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- “the
establishment of a Finance Bill Sub-Committee ... by this House
seems to me to be a quite deliberate claim to additional powers over a
Bill in respect of which this House is not supposed to have any power
at all”.
- “I am wholly
opposed, and so is the Government as a whole, to the Lords
transgressing into areas of
taxation”.
It is difficult to see what we are doing that the Government consider to be so wrong. Indeed, when the initiative was taken four years ago to set up the sub-committee, your Lordships’ House undertook a self-imposed restraint that the sub-committee’s inquiries should steer clear of the rates or incidence of taxes and limit themselves solely to matters of tax administration, clarification and simplification. I should add that both the Clerk of the Parliaments and the Clerk of the House of Commons were consulted at the time, and gave their views that the establishment of annual sub-committees along these lines to inquire into Finance Bills would not disturb the distribution of power between the two Houses. So I have to say, and I have said so in evidence to the Joint Committee, that I reject completely the notion that we have been in any way acting improperly in inquiring into these Bills. We have been exercising with considerable restraint the rights of your Lordships’ House going back for a very considerable length of time.
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In four years, here has not been a single occasion on which party bias has played a part in our sub-committee’s deliberations. We have commended the Treasury and Her Majesty’s Revenue and Customs and endorsed their explanations or proposed changes of tax at least as often as we have felt it necessary to criticise what they have done. Indeed, it is fair to say that we have provided a platform in some instances for the Government to clarify their proposals to Parliament and to the public at large. I accept that the Government may occasionally not feel too comfortable with our probing, but that is part of the role of Parliament—to hold the Executive to account. However, they cannot fairly accuse us of exceeding our powers.
Let me move on to the Finance Bill and my committee’s report on it. The Bill is substantial, so it was necessary for us to be selective. We chose to look at two areas of taxation that we had considered before and to which new measures were being added; namely, measures to counter the avoidance of direct tax and measures to crack down on VAT fraud. We also chose one new measure: proposals to change the inheritance tax treatment of trusts. We were generally happy with the strategy that the Government are pursuing to follow up their measures to counter tax avoidance. We were told both by tax professionals and by officials that they felt that there had been something of a behavioural shift as a result of earlier measures in this direction and that consequently there was less widespread adoption of the more aggressive and sophisticated tax avoidance schemes. The Minister referred to that in his speech and I entirely agree with what he said. Our one concern was about the need to achieve greater certainty for taxpayers so that normal and innocent commercial activities do not become inadvertently caught.
Similarly, we welcomed Clauses 19 to 21, which were designed to strengthen the powers of Customs to deal with the missing trader intra-community fraud—the “carousel fraud”. It appeared to us that the measures introduced in the Finance Act 2003 had gone some way towards stamping out this phenomenon, but they simply had not done the trick. We very much hope that the latest measures will be successful. It is very important that progress should be made in this area. The scale of losses at the moment is substantial and could well be increasing. Though newspaper reports have claimed that they could be as much as £5 billion a year, the Treasury’s estimate of between £1 billion and £2 billion—which it is to be hoped is more accurate, and I accept that it is—still represents a substantial amount of money that could be put to good use if collected.
The proposals regarding the inheritance
tax treatment of trusts are to be found in Clause 157 and Schedule 20.
We noted first that, while consultations had been going on around
modernisation of the taxation of trusts generally for income tax and
capital gains purposes, there had not been consultation on the
Government’s specific proposals to change the inheritance tax
rules. The argument deployed by the Treasury was that, had there been
consultation on these proposals—the Minister made these
points—
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While we accept that there might be circumstances in which the need to avoid forestalling precludes normal consultations, we did not hear convincing evidence to show why in this case counter-forestalling action could not have been taken that would have allowed consultation to take place. For example, as one of our witnesses suggested, the Government could have announced what they proposed last December or January on the basis that consultation would take place but that the legislation, when enacted, would be effective from the date of the announcement. Indeed, I see that in another place the Paymaster General quoted this witness as stating to us that there would have been forestalling if there had been consultation. For the record, the witness actually said, and I quote from the record of evidence:
- “I do think
forestalling would have been a problem but there are ways in which it
could have been
tackled”.
