Rehman Chishti (Gillingham and Rainham) (Con): I congratulate the Prime Minister on being the first international world leader to visit Pakistan and meet

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Prime Minister Sharif, which clearly shows our two countries’ close collaboration and links. Will the Prime Minister clarify one point? Were discussions had with Prime Minister Sharif about reforming the madrassahs, the religious schools, in Pakistan, which have often been seeing as a recruiting ground for extremist and radicalised organisations? Does the Prime Minister agree that we need to ensure there is a wide spectrum of education in Pakistan, so that students can move away from ethnic and radicalised violence in the country?

The Prime Minister: In my discussions with Prime Minister Sharif, he made it very clear that his three priorities were the economy, energy and extremism. On combating extremism, I think that we agree not only that there is a need for a tough security response, but that we need to drain the swamp of extremism, including by reforming education. He particularly praised the work that British aid has delivered in the Punjab, where his brother is the Chief Minister. Sir Michael Barber—a well-known British civil servant—has worked his socks off making more than 30 visits to the Punjab and delivering a programme that has meant that millions of Pakistani children have had schooling that they otherwise would not have had. That is all down to his hard work and to British aid.

Jim Shannon (Strangford) (DUP): I thank the Prime Minister for his statement. I had the opportunity two years ago to visit Afghanistan and, in particular, to visit Lashkar Gah, where the police recruits were being trained. The US Government have invested $6 million in their training college. The policing training might be rudimentary, but it is very important. Will the Prime Minister update the House on how many police officers are trained each quarter and whether they are on target to deliver sufficient police officers for all of Afghanistan?

The Prime Minister: I do not have the specific figures for police officer training, but in our monthly update to Parliament, which I instituted, Members can see the police training numbers, the army training numbers, the overall national security force training numbers and the retention numbers. This is a good moment to pay tribute to all those from Britain, including those from Northern Ireland, for the role that they have played in helping to train the trainers in those important programmes.

Mr David Nuttall (Bury North) (Con): Does the Prime Minister agree that the accession of Croatia yesterday will increase the burden on the EU budget, as it will be another net recipient of EU funds?

The Prime Minister: That obviously puts a little extra pressure on the budget, which has been reflected, but it is a pretty modest additional amount. It is in Britain’s interests that the EU continues to enlarge and expand. Croatia has been added to what is already the world’s largest single market, and Britain as a trading nation will have all sorts of opportunities to increase our trade with and investment in Croatia. We will put in place the transitional controls available for new nations—the Government have already made that decision.

Julian Smith (Skipton and Ripon) (Con): I welcome the Prime Minister’s leadership on deregulation in Europe. The Commission has been worse than useless at understanding the burdens that it places on our smallest

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businesses. How do Britain’s 5 million small and medium-sized enterprises input into the new taskforce that he set up last week?

The Prime Minister: I thank my hon. Friend for his question. We must recognise that the Commission has made some progress and we will probably get further if we credit it with that but push it harder for more, which is my tactic. It has consulted business on the top 10 most burdensome regulations. For the first time, it has committed to exempt micro-businesses with fewer than 10 employees from new EU proposals and has also looked through the forthcoming regulation and removed 17 new regulatory proposals. Overall, the burden on business is down by some 25% in recent years. There is some progress, but it is not going fast enough, which is why I am setting up a regulation review panel comprising Marc Bolland from M&S, Ian Cheshire from Kingfisher, Glenn Cooper from ATG Access, Louise Makin from BTG, Dale Murray, who is an angel investor, and Paul Walsh, the former CEO of Diageo. That is a list of very senior businessmen and women, and small businesses can write to them and send in their ideas for what they want changed.

Iain Stewart (Milton Keynes South) (Con): I, too, am pleased that my right hon. Friend has been able to establish an early and productive relationship with the new Prime Minister in Pakistan. May I urge him to keep high on his agenda the treatment of the Hazara community, which continues to face severe persecution?

The Prime Minister: I am grateful to my hon. Friend for his comments. One of the advantages of getting in there early as the first Prime Minister to go and meet Prime Minister Sharif is that we can have that sort of dialogue. We have a full strategic partnership with Pakistan and a national security dialogue, so all these issues can be raised.

Andrew Stephenson (Pendle) (Con): I congratulate the Prime Minister on being the first western leader to visit Nawaz Sharif following his election and the first peaceful and democratic transition of power in Pakistan since its independence in 1947. A lasting stable peace in Afghanistan cannot be achieved without the involvement of Pakistan, but trade, energy, relations with India and a whole range of other issues will be higher up Prime Minister Sharif’s agenda. What can our Prime Minister do to ensure that momentum on Afghanistan-Pakistan relations is not lost?

