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Mr. Flight: The Paymaster General has kindly given some figures. My maths may be slow, but will she quantify what lost tax the Government have assessed? What loss of inheritance tax yield per annum are the measures designed to recover? Column Number: 239 Dawn Primarolo: Forgive my trying to put the matter delicately, but it is not possible to give an annual yield. That depends on the age of people when they enter the scheme, and how long they live, which are unpredictable factors. We are reliably informed by the market that 30,000 schemes have developed up to the December period. Billions of pounds of assets are wrapped up in those schemes, so over time hundreds of millions of pounds of inheritance tax will not be paid, and that is a substantial loss over a long period. Indeed, the figure could rise into billions of pounds. The question posed for the Government about the clause concerns the challenge whereby gifts with reservations are being negated and the desire to ensure that wealth is appropriately taxed as the tax system requires it. Mr. Jack: I want to concentrate on the figures. It is difficult to accept that, when the Treasury asked the Revenue for recommendations to deal with the schemes, a figure concerning the amount of tax that was at risk was not given with some accuracy. Perhaps I am wrong mathematically, but if there are 30,000 schemes at £500,000, that is £15 million of assets and, at 40 per cent. tax, £600 million. [Hon. Members: ''Billion.''] Is that the right amount? Perhaps we can have an answer. If research was undertaken, will the Paymaster General explain the relationship between the high marginal rate of tax in inheritance tax and the incidence of the schemes? On the contrary, if we lowered the rate of tax and got away with exemptions, would that be another way of tackling the problem? Dawn Primarolo: Before the consultation exercise, the publication of the clauses and the extremely revealing responses that were received, the potential loss of revenue has increased. I am referring to the Revenue's knowledge of the types of marketing schemes. What is provided for is when the asset continues to be enjoyed, as if owned, and that is what comes into the tax charge. Taxpayers then have the choice of whether they want to remain within the inheritance tax laws, and if they do, they can make an election to keep their scheme in place. If they do not come under exemptions in the proposals in the schedule, and they are not within the de minimis, which deals with a huge number of the processes— Mr. Burnett: Will the Paymaster General give way on that point? Dawn Primarolo: I will be happy to give way, but it is helpful if I am allowed to finish one point before I move on to the next. Otherwise, I shall lose my way and venture into discussing the schedule inadvertently. The schedule provides for an either/or situation. It will either allow the inheritance tax rules to operate as they should without the contrived schemes, or if the scheme is used and the taxpayer does not want to unwind that scheme—or simply elects for it to disapply, which the schedule provides for—an assessment will be made each year of whether they have benefited from use of an unearned asset that Column Number: 240 comes into taxable capacity, in exactly the same way as the benefit in kind legislation operates. In a nutshell, that is what is provided for in the measures.Mr. Burnett rose—
Dawn Primarolo: I will give way to the hon. Gentleman later. I have not forgotten him. When we discuss the schedule, the right hon. Member for Fylde will see the fantastically complicated schemes that are currently in place. The Government have sought to create a simple mechanism that will allow people either to come out of the scheme or to allow it to run and take a charge on the assets elsewhere. We shall come to that when we discuss the schedule. I have not forgotten the right hon. Gentleman's point on wealth, and we shall come to that when I have dealt with the question from the hon. Member for Torridge and West Devon. Mr. Burnett: I know that the Paymaster General is probably bringing her opening remarks to a close fairly soon, but I am sure that she would not want to mislead the Committee into believing that the de minimis limit is in any way generous. Notwithstanding the proposed Government amendment, we are talking about a de minimis limit—predicated at times 20 for a 5 per cent. return—of £100,000. The IHT threshold is considerably more than that. By using the income tax sledgehammer, we are going to catch people who are not even within the IHT limit. It is a deplorable piece of legislation that we shall debate. Dawn Primarolo: The hon. Gentleman is quite right that we will be debating it, but in the Government's view he is absolutely wrong to suggest that people who would normally be exempt will be caught by it under the normal rules of inheritance tax. The Chairman: Order. I suggest that we do not pursue that point until we get to the schedule, because it arises specifically