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Schedule 15
Charge to income tax on benefits received by former owner of property
3.45 pm
Amendment made: No. 117, in
Mr. Flight: I beg to move amendment No. 34, in
schedule 15, page 341, line 8, leave out '17th March 1986' and insert '9th December 2003'.
[R] Relevant registered interest declared.
The Chairman: With this it will be convenient to discuss the following amendments:
No. 35, in
schedule 15, page 341, line 17, leave out '17th March 1986' and insert '9th December 2003'.
No. 39, in
schedule 15, page 343, line 2, leave out '17th March 1986' and insert '9th December 2003'.
No. 41, in
schedule 15, page 343, line 10, leave out '17th March 1986' and insert '9th December 2003'.
No. 43, in
schedule 15, page 344, line 24, leave out '17th March 1986' and insert '9th December 2003'.
Mr. Flight: All these amendments replace the effective date of 17 March 1986 with 9 December 2003 to counteract the retrospective nature of the proposals. The Low Incomes Tax Reform Group and others have given broad examples of the potential impact of retrospective legislation. People who have given away assets or cash to their children and have fewer resources behind them risk an income tax charge if they are helped in their final years by their children. The later Government amendments do not necessarily avoid that.
There are a multitude of arrangements surrounding the use of the family home, including granny flats, which enable older people to remain within the family community. Such arrangements could become liable to an income tax charge, and that must be wrong in principle. The provisions are so widely drawn that in
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many cases it is impossible for a taxpayer to know whether they will apply to them. If a person had made a cash gift to his child in 1986, how could he possibly know whether cash used by the child 20 years later to buy a property for occupation by his elderly parents indirectly derived from the cash that was initially given?
The Paymaster General will be aware of the specific example in the representations made by the Institute of Chartered Accountants. It states:
''Let us assume that someone gives his son £10,000. Seven years later the son buys a house for £50,000. Seven years after that the father, being elderly, moves into a granny annex at the house which is now worth £150,000. Under the current proposals, it appears that the father will be liable to the new income tax charge'',
and that includes the de minimis extensions. By making the new rules prospective, rather than retrospective, the possibility of such unfair situations would be removed. By removing the retrospective nature of the provisions we would necessarily not require the tracing provisions, which have attracted considerable criticism and which the Paymaster General has not satisfied me are adequately removed by some of the Government's amendments.
The Law Society uses the following example, asking us to assume
''a gift of a holiday cottage in 1987. The donee sold it in 1990 and used half of the proceeds to start a business, adding the other half to his quoted investment portfolio. In 2004 the original donee sells his business, liquidates his investment portfolio (to and from which there have been various additions and withdrawals in the meantime but which overall has grown significantly) and buys a large country house, allowing the original donor to occupy a cottage in its grounds; or buys a work of art at auction which he leaves with the original donor while he goes to work in an unstable part of the world. The donor will have no right to obtain information—if indeed it is still extant—which would enable him or anyone to assess how far, if at all, his original gift of the holiday cottage can be traced through into the value of the cottage . . . or of the work of art,''
as required under the provisions of the schedule. The Government have not introduced any amendments to change the effective date from March 1986, as my amendments propose, although I accept that certain Government amendments do broaden the reliefs and exemptions from the charge.
The Paymaster General will no doubt talk about the impact being retroactive rather than retrospective, but I remain of the view that the retrospective nature of the legislation as it falls on individuals is wrong and leaves uncertainty about all sorts of potential situations.
Dawn Primarolo: The hon. Gentleman seeks to make two points about his amendments. The first is about retrospection. He claims that inheritance tax arrangements made in 1986 should be completely immune from any change anywhere else in the tax system. As he well knows, no taxpayer is ever provided with such reassurance. Taxpayers make plans for the use of their income in the knowledge that the tax system may change. Retrospective measures in tax law seek to make a charge on benefits that have already accrued, but the schedule does no such thing. The bringing into charge occurs from the 2005-06 tax year. Therefore, the benefits that accrue in that tax year will fall within the charge. If the legislation were
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retrospective, it would backdate the charge to 1986 for accrued benefits over that entire period, but we do not seek to do that. I absolutely reject the hon. Gentleman's proposition that the proposals are retrospective. They start in 2005 and will assess the benefits at that point.
If the taxpayer does not wish to pay the income tax charge at that time, they make an election. The inheritance tax rules will be deemed to operate, and the property is theirs and will be dealt with at the point at which the estate comes into charge.
