The
Chairman: At this point, may I say to hon. Members
that I hope that this will not turn into a debate on schedule 20? It
would be rather premature to have that
debate.
Dawn
Primarolo: Indeed, Sir John. I should point out to the
hon. Lady that, whatever she might think, the changes contained in the
clause are completely unrelated to the issue she referred to. This is a
free-standing clause directed at artificial trust arrangements that are
designed to get round both IHT gift with reservation rules and the
pre-owned asset income tax charge. The problem when professional bodies
write complex examples is that it is difficult to know whether they are
giving real examples or are seeking to punch a hole in the legislation
by describing a theoretical position. I have seen little evidence that
her examples refer to common behaviour.
Let us take the example of the
person who provided cash so that his mother could buy a house. The
mother dies and leaves the house, interest and possession to her son
who is then caught by the income tax charge. Let us look at how
unlikely that would be. It would require the person in question to make
a significant gift to somebody else to purchase an asset, only to have
it resettled upon them under the person’s will within
seven years and then take up occupation and receive an imputed benefit
of more than the de minimis limit of £5,000 per annum. The
amendments that we have made to the election provision would enable the
person to elect out of the income tax charge. The relationships that
have been suggested seem somewhat unlikely, but even so the answer is
for the person to elect out of the income tax charge if their interest
also forms part of their estate for IHT purposes. The hon. Lady gave a further
example and I am aware that representations have been made to the HMRC
about it. It is in connection with elderly parents being caught if they
do not have enough property to be liable for IHT. They sell their house
and give money to their children to convert part of their house into a
granny flat. I believe that that was discussed during the debates on
pre-owned assets. I have asked the HMRC, under those circumstances, to
monitor the situation so that we can see whether that is an issue and
whether it will create difficulties with the pre-owned assets. Should
that be the case, I would be prepared to reconsider the
matter. I remind the
Committee, however, that the pre-owned asset rules are targeted at
those who use contrived structures to avoid paying inheritance
tax—that still stands. I was amazed at some of the examples in
defence of the individuals who claimed that they were not trying to
avoid inheritance tax. Often that paves the way to a clear indication
that that is exactly what they were trying to
do. The hon. Lady also
said that innocent cases could be caught by the provisions. With the
exception of the case that I flagged up in which there is discussion
with representative bodies and which I am asking the HMRC to monitor
carefully—the legislation was not intended to apply to such a
case—the truth is that it is incredibly unlikely—it still
has not been asserted—that innocent cases will be affected by
the pre-owned assets regulations, even in the cases that she
mentioned. Great care
is always necessary in such matters, but the fact is that the reason
for the exemptions, and hence for the clause, is to ensure that
individuals do not sidestep income tax or the IHT charges and do not
avoid income tax charged to the pre-owned assets or the inheritance
tax. I see you smiling, Sir John, but given the arguments that were
advanced in the introduction of the pre-owned assets, I am sure that
you understand that I am not particularly attracted to such
action. I am sure that
we will have a lot of time to discuss the matter during consideration
of later clauses, but I can assure the hon. Lady that care is taken
over the interaction of the legislation. If she is seeking an assurance
from me that I shall continue to do that in the course of this Finance
Bill, I can give her that assurance. However, perhaps some of the
points that she made today would be more appropriately explored at a
later stage.
Mrs.
Villiers: I acknowledge that that issue
is separate from schedule 20, which is why I did not seek to
advance issues on schedule 20 apart from where I felt that there might
be a difficulty with its interaction with some of the pre-owned asset
regimes. I refute the suggestion that I was seeking to punch a hole in
the legislation. I made it plain that I was not seeking to defend the
double trusts reverter to settlor
arrangements.
Dawn
Primarolo: I was not suggesting for a minute that the hon.
Lady was seeking to punch a hole in the legislation. If I thought that
that was the case, I would have been much clearer and said it to her
directly. I was referring to the examples constructed, which often
inadvertently have that effect. So unless she dreamed them up herself,
I am not accusing her of such a thing.
6.45
pm
Mrs.
Villiers: Turning to those examples, I think that the
Paymaster General referred to one given by the professional bodies to
which I do not think that I referred. I did not refer to any of the
examples in which a parent passed a property to a child and the child
then sets up a trust. I referred to one example in which an individual
sets up a trust for his spouse. Again, I emphasise that I acknowledge
that there are significant problems when a property is transferred to a
child and a trust is set up. They seem to be at the heart of the double
trust situations, which the clause is targeting. As I have said on
several occasions, I can understand why the Government want to target
them. The situation that I described is subtly different. There is no
double trust and no attempt to exploit the loophole that is provided by
section 54. That can be done by setting up a double trust. It would be
useful for the Paymaster General to bear that in mind.
Lastly, I welcome the Paymaster
General’s indication that she is prepared to monitor situations
where, for example, an elderly parent sells a share in the equity of
their home. As I said, she and the Revenue have shown a welcome degree
of flexibility in trying to remove innocent transactions from the scope
of these proceedings. I know that there was a particular concern about
loans between family members triggering the pre-owned assets regime. I
gather that, through extra statutory mechanisms, it looks like that
anxiety is being averted. I am pleased to hear that that approach,
which tries to ensure that innocent transactions stay out of a very
penal pre-owned asset regime, is continuing in relation to some of the
examples that I mentioned.
I sign off by saying that, in
the complicated example I raised, the real problem was the double
taxation charge. Regardless of what one thinks about the motivation for
setting up a trust, I hope that the Paymaster General would agree that
one of the things we do not want to come out of this measure is that
people end up in the pre-owned assets regime and pay inheritance tax.
It should be one or the
other. Question put
and agreed
to. Clause 80
ordered to stand part of the
Bill. Further
consideration adjourned.—[Mr. Andy
Reed.] Adjourned
at twelve minutes to Seven o’clock till Thursday 25 May at five
minutes past Nine
o’clock.
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