We received different estimates from officials and private sector professionals about the number of people likely to be affected by these proposals. Some professional bodies from which we took evidence believed that at least a million—probably more—wills would be affected and would need to be reviewed, and perhaps amended, at a cost of between £400 to £700 per will. Officials took a different view. They told us that 94 per cent of estates were not in any case subject to inheritance tax and that, while some people might need to review their wills, the number would be nothing like those that had been suggested. It was impossible for us to say who was right, but we remain concerned at the extent of the disagreement on the impact of these measures. The amendments made to the Bill during its passage should have reduced the need to review wills, but we remain without an agreed estimate of the size of the burden.
We accept that there may have been tax avoidance through the use of trusts and that the Government are fully entitled to tackle this, but we are less sure whether the route adopted was the right one. There was a lack of clarity about the purpose of the changes. Were they primarily about preventing avoidance, as Ministers suggested, or were they simply part of an alignment and modernisation process, as the papers published on Budget day implied? We did not receive a clear answer. As the Government have not made clear what they were trying to achieve, we remain uncertain whether the policy of neutrality towards trusts has been altered. The measures in the Bill will impact on a wide range of trusts, which are used not necessarily for tax avoidance but as part of the responsible stewardship of family assets. The measures could make such stewardship less certain and more complex.
Overall, we did not feel that the introduction of measures to change the inheritance tax treatment of trusts had been handled well. We felt that they could have been handled much better. The Government are right about the avoidance of direct tax and about the VAT problem, which is very serious, but we are very critical of the way in which they have handled the changes to the inheritance tax treatment of trusts.
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5.29 pm
Baroness Noakes: My Lords, I thank the Minister for introducing the debate and I look forward to hearing the maiden speech of the noble Lord, Lord Burnett. I also thank my noble friend Lord Wakeham for introducing the report of the House’s Economic Affairs Finance Bill Sub-Committee. These reports have now become a firmly established feature of the work of your Lordships’ House and nicely demonstrate the expertise that our House possesses. I do not believe that anyone who has read the reports can doubt that this House can make a major contribution to the framing of effective tax legislation. I completely support what my noble friend said on the subject of the work of our sub-committee and the propriety of that work.
The report tackles the difficult subject of carousel fraud, which involves significant losses to the Exchequer and completely messes up our trade statistics. The weapons crafted in the Bill, especially the powers of inspection of goods in Clause 20 and of record keeping in Clause 21, have the potential to impose further burdens on businesses, and not only those that are suspected of being involved in fraud. I hope that my noble friend will forgive me for saying that his sub-committee’s report bends a little too far in favour of HMRC in accepting the imposition of further regulatory burdens. It is sometimes easy to justify the individual burden, but the important thing is the overall picture. The CBI estimates that the costs of new regulations introduced under this Government now exceeds £50 billion, and this Bill has just tightened the regulatory noose around the neck of British business a little further.
The report deals with inheritance tax and trusts. My noble friend Lord Howard of Rising will deal with that area in detail when he winds up the debate for these Benches. We deplore the underhand way in which the changes were revealed, with not a word in the Budget and, as we heard, absolutely no consultation. It also shows HMRC and the Treasury in a pretty unflattering light. There can be no real explanation for the 50 amendments that the Government introduced when the folly of their initial clauses was unmasked by the various professional bodies, who were appalled by the proposals as drafted.
This debate
traditionally offers your Lordships’ House the opportunity to
debate not only the Finance Bill, which we have no power to amend, but
the Budget from which it derives. I would like to say a bit about that.
The Budget is nearly four months old and to that extent it is old news,
but the content of the Budget is of continuing interest, so I will
spend a little time on it before returning to the Finance Bill. The
Budget sets out for all to see the weaknesses that must be addressed if
the UK is to prosper in the long term. We tax a lot; we borrow a lot;
and we spend the proceeds inefficiently. Taxation is set to rise to
nearly 39 per cent of GDP. Hard-working families have already noticed
that their pockets have been picked by the Chancellor, which is why
consumer spending has been subdued. I think that we will notice that
even more over the coming years. The tax burden is also a
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The Budget shows that government borrowing as a percentage of GDP will rise to 38.4 per cent, which is close to the Chancellor’s sustainable investment rule of 40 per cent. The declared borrowing excludes anything for PFI debts, let alone pension liabilities or Network Rail debts. We expect the Office for National Statistics to do something about PFI debts this year. Will the sustainable investment rule remain unchanged at 40 per cent whatever the ONS produces on the scoring of PFI liabilities? Or will we see another bit of creative accounting to massage away any problem?