The Prime Minister: My hon. Friend makes a good point. This democratic transition is an incredible moment for Pakistan, and I believe that it should use it as a moment to get the world to look afresh at this remarkable country, which has an enormous population and great economic prospects for the future if it makes the tough and necessary decisions. We must accept that Prime Minister Sharif has many priorities. He needs to deal with energy shortages, to get his economy on track and to deal with extremism. It is in dealing with that last element where we need to work together to demonstrate that the extremism suffered in Pakistan cannot be addressed without addressing the extremism from which Afghans are suffering, too. If we can try to achieve joint working between the President and the Prime Minister and the two Governments, that is the key.

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Stephen Metcalfe (South Basildon and East Thurrock) (Con): Does my right hon. Friend agree that the best way to tackle the scourge of youth unemployment across the EU is through the creation of jobs and growth and that the best way to do that is to raise our vision above the horizon of the EU and look to countries such as India and China, where two fifths of the world’s population live, to rid ourselves of burdensome regulation and to make Europe a more competitive environment?

The Prime Minister: I agree that the creation of private sector jobs is absolutely key, particularly for those countries that have large budget deficits. We have seen the decline of public sector jobs, but perhaps three times as many private sector jobs have been created. To achieve that, we need to rebalance our economy and to trade more, so, particularly as the European Union is a low-growth area—or a no-growth area in terms of the eurozone—we must look for new trading partners. That is why we should be look at countries such as Kazakhstan, where we are the second largest investor but where trade volumes are quite low. That is why we need, as I have put it, to compete in the global race and forge partnerships with all of the fastest growing countries of the world.

Gavin Barwell (Croydon Central) (Con): The Leader of the Opposition rightly mentioned youth unemployment, which has fallen by 15% in my constituency since Labour left office. One way to drive it down further is to expand the single market, so I welcome what the Prime Minister said about accession negotiations with Serbia. Does he agree that the long-term aim should be an EU from the Atlantic to the Urals, but that if the EU is to include more diverse countries, it needs to change fundamentally?

The Prime Minister: I absolutely agree with what my hon. Friend says. Britain has always believed in a wider,

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looser Europe and it is that that we should be fighting for. As he says, if we want it to be that sort of Europe, it must make changes and must be more flexible. The countries in the eurozone will need greater integration, but if we are to be attractive to other countries as a European Union, we must be more flexible and competitive.

Mr Philip Hollobone (Kettering) (Con) rose—

Mr Speaker: I have been saving up the hon. Member for Kettering (Mr Hollobone) so that the House can savour him.

Mr Hollobone: My right hon. Friend will know that there are almost 11,000 foreign national offenders in our prisons, many from EU countries. There is an EU-wide compulsory prisoner transfer agreement, but only the United Kingdom and 12 other member states have ratified it. If it was not discussed at this EU Council, will the Prime Minister use his best endeavours to ensue that it is on the agenda for the next EU Council, ahead of the removal of transitional immigration controls from new entrant countries?

The Prime Minister: My hon. Friend makes a very good point. This prisoner transfer agreement is absolutely in Britain’s interests. We have held specific National Security Council discussions about prisoner transfers and about foreign national offenders, because I think that we need to do much better in getting people out of our jails and back to the countries where they belong. We are making some progress, but it is hard work. This European Union agreement is a potential benefit for us and we have to do everything we can, both at the European Council and bilaterally with other countries, to get them to sign and implement. That is a programme that the Government are very much working on.

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Stop and Search

1.39 pm

The Secretary of State for the Home Department (Mrs Theresa May): With permission, I would like to make a statement on the powers of the police to stop and search members of the public.

Police officers have been given the right to stop and search people by several Acts of Parliament, although most searches are conducted through the Police and Criminal Evidence Act 1984 and the Misuse of Drugs Act 1971. These Acts say that officers must have “reasonable grounds to suspect” that the subject is guilty of some form of criminal behaviour before they are allowed to conduct a search. Owing to the sensitivity of stop and search, officers are required by law to record various pieces of information about each search they undertake.

I would like to start by making it clear that the Government support the ability of police officers to stop and search suspects. It is an important power in their daily fight against crime, and it is especially important in relation to combating gangs, knife crime and drug offences. For example, in the last 12 months, stop and search in London has resulted in 45,000 criminals being arrested, including 3,212 criminals carrying weapons and guns, 7,287 criminals in possession of suspected stolen goods and 1,484 criminals in possession of tools used to steal or cause damage.

As long as I am Home Secretary, the police will maintain their right to stop and search. But as important as stop and search undoubtedly is, we have to be frank about widespread public concern regarding its use. Official statistics show that more than 1 million stop-and-search incidents are recorded every year. But on average only about 9% of those incidents result in an arrest, and that figure prompts me to question whether stop and search is always used appropriately. In fact, the search-to-arrest ratio varies considerably across forces: in Cumbria, the figure is 3%; in Kent, it is 19%. In London, where most stop-and-search incidents take place, it is 8%; in Greater Manchester, it is 8%; and in the West Midlands, it is 7%. Now, of course, we should not expect all stop-and-search incidents to lead to arrest, but those percentages are far too low for comfort.

The Government are concerned about the use of stop and search for two reasons. First, it must be applied fairly and in a way that builds community confidence in the police rather than undermining it. Secondly, given the scale of recording requirements placed on the police, when stop and search is misapplied, it is a waste of police time.

