Draft Taxation of Equitable Life (Payments) Order 2011
The Committee consisted of the following Members:
† Banks, Gordon (Ochil and South Perthshire) (Lab)
† Blears, Hazel (Salford and Eccles) (Lab)
† Burden, Richard (Birmingham, Northfield) (Lab)
† Goodwill, Mr Robert (Scarborough and Whitby) (Con)
† Hemming, John (Birmingham, Yardley) (LD)
† Hoban, Mr Mark (Financial Secretary to the Treasury)
† James, Mrs Siân C. (Swansea East) (Lab)
† Leslie, Chris (Nottingham East) (Lab/Co-op)
† McCartney, Karl (Lincoln) (Con)
† Poulter, Dr Daniel (Central Suffolk and North Ipswich) (Con)
† Reevell, Simon (Dewsbury) (Con)
† Ruddock, Joan (Lewisham, Deptford) (Lab)
† Sharma, Alok (Reading West) (Con)
† Tomlinson, Justin (North Swindon) (Con)
† Williams, Stephen (Bristol West) (LD)
Wilson, Sammy (East Antrim) (DUP)
† Wollaston, Dr Sarah (Totnes) (Con)
Lydia Menzies, Committee Clerk
† attended the Committee
Fifth Delegated Legislation Committee
Wednesday 8 June 2011
[Mr Christopher Chope in the Chair]
Draft Taxation of Equitable Life (Payments) Order 2011
2.30 pm
The Financial Secretary to the Treasury (Mr Mark Hoban): I beg to move,
That the Committee has considered the Draft Taxation of Equitable Life (Payments) Order 2011.
It is a pleasure to serve under your chairmanship again this afternoon, Mr Chope.
When we introduced the Equitable Life (Payments) Bill last year, we provided a power for authorised payments made by the scheme to be free of tax and to be disregarded for the purposes of assessing eligibility for certain means-tested support. In the spending review we announced that payments would be free of tax, and there were strong reasons for doing so.
A key issue was simplicity. It would be extremely difficult to decide the appropriate tax treatment of a payment that represents loss suffered on an investment over a considerable period of time, during which the circumstances of many policy holders may have changed. It would be challenging to explain any such treatment and associated reporting requirements to those in receipt of payments. Such an approach would also be extremely time-consuming. In light of our commitment to concluding the Equitable Life issue as quickly as possible, it is untenable.
Secondly, there was a total loss of £4.1 billion, and £1.5 billion will be available through the scheme, based on our careful assessment of what funding would strike a fair balance between fairness for policyholders and fairness to the taxpayer. Adding a tax liability to payments on top of that discount would disrupt that balance. Articles 2 to 4 provide for authorised payments to be disregarded for the purposes of capital gains tax, corporation tax and income tax. All direct payments from the scheme to identified payees, as set out in the Equitable Life payment scheme design document, are authorised payments under the scheme. Where Equitable Life has only one set of data and no records of individual members of a group pension scheme, the scheme will use the trustee of the group pension scheme as a paying agent. Onward payments from those trustees to their pension scheme members are also authorised payments for this purpose.
Article 5 provides for inheritance tax. It ensures that someone’s right to, or interest in, an authorised payment will be disregarded when calculating the value of that person’s estate on death for the purposes of inheritance tax. Furthermore, it ensures that such rights or interests are similarly disregarded when calculating the value of relevant property subject to a 10-year anniversary charge for inheritance tax, where an authorised payment is made on or after such an anniversary. That means that
no estate will have to be reopened for inheritance tax to be charged on payments received after death. Payments received before death will not be ring-fenced to give ongoing relief from inheritance tax. Such ring-fencing is not practicable.Article 6 provides that when calculating investment income for the purposes of entitlement to tax credits an authorised payment shall be disregarded. Chapter 9 of the scheme design document published last month details how the tax relief set out in the order will work in relation to the scheme.
I hope that all members of the Committee will support the order. By ensuring that the order is made before the end of the month, we can give certainty and reassurance to those who receive the first payments, which will be made before 30 June. I hope that I have reassured hon. Members that the order reflects the Government’s principles of fairness, transparency and simplicity in our response to the Equitable Life saga and that Members will give the order their full support.
2.33 pm
Chris Leslie (Nottingham East) (Lab/Co-op): I should say at the outset that this is a fairly straightforward statutory instrument. The Minister’s comments are uncannily similar to those delivered yesterday in the other place by Lord Sassoon.
Chris Leslie: Very similar, in fact. Some Equitable Life policy holders remain dissatisfied with the Government’s strategy in not delivering, as they see it, 100% compensation for their full relative losses. It is for them to draw their own conclusions about whether the Government have kept their word in the strategy they have pursued. Having said that, the strategy is in place. Now that it has completed the legislative process, it is important to ensure that compensation payments are made as quickly as possible.
Will the Minister respond to a couple of quick points? First, does he have any idea what the largest compensation payment is likely to be? If we are discussing what is essentially a tax relief order, will the scale of compensation payments be particularly significant? Does he have a sense of what the largest of those compensatory payments will be? If a big lump payment is being made, and it is free from tax, it would be interesting to know whether we are talking about tens of thousands of pounds or more than that.