As the Minister is aware, the Chancellor is a past master of dodgy accounting; he has revised the calculations of the golden rule so many times that no one now believes that it has any meaning. For the record, the Chancellor says, on the revised, revised, revised rules, that he has £16 billion of headroom to the end of 2008-09. That £16 billion includes £6 billion contingency, and he has already spent some of that. That leaves £10 billion, which is roughly the size of the normal range of estimation error. The Institute for Fiscal Studies calculates that the Chancellor has a 55 per cent to 60 per cent chance of meeting the golden rule in the absence of other policy changes. Does the Minister admit that there is any possibility that the golden rule will not be met?
All of this tax and debt has been funding the Chancellor’s public spending spree, which has simply not produced commensurate benefit. Last week, the Treasury issued a paper on the 2007 spending review, which shows that the Chancellor is in complete denial. He still has not grasped that genuine reform of public services is essential. He has not understood that the reason why the NHS produced record financial deficits despite high funding was that he blocked the kind of reforms that might have made a difference. The reality is that he has built the Treasury into an empire that watches helplessly as spending turns into negative productivity.
The arithmetic is getting ever harder for the Chancellor’s next spending review, which is why he has conjured up another 2.5 per cent of efficiency savings to add to the 5 per cent already announced and Gershon’s smoke and mirrors. Our calculations show that even if all those efficiency promises are delivered—and there is absolutely no track record on that—many departments other than those for health and education will be struggling to get any extra cash. I am sure that the Minister will put a brave face on it and say that we must wait until next year, but I am also sure that he knows what the sums look like.
I do
not have time to talk about the economy more widely—trade
deficits widening, unemployment rising, poor productivity growth,
economic growth below our competitors and business investment the
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Let me turn back to the Finance Bill. We have become so used to massive Finance Bills that it is something of a relief that we have only 180 clauses and 26 schedules in a two-volume Finance Bill. The Bill creates further complexity on top of that created over the past nine years. It is a pity that my noble and learned friend Lord Howe of Aberavon is not able to be with us this afternoon, because I know that he would have wanted to repeat his message of simplifying the tax system. I was very disappointed to hear the Minister defend complexity rather than reach out towards simplicity, which requires different approaches and different structures. I hope that one day the Treasury will have a Damascene conversion.
The Bill, at long last, introduces real estate investment trusts, which have been welcomed on all sides. However, the Government have failed to maximise their potential by refusing to allow the possibility of AIM-listed REITs. The Bill also features a now familiar Treasury practice of creating reliefs, promoting them and then, when they are successful, declaring them to be tax avoidance. First, the 0 per cent rate of corporation tax for small companies is abolished in the Bill. Secondly, the home computing initiative, which the Government have only recently been promoting, has been axed. Home computer users and small businesses now join all other tax-avoiding ogres in the Chancellor’s imagination.
The last element of the Finance Bill that I shall mention is the 14 pages of barely comprehensible group relief rules in Schedule 1 in response to the European Court of Justice decision in the Marks & Spencer case. This makes plain the shameful truth that our sovereignty over direct taxation matters has been ceded to Europe. Direct tax is not a matter of Community competence and the ECJ has twisted the treaty provisions to assert its jurisdiction. The Minister knows that there are plenty more cases in the pipeline. Will the Minister tell the House why the Government have so meekly accepted this? Why have the Government not mounted a campaign to defend our tax autonomy?
My honourable friends in another place voted against this Finance Bill two weeks ago. It is a great pity that we cannot do the same in your Lordships’ House.
5.40 pm
Lord Burnett: My Lords, it is a great honour for me to make my maiden speech today. I should first like to put on record my thanks to your Lordships and the staff of the House for all the kindness and help that you and they have extended to me. Having had the privilege of serving as Member of Parliament for Torridge and West Devon for eight years, I am pleased to say that I have now participated in votes where the result was not a foregone conclusion.
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In my chequered career, I have been a new boy on a number of occasions, and each time there have been new and important lessons to learn. I started my working life in January 1964 as a rather spoilt young man, arriving at Exton station, between Exeter and Exmouth, on a very cold winter’s evening. That is the station nearest to what is now known as the Commando Training Centre Royal Marines. I had had an ambition to join the Royal Marines for many years. A three-tonne lorry arrived and out of the passenger door jumped a tall, imposing figure in full blues. I thought to myself, “How awfully kind of the general to come and meet me”. It was, in fact, the legendary colour sergeant, Jan Crook, who had the Herculean task of taking through our initial training the eleven of us who joined in my year. I looked at my suitcases and looked at the back of the lorry. The colour sergeant whispered in my ear, “I think sir will be carrying his own cases”.
