Mr. Howard Flight (Arundel and South Downs): Clause 81 is the result of considerable work between the industry and the Inland Revenue to remove anomalies in the law and give policyholders greater certainty about their tax position.
Introducing the new requirements by April 2002 will involve insurers in a large task. There is a new rule that insurers must advise the Inland Revenue, not when a potentially taxable gain has arisen, but where there is a large gain; insurers will therefore have to separate out what is deemed large. Dealing with that efficiently over a one-year period could create problems, although it would not do so in the longer term. It might be helpful if the threshold for reporting to the Inland Revenue were optional for the first year.
The main point of the clause is to clarify the position where an insurance policy is held jointly and transferred into the sole name of one of the holders prior to the 10th anniversary of commencement. The transfer is then taxed as if part of the policy had been cashed in early. The key question is whether the clause and the relevant parts of the schedule will impose a new stealth tax on divorce where a policy supporting a mortgage is transferred into a sole name because only one of the parties is henceforth responsible for the mortgage. While we may be in favour of fiscal incentives in support of marriage, we are not in favour of fiscal stealth tax because people have the misfortune to get divorced. If, as we have been advised by various parties in the case, that is the impact of the Bill, the clause will have to be amended and should not be passed in its present form. It would be useful if the Minister could assure me that that will not be the effect in the event of divorce.
Mr. Burnett: I have a small drafting point that the Law Society has raised with me, in relation to new section 546A.
Mr. Flight: I think that that is covered by amendment No. 44 or 45.
Mr. Burnett: I am grateful to the hon. Gentleman. In that case, I shall wait for the matter to come up in due course.
Mr. Michael Jack (Fylde): This is a complex area of tax. The tax treatment for life assurance policyholders normally goes on autopilot, which is why the clause and its associated schedule deal with activities that must be undertaken by life assurance companies. Could the Minister say how things will be communicated to taxpayers so that they can know with certainty where they stand if they are either the holders or the recipients of a life assurance policy? Is that dealt with by clause 81?
The Economic Secretary to the Treasury (Miss Melanie Johnson): The hon. Member for Arundel and South Downs (Mr. Flight) seems to believe that the legislation changes the current position, but it will simply bring clarity to a confusing and unclear situation. We have always taken the long view that, in a transfer of interest in rights under a policy, the clear legislative intent is that what is transferred is only a part of the beneficial interest in the rights under the policy. In fact, difficulties have arisen because in transfers of interest in law, there are different ways in which co-owners may hold the rights under the policy. In England, Wales and Northern Ireland, those differences bring uncertainty to the tax treatment of a part transfer. The tax treatment of such a transfer in Scotland is certain and accords with the original legislation's intention. The measure will bring clarity to an unclear situation and help both the industry and individual policyholders.
A small gain in tax is projected as a result of the change, but only because of better communication between the life industry and policyholders, which will lead to greater compliance in self-assessment forms. That is the only way in which any tax change will result from the measure; there is no hidden tax, as the hon. Gentleman suggested there might be. Indeed, the tax charge on changes in the ownership of life policies has existed since 1968, so there is no intention to change the overall position.
If the assignment is exempt before the change, it will remain so after it. In fact, the measure introduces a new exemption if the share in the policy is gifted. It appears that the charge does not apply consistently, even though no relevant distinction in economic terms results from the different interpretations and forms of ownership. The clause and the schedule will bring consistency and certainty of treatment for insurers and policyholders alike, and I hope that that clarifies the position for the hon. Gentleman.
The right hon. Member for Fylde (Mr. Jack) asked what communication there would be. I can let him know in more detail, but the basic idea is that there should be an annual statement from the insurance company to policyholders to give them a much clearer understanding of what is happening and, by providing them with the necessary figures, to help them to complete their self-assessment tax forms. If that is not sufficient detail for the right hon. Gentleman, I will write to him with further information.