out of the schedule. Dawn Primarolo: Indeed, Mr. McWilliam. That is all I was going to say on the matter. I would like to deal with the point following on from the questions of the right hon. Member for Fylde. When taxpayers engage in such planning, it leaves future taxpayers as a whole out of kilter. The Government wish to deal with that. To all appearances, the taxpayer has modest means, but they enjoy valuable future benefits, such as a rent-free home, valuable art and antiques, and access to a fund of financial assets if they feel the need, that their less-fortunate neighbours—that is, the vast majority—can get only by spending hard-earned, and taxed, income. The Government think that it is perfectly proper to have regard to that for income tax purposes looking forward. That is what we are proposing. One of the issues that we will discuss extensively when we reach the schedule is whether it is retrospective. When we reach that point, I will explain to the Committee why the Government reject that proposition. Clearly, the charge starts from 2005-06 and there are choices that the taxpayer can make. Column Number: 241
11.15 amIt is absolutely true that the Government have benefited from what, in polite circles, we would call a lively consultation process following the announcement of the principle in December. We have made it clear that we wanted to target schemes with the potential to cause serious lose of inheritance tax. The responses in the consultation were of significant benefit in realising that objective, not only because they revealed the extent of the problem—which was considerably wider than I, as a Minister, had appreciated—but because they resulted in some important points being made. The Government are responding to those in our amendments. With a provision of this nature, it is not surprising that interested parties have continued to come forward with points as they have seen the fine print of the legislation. The debate on a substantial number of amendments, both Opposition and Government, will give all those major points a fair airing and discussion. As I said, the Government have been more than happy to take up points in Government amendments. I am happy that there is a significant degree of overlap between what we are proposing and some of the amendments tabled by the hon. Member for Arundel and South Downs and his colleagues. We will debate each of those as we move to the schedule attached to the clause.In the meantime, with those opening remarks, I commend clause 84 to the Committee. Mr. Burnett: I am also grateful to the hon. Member for Arundel and South Downs. We discussed inheritance tax for a short period in last year's Finance Bill. There was remarkable similarity of view between him and myself. What is fair about a tax that the rich can escape with impunity but that catches millions of people with modest means who may well be subject to the income tax charge and not even have the cash to pay it? The clause does nothing to redress those problems. It is a short-term, measly, muddled, useless bit of legislation. Proposed changes to the rules on pre-owned assets will make people completely and unknowingly dishonest. They can fall foul of the legislation and be completely unaware of the fact. Say a daughter or son moves in with their parents, entirely altruistically, and cares for them, forsaking an opportunity to get on the property ladder, and spends money improving the property and refurbishing it. Of course, the daughter or son is saving the state thousands of pounds by looking after the parents, but they will probably fall into the charge to income tax, because they will, by operation of law, have an equitable interest in the property, and any sane, sensible and able lawyer will advise them of that fact after the effect. The legislation catches all post-1986 transactions. We should not be in the business of passing retrospective legislation. Not only is the legislation repugnant because it is retrospective, but it is characterised by muddled drafting and confused Column Number: 242 objectives. For example, why use an income tax measure to endeavour to correct the shortcomings of inheritance tax legislation? I have referred to the de minimis sum that I know Government amendment. No. 146 will increase to £5,000. However, as I said in an intervention, that will put into charge to income tax people who may well be under the IHT threshold. Will the income tax charge be levied on pre-owned assets that qualify for inheritance tax exemptions—for example, business assets and agricultural property? What will happen in small and medium-sized businesses—family farming partnerships or family businesses—where there are adjustments to capital accounts? What about the Boden principle and the Ralli principle? It is well known that young sons or daughters take on businesses and work for 20 years or so, having been told, ''This business will one day be yours.'' Will they face an income tax charge levied over 20 years? This is horrendous.
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