Before I lead on to the Finance Bill, I should declare that I am landlord of agricultural and residential property and also that I am a consultant at a West Country law firm. I am also a member of a tax committee of the Law Society.
I seem to have chosen to make my maiden speech on the hottest day for years and the Finance Bill, despite everyone’s best efforts, is not the most gripping subject. However, there was much debate in the other place and in the country about the inheritance tax changes proposed in this year’s Finance Bill. There certainly was some avoidance with older interest in possession trusts, circumventing the gifts with reservation anti-avoidance provisions. It was right to close this loophole. However, rather more than that was proposed.
Professional bodies and others had discussions with officials and progress seemed slow. I wish to put on record my gratitude to the Paymaster General for finding nearly two hours in May during the progress of the Finance Bill to discuss the issue with me. She was, as always, courteous, conscientious and prepared to listen to the points I raised on behalf of the hundreds of thousands, if not millions, of taxpayers, of clients of members of the Law Society, the Society of Trust and Estate Practitioners and the Association of British Insurers, for whom I was speaking.
The Bill was greatly improved by the amendments made to Schedule 20, but further work remains to be done. It will not now be necessary for many hundreds of thousands of wills to be changed to ensure that the normal inheritance tax exemption applies to a life interest left to a spouse or civil partner. As the Bill was originally drawn, the new Section 49A of the Inheritance Tax Act 1984 would not have applied to life interests that might have ended in the beneficiary’s lifetime or where children would not inherit after the beneficiary’s death until they reached the age of 25. It is standard practice for wills to be drawn up in terms which enable a life interest to be ended in the life tenant’s lifetime and which require property left to children to be held in trust for them until they reach the age of 25.
Helpful changes were also
made where property is left by parents to their children and is
conditional on
17 July 2006 : Column 1053
However, the new inheritance tax rules still impact very harshly where lifetime settlements are made. Trusts have traditionally been used for settling property disputes in divorce proceedings, in arranging for family property to be held after a second marriage and in providing for disabled beneficiaries. The requirement to treat their lifetime settlement of property as a chargeable transfer will mean an extra cost being imposed on what would otherwise be a sensible and economic arrangement—for example, where the family home is owned by the former spouse, but must remain unsold while the children are growing up.
Trusts created during a settlor's lifetime giving a life interest to a husband, wife or civil partner are now treated much more harshly than trusts in favour of other beneficiaries. That is a particularly perverse outcome. Trusts of this type are particularly useful where there has been a second marriage and it is intended that the children of the first marriage will inherit property after providing for the second husband or wife. If there is a family home or other property and a spouse wishes to give it to his or her spouse for life, and then to the children of the first marriage, there are real tax problems. Under the new rules, the gift will be a chargeable transfer leading to an immediate inheritance tax charge, in spite of the beneficiary being the spouse. The gift will also be a capital gains tax disposal, but, because the spouse benefits, there will be no holdover relief for the gain, since the trust will be “a settlor interested settlement”. Incidentally, this would not be a problem if the life interest was given to a mistress instead of a wife.
If the gift creates a life interest over the family home or an interest in it, it will be a gift with reservation of benefit. When the settlor spouse dies, inheritance tax will be charged again on top of the inheritance tax already charged when the settlement was made. The reason for that is that the lack of exemption when the settlement was made prevents Section 102(5)(a) of the Finance Act 1986 applying.
Special rules for gifts held in trust for disabled beneficiaries are far too restrictive, and that point has been made by many bodies representing the interests of the disabled. In addition, when the Government reconsider this legislation, as I sincerely hope they will, I hope that they will ease the inheritance tax burden on life protection policies.
Finally, I would emphasise again that such interest in possession trusts are not used for tax avoidance. The life tenant is treated for inheritance tax purposes as if she or he owned all the trust’s assets absolutely. The reasons for the creation of these trusts are many, including the fragility of marriage and the protection of the vulnerable.