Mr. Flight: I will expand a little on my point, because the Minister has not effectively placed on the record the fact that the measure will not bring a tax charge on divorce. Hon. Members should imagine a situation in which joint assets are split so that the wife keeps the family house subject to a mortgage and the endowment policy to cover that mortgage, while the husband retains immovable assets. In the past, it has been unclear whether and to what extent there is a chargeable gain on the transfer of the life policy from joint ownership to the ownership of one party. In most cases, the assignment escaped tax. The measure is an improvement on the current position, which is confusing, but the matter could have been more sensibly addressed than it is by the clause and schedule.
The schedule confirms that if a qualifying policy is transferred from joint ownership to that of one party, and the transfer occurs before the 10-year point, there will be a chargeable event, and it clearly identifies who should pay the tax. If the parties had remained married and the policy had been held beyond the 10-year hurdle there would have been no tax liability. In the vast majority of cases, when an insurance policy backs a mortgage, the remaining owner of the policy continues to pay the premium for the life of the policy. It would be simpler, more straightforward and more reasonable to ignore the transfer on divorce or separation and to make any tax change crystallise only if the policy is cashed in within the 10-year period by the party who ends up holding the policy. As drafted, however, the clause will impose a windfall tax on divorced or separating couples that would not arise if the couple stayed together.
Mr. Jack: I thank the Minister for her clear answer to my question. I am glad that companies will advise taxpayers on the basis of the information that she has mentioned.
Some small policessmall in financial termswill be caught by the clause and the schedule. I am anxious that someone who may have no knowledge of these matters, and, unwittingly, may not complete a self-assessment formhe may in the end be a non-taxpayerwill suddenly be informed that he has a tax liability. What is being done about people who are not subject to self-assessment, who are non-taxpayers or who may unwittingly get the notice and worry about what they have to do if they are caught up in these arrangements?
Miss Johnson: On the latter point, the form of communication has not yet been decided; it is too early to say exactly what will be sent out. However, I understand that it will cut the red tape involving insurance companies and give clearer information to policyholders about their gains and about the related tax. I shall be happy to listen to the right hon. Gentleman's representations if he has cause for concern in the future. He would agree that it is right in principle for all insurers to tell policyholders about their gains; that is the principle that underlies the proposal. The Association of British Insurers, which represents the insurance industry, already supports that policy.
Insurers cannot know whether there is tax to pay on a gain, however small it is, as that is a matter for the individual. The gains could affect an individual's entitlement to an age-related personal allowance, and may fall to be taken into account when calculating the level of tax credits. These are matters for us to consider as individuals when completing our self-assessment forms, or when deciding whether we need to make a return if we are not automatically subject to self-assessment. There is no reason for a gain to fall outside tax just because it is small; such matters must be dealt with on an individual basis, as is proper.
I make it clear to the hon. Member for Arundel and South Downs that what is proposed is not a new tax on divorce, although I am intrigued by the Opposition's anxiety about it. There is an existing tax charge when there are changes in the ownership of life policies, whether or not they are part of a divorce settlement; nothing is being changed in essence. The charge could be different, but it is not new.
The measure removes uncertainty about what and who is chargeable. No changes are being made in respect of Scots law. The only differences cover the ambiguities that have emerged in England, Wales and Northern Ireland, where at present there is considerable uncertainty; we are clarifying matters and bringing that uncertainty to an end.
The Chairman: The debate on the clause is going a little more slowly than I had anticipated, and members of the Committee will have to be quick if they want to catch the tea trolley, which is outside the Committee Room now. However, I remind the Committee that the quorum remains at 1011 including the Chairman.
Mr. Flight: Will the Minister confirm that the effect of the clause and the schedule in cases of divorce is as I explained? If so, at the very least I ask the Government to reconsider along the lines of my brief suggestions. Previously, there was a lack of clarity, as the Minister said, but as clarified, the proposal now highlights what seems to be an unreasonable tax on divorce.
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