The hon. Gentleman's second point is that not only is the provision retrospective but it introduces unnecessary burdens on the individual, including outrageous requirements for record keeping, possibly going back to 1986. I believe that the Committee would agree that it is sensible and reasonable that the record-keeping obligations in this measure should be consistent with those of the inheritance tax system, because that is basically the option open to the taxpayer. That is why the Government have introduced a provision to ensure that the charge will not apply to gifts if seven years have elapsed without the donor enjoying the benefit.
4 pm
The hon. Gentleman made a point about a father giving x amount some 20 years ago to a son, who invests a proportion of it and uses the rest for property. That is not how this measure operates within the rules on the seven years. Although it is right for the hon. Gentleman to press the Government on the point, I say to him that the provision is not retrospective. We do not seek to cast a charge back into preceding years, as retrospection would. Under the clause, an arrangement gives rise to future tax charges as a result of a change in the tax system that is provided for in schedule 15—no more, no less.
As we progress, hon. Members will see that there are many exceptions and many ways in which people will not be liable under any of the provisions in any of the schedules that we are discussing. Those who are liable have a clear choice between the inheritance tax or an income tax charge; the matter is in their hands.
Rob Marris: Does my right hon. Friend share my surprise that the hon. Member for Arundel and South Downs prettily read an example from the Law Society, of which I am a member, but did not say that the Law Society proposed two long amendments to address that issue which are not along the lines of the amendments that he tabled today?"
Dawn Primarolo: We will debate that under another group of amendments. Government amendment No. 137 specifically deals with that issue and takes care of the point that the hon. Member for Arundel and South Downs made about a father giving money to a son, with various transactions occurring after that.
In conclusion, Government amendment No. 137 means that if the gift was made more than seven years ago, it will not be chargeable. The amendment is designed to ensure the position referred to by the hon. Gentleman when he made the point about how far
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back the record keeping must go, and it is reasonable for the Government to hold that position. The provision is not retrospective. It is about a future tax liability arising from the arrangements made by the taxpayer for their assets while they continue to enjoy them.
Mr. Flight: First, we welcome the provision, as we will in due course welcome Government amendment No. 137, but the situation is not as simple as the Paymaster General has described it. If I understand the amendment, in particular situations of concern—for example, where parents give capital to children to buy a house, then, much later in life, return to live with them—it all depends on there being a seven-year period between the parent giving the money and coming back to enjoy the benefit.
Record keeping will be required to establish the position. One of our objections is with the record-keeping burdens imposed on hundreds of thousands of non-rich, ordinary people. Even though amendment No. 137 may ultimately remove the concerns raised by many hon. Members, it would not do so without record keeping to establish that there was a seven-year gap during which the original donor did not enjoy any benefit.
Secondly, my right hon. Friend the Member for Fylde, who has left the Room, made an important contribution about the essence of, and the semantic debate about, the meaning of the word ''retrospective''. His point was that even the Inland Revenue website sets out the methods available to taxpayers to mitigate inheritance tax liabilities. The Paymaster General may have read the letter in The Times by Jeremy Woolf, QC, and she may even have seen his more substantial opinions backing up that letter. I think that, particularly in the overall context and practical consequences of inheritance tax, the issue is that the measures are retrospective on the individuals concerned, whatever clever semantics one wants to get up to.
Earlier, we touched on how the measures may not even bite, but the fact is that many people who made arrangements that were perfectly legal 18 years ago find that those are suddenly being overturned as they approach old age.
The Paymaster General earlier made what, I regret to say, I thought were ill-informed remarks about my making shallow comments about historic homes. I suggest that the Revenue work with the Historic Houses Association and plot through the perfectly genuine cases where people could not qualify for conditional relief. The Paymaster General made reference to chattels that were not sufficiently valuable to qualify. She should be aware that it is quite difficult to qualify for conditional relief. That relates to the principal point about retrospection.
With respect, the Paymaster General glossed over a major problem of families who have done their best to preserve a house and its collection and to hand it on, and who are not, otherwise, rich people. They have a motive that the Paymaster General may not approve
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of, but they are going to find themselves either with a bill that they cannot afford to pay or having to sell the property and go to live somewhere else at the age of 75 or 80. That is not in the national interest.
The complexity produced by making the measures retrospective is still significant. Helpful though some of the Government amendments are, a great deal of investigation and evidence production is required to understand how they bite. We are still of the view that, in this territory, if one accepts that there is a big hole to be filled—which is itself debatable—the correct thing to do would be to fill it going forward.
In a sense, this problem is caused by a failure of Government to block holes in inheritance tax satisfactorily in the past. We are against what we view as, in practice, the retrospective elements, and we want to put the matter to the vote.
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