matter sympathetically to see whether we can perhaps address what appears to be an anomaly. I can see the logic of the Government’s policy, but a small number of widows and widowers will not be able to benefit from it.
Mr. Breed: I want to emphasise the points made by the hon. Gentleman. There are examples and I have been sent one. I cannot put it more succinctly than Mr. Harvey, who writes:
“My mother died recently and I have been informed by HMRC that despite the new regulations introduced last year on nil-band transfer the executors of her estate cannot use the nil-rate band allowance from her deceased spouse (my father) who died in 1971. My father left everything to my mother but as they had some small savings and there was a house, albeit in joint ownership, the value of the estate was more than the then-limit of £12,500 and my mother, who only had a very small widow’s pension, had to find £850 to pay death duties at the time. HMRC admitted that now having to pay IHT on my mother’s estate is unfair but pointed out that they are only able to work from the regulations which were in existence at the time, ie Estate Duty rather than Inheritance Tax. Ironically, the only reason my mother’s estate will now be liable for IHT is because of the value of the house - the same one - which caused the initial demand for payment back in 1971.”
It is quite clear that others will find themselves in this situation. Although it is a relatively small number of people, as Mr. Harvey puts it:
“It seems particularly unfair for a generation who were frugal and careful with money to a degree almost unheard of today. I also presume that this outcome for what must be a group of mainly elderly widows was never actually intended as part of the new legislation.”
I am sure that that is the case. I hope that fairness prevails and I hope that the amendment will be given proper consideration.
Jane Kennedy: Amendments Nos. 44 and 45 are related to the inheritance tax rules for transfers to spouses who are domiciled outside the UK. As has been described, spouse relief is limited to the first £55,000 of assets transferred when the surviving spouse is domiciled outside the UK. This is a long-standing feature of the inheritance tax legislation. Amendment No. 44 seeks to operate the transfer of nil-rate band as if the limit for such transfers had not existed at the date of the first death. Amendment No. 45 seeks to disapply the limit for all transfers of assets to spouses domiciled outside the UK from April 2008 onward.
The restriction on the spouse exemption dates back to 1975, when the unlimited exemption for all other spousal transfers was first introduced. It is necessary to ensure that inheritance tax is not avoided through transfers of assets to their intended beneficiary via a non-domiciled spouse. Without the restriction an individual could easily transfer an unlimited quantity of assets to their non-domiciled spouse, who in turn could pass the—now offshore—assets back to the intended UK beneficiary without inheritance tax ever biting.
The potential cost to the Exchequer is hard to estimate but could be very substantial indeed. Members of the Committee with particularly long memories—I suspect that includes you and I, Sir Nicholas, and perhaps the hon. Member for Gosport—may recall that a similar amendment was tabled by the hon. Member for Bournemouth, West (Sir John Butterfill) during the passage of the Finance Bill in 1995. The Government of the day argued against the amendment for precisely the same reasons as I have just given.
It being One o’clock, The Chairman adjourned the Committee without Question put, pursuant to the Standing Order.
Adjourned till this day at half-past Four o’clock.
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