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;
and
(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—
where—
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;
and;
(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.
The
position of spouses who are non-domiciled is not as strong as that of
domiciled spouses. I wish to probe the Government’s approach on
the matter. Is the Financial Secretary convinced that the
discrimination—I use that word in a neutral way—between
domiciled and
non-domiciled spouses is consistent with European law? For example, it
would appear that a UK person is treated in a different way from people
who are domiciled in other member states. The schedule may be an
opportunity to look at the matter again. Amendment No. 44 would allow a
non-domiciled spouse a full nil-rate band transfer. Alternatively,
amendment No. 45 would abolish the non-domicile limit. I would be
grateful to know the Government’s reason for the continuation of
the £55,000 limit and whether they will review
it. 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.
| 