I hope that we
shall have an opportunity to debate these matters again. I am delighted
that this House has in recent years been doing more and
more
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5.49 pm
Lord Barnett: My Lords, I am delighted to have the opportunity of congratulating the noble Lord on his excellent maiden speech. Obviously, there are not too many Members of your Lordships’ House who are as expert as he is on trusts, but certainly the Finance Bill Sub-Committee would be delighted to see him participating both in our committee and in our debates. I would say that even if he did not have a name that is so similar to my own—there is only one letter that is different. The noble Lord’s excellent maiden speech dealt precisely with the issue that we are debating, which is not always the case with maiden speeches. As a solicitor practising in taxation, he will be a valuable Member of your Lordships’ House and of our Select Committees. I am delighted to welcome him, and again I congratulate him on an excellent maiden speech.
I want to follow a few of the points made by the noble Lord, Lord Wakeham—the excellent chairman of the Economic Affairs Select Committee and the sub-committee in which I was fortunate to participate. He referred to the criticism by members of the Government of our work as a sub-committee. I want to add a few words on that because I strongly support what the noble Lord, Lord Wakeham, said. I refer, in particular, to evidence given to the Joint Committee by my right honourable friend Jack Straw. What he said was so wrong that I feel I must mention it briefly. The noble Lord, Lord Wakeham, quoted some of it but it is worth quoting again. He said:
- “I am concerned,
and I have to say Treasury Ministers still more so, that the
establishment of the Finance Bill Sub-Committee of the Lords Economic
Affairs Committee seeks to circumvent the financial privilege of the
Commons. It is seeking to insinuate a function for the Lords which was
never envisaged before by the passage of the Parliament Act 1911 or
during the rest of the 20th century. It is our judgment that the
existence of the Finance Bill Sub-Committee is incompatible with the
conventions which over the running of matters are dealt with by the
Commons”.
The first concerns the existence of the sub-committee. I understand that it was set up with the agreement of the Cabinet. The Leader of your Lordships’ House at that time—the excellent and unfortunately too-early-deceased Lord Williams—spoke in the Cabinet and got agreement for such a sub-committee to be set up.
The
second point is more important as it relates to circumventing financial
privilege. I hate to say this about my right honourable friend but what
he said was nonsense. Clearly, he has not had time to read any of our
sub-committee reports, otherwise he would not have dreamt of making
such a statement. As the noble Lord, Lord Wakeham, said, we
successfully avoid circumventing the Commons in
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In a way, that was brought out by the intervention of the noble Lord, Lord Forsyth, who I am sorry to see is not in his place. He asked the Minister how long the Commons had debated the Finance Bill, which is more than 500 pages long. He should be aware, as should any of us who have had a little experience of matters in the other place, that Oppositions of all political parties never debate Finance Bills properly. That is precisely why these Bills get bigger and bigger—they are never properly amended. That is true not only under this Government but, as the noble Lord, Lord Wakeham, will be aware, under all Governments. Oppositions tend to choose for debate the sexy party-political issues and they virtually ignore the rest. That is where the value of our sub-committee lies. We do constructive work, as anyone would know if they read our reports and the evidence that we take. They would recognise, as officials do, how important our work is. I know that the Chancellor does not like interference from anyone and certainly not from the House of Lords, but if he would only recognise the value of our sub-committee’s work, that would be of great benefit to the Treasury and Ministers and it would aid the better drafting of legislation.
Having said that, the media in this country are even worse. I leave aside what might be called the serial partisan, party-political press; I am talking about the so-called serious press. When we issued our report, the newspapers carried headlines along the lines of “The Lords slam the Treasury”. As the noble Lord, Lord Wakeham, pointed out, we chose three issues to debate. On one, we disagreed, rightly, not with Ministers or even the Treasury but with Revenue officials who did not consult as they should have done. If they had, they would not have needed to amend the Bill right at the end of their deliberations in the way that they did, as they would not have included certain things in the Bill in the first place.
That was one part of the three issues that we looked at and, even there, we broadly agreed with the Revenue on anti-avoidance measures, and we certainly agreed with it on the other two issues. It will not be known to the media or to anyone else outside that our committee also spoke about the way in which the professions exaggerate in these matters. Plainly, they were wildly excessive in talking about the number of people who would be affected by inheritance tax through the use of trusts, although, as the noble Lord, Lord Wakeham, will know, at the time I was a little alarmed that we might inadvertently have set up trusts in our wills, even if we had not intended to do so. However, we were generally constructive, as we always are in our reports, and I am sorry that the Government and Ministers do not recognise the value of the sub-committee’s work.
We rightly criticised the
lack of consultation, but I recognise that officials—I am not
talking about Ministers now—did not want to consult because of
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