Will the Minister update the Committee on when payments might be made and when he envisages their completion? Many people have been waiting for some considerable time, and the draft order is part of the process. Finally, the order exempts any compensation payments from capital gains tax, corporation tax, income tax, inheritance tax and tax credits, which is all good and sensible. As I understand it, however, the payments could still affect the social security benefits of those in receipt of compensation. For example, if a former policyholder receives housing benefit, council tax benefit, jobseeker’s allowance, employment and support allowance, carer’s allowances and so on—a number of elderly people are affected by this particular set of compensatory arrangements—their benefits may be adversely affected,
because of the means-testing arrangements. Why have the Government chosen to exempt tax, but not social security? That is a genuine question. I do not know whether the measure follows a pattern of tax-relief arrangements for similar compensatory or ex-gratia payments in the past or whether there are genuine principles for tax relief on compensation for maladministration. From some perspectives, however, it seems a little unfair that those who may be the least well off financially do not get the benefit of a disregard, whereas those who pay tax do. Will the Minister clarify that point?2.37 pm
Mr Hoban: The hon. Gentleman has made some interesting comments. The Government have moved quickly to resolve the issue of Equitable Life. His predecessors did not move as quickly when they were in government. We have seen a swift, simple and fair settlement of the issue, and we will start to make payments at the end of the month. The scheme design document, which we published last month, sets out the timetable for making payments to Equitable Life policyholders. For non-with-profits annuitants, the payments will take place over the course of the next three years to enable us to maximise the amount of compensation that we can pay to policyholders. With-profits annuitants will receive payments over the duration of their life to match the stream of income that they would have received if maladministration had not taken place. That process is in train.
The hon. Gentleman asked about the size of the compensation payments, which varies. As he will know from the scheme design document, we have set a de minimis level. The payments will be in proportion to the amount of money that the policyholders have lost. With the exception of with-profits annuitants, everyone will get a proportion of what they would have received. Everyone, apart from WPAs, will get about 22.4% of their losses. Some significant losses may have been incurred, but people will receive approximately a fifth of those losses only. It would not be appropriate to add tax on to those losses, regardless of how big the compensation payment actually is.
The hon. Gentleman asked a fair question about the distinction between tax and benefits that is set out in the draft order. Let me add a bit more detail to the approach that we have taken. The income assessment used when deciding eligibility for child and working tax credits is generally based of the income of a tax year, which is chargeable to income tax. As authorised payments are to be exempt from tax, it follows that they should also be disregarded for tax credit purposes. Most of us bear in mind the fact that an Equitable Life policyholder suffering loss is elderly. One of the interesting facts that emerged from the analysis by Towers Watson of policyholders was that quite a number of people who suffered losses were relatively young, and this is still a relevant concern for them.
For the purpose of social security, including pension credit, and social care, with-profits annuity payments will be classed as income, and as capital for payments in relation to other policy classes. They will affect eligibility in the same way as any other changes to a recipient’s income or capital, which is fair. Although treating money that should have been received over many years as one
year’s income could potentially distort the assessment of an individual’s eligibility for benefit, treating it as an asset is fair, as the money would have been part of a policyholder’s capital whenever it was received.Of course, capital limits do not immediately cut off eligibility for benefits. They work on a sliding scale, gradually reducing support for individuals with larger assets. It is unlikely that many recipients who would otherwise have been eligible for means-tested benefits will receive sufficiently large payments to affect that eligibility dramatically. For WPAs, the payments will be treated as income. That is fair, because a large proportion of their payments relate to the future loss, which would ordinarily have been tested as income for the purpose of means-tested benefit.
Chris Leslie: I may be wrong, but as far as I understand it, there is no appeals process in this compensation arrangement. Will an individual receiving compensation, whose benefits or living standards will be affected—they will encounter hardship as a result of the receipt of this asset being taken into account in calculation of their benefits—be able to appeal to the Government or others on the grounds of hardship, because that sudden compensatory lump sum arrived at that time? Or is it essentially a matter of “That is it”? Is there any flexibility? There could be circumstances in which individuals encounter hardship as a result of that compensatory payment.
Mr Hoban: The hon. Gentleman poses a slightly curious situation. To deal with the first point, there is an appeals process, as I am sure he will recollect from the scheme design documents. It would be an appeal on the basis of whether there was a correct calculation of the loss; whether the payment agency correctly identified all the premiums paid by the policyholder. If someone believes that NS&I, which will be our delivery partner, has not properly identified all those payments, they can appeal. There is a two-stage appeal process. The first stage is within NS&I, our delivery partner, and we are in the process of setting up an independent body to hear a second stage, so an appeal mechanism is in place.
The hon. Gentleman raised the issue of means-testing. There was widespread concern when the previous Government announced their response to the ombudsman’s report about whether there would be means-testing for compensation. There was strong opposition across the House to means-testing, so every policyholder will be treated in the same way. Everyone, excluding WPAs, will have a pro rata discount applied to their losses.
We are making a payment to policyholders. For benefits purposes, that will be treated as an addition to their capital. I am not sure that I see the logic of the hon. Gentleman’s comment that an increase in capital makes someone worse off. I do, however, accept his point that that would affect someone’s eligibility for benefits. That is why we have made a distinction. We could have said that these payments were income. However, we have chosen to treat them as capital, so there is a fairer outcome. We should remember that when these policies matured, they would have received a lump sum, which would have been added to their capital. The original payment that would have been part of the capital compensation is equally treated as part of their capital. That is a fair balance that we have sought to strike.
They will not be paid income tax, but the payments will be counted towards capital in determining eligibility for some benefits.I hope that that has clarified the situation. It is a difficult balance to strike, and we have had to think it through quite carefully in getting the design of the
scheme right, but I think that the scheme achieves the right balance between fairness to the policyholder and fairness to the taxpayer, which we have sought to achieve throughout the process.