I want to deal first with fairness and community confidence. The official statistics show that, if someone is from a black or minority ethnic background, they are up to seven times more likely to be stopped and searched by the police than if they are white. Now we should not rush to conclusions about those statistics, but everybody involved in policing has a duty to make sure that nobody is ever stopped just on the basis of their skin colour or ethnicity. The law is clear that in normal circumstances, stop and search should only ever be used where there is a reasonable suspicion of criminality—and that is how it should be. I am sure we have all been told stories by constituents and members of the public about what it is like to be a young, law-abiding black man who has been

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stopped and searched by the police on more than one occasion. If anybody thinks it is sustainable to allow that to continue, with all its consequences for public confidence in the police, they need to think again.

The second reason that I am concerned about stop and search is that if it is being used too much or with the wrong people, that is a dreadful waste of police time. It is estimated that a police officer spends 16 minutes conducting a stop and search and then completing details of the incident in compliance with the law. Given that there are just under 1.2 million stop-and-search incidents every year, we are talking about a total of 312,000 hours per year—the equivalent of 145 full-time police officers.

Since the election, I have made it a priority to cut red tape and free up police time, and the changes that we have made, including changes to stop-and-search recording, should save up to 4.5 million police hours a year—the equivalent of an extra 2,100 officers on the streets. There is no point in making all those changes if police officers then spend their time conducting pointless stops and searches, with all the bureaucracy that goes with them.

In London, the Metropolitan Police Commissioner, Sir Bernard Hogan-Howe, has changed the Met’s guidance, improved training and set a target that at least 20% of stop and searches in London should result in an arrest or drugs warning; and since then, they have made good progress. The latest figures suggest that in the last year 18.3% of stop-and-search incidents in London led to an arrest or drugs warning. In Hackney, it was as high as 26.3%, and the overall use of stop and search in London has fallen, too, from 500,000 to 350,000 in the past year.

That shows that it is possible to make changes to stop and search without jeopardising public safety. So, too, do the changes I made in March 2011 to the operation of stop-and-search powers under the Terrorism Act 2000. Then, I introduced a much more limited power that enables the police to stop and search people and vehicles without reasonable suspicion, but only in exceptional circumstances where there is a real threat of terrorist attack. This power has not been used outside Northern Ireland since it was introduced in March 2011, and there has been no effect on public safety.

Last year, I commissioned Her Majesty’s inspectorate of constabulary to conduct a comprehensive inspection into the use of stop-and-search powers. Its report is due to be published next Tuesday. I have not seen it yet, but the report should provide us for the first time with a comprehensive evidence base of how stop and search is used and recorded across the country.

However, on an issue as important as stop and search, it would be wrong to consult HMIC and work with the police without also consulting the public. So I can tell the House that today I am launching a consultation, lasting six weeks, that will give members of the public the chance to have their say about the future use of stop and search. Copies of the consultation document will be made available in the Library.

By the end of the year, the Government will respond formally to both the HMIC report and the public consultation. That response will then inform our work with HMIC, the College of Policing and police forces up and down the country to make sure that stop and search works fairly and in everybody’s interests. I want to see stop and search used only when it is needed; I want to see higher search-to-arrest ratios; I want to see

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better community engagement; and I want to see more efficient recording practices across the country.

At its best, stop and search is a vital power in the fight against crime; at its worst, it is a waste of police time and serves to undermine public confidence in the police. It is time to get stop and search right, so I commend this statement to the House.

1.46 pm

Yvette Cooper (Normanton, Pontefract and Castleford) (Lab): I thank the Home Secretary for her statement. She has not given me a copy of the consultation, so I have not seen its proposals, but I do welcome the principles behind it. I agree with the Home Secretary that the stop-and-search powers are important and can help the police tackle serious problems. However, the way in which they have been used has raised serious concerns about, for example, the scale of use, the lack of intelligence-led approaches and the disproportionate use against ethnic minorities and the potential waste of money.

Stop-and-search powers are useful for the police—for example, enabling them to search for weapons or stolen goods without needing to arrest someone. The Home Secretary knows about Operation Blunt, run by the Met in 2009, which delivered a 13% reduction in knife crime and a 23% reduction in youth killings and seized over 1,000 knives and which did use intelligence-led stop and search as part of that strategy. People have been arrested for possession of guns, knives and other offensive weapons as a result of stop and search, too. But where stop and search is used inappropriately or too widely, it can cause a very wide range of serious problems.

Given the relatively low proportion of searches that lead to arrest, I welcome the work that has been done to reduce the number of stop and searches, which has fallen since 2008. I welcome the work by my right hon. Friend the Member for Kingston upon Hull West and Hessle (Alan Johnson), the former Home Secretary, to restrict inappropriate use, which helped deliver an initial 10% reduction in stop and searches. I also welcome the decision by the Home Secretary to restrict and change section 44 stops and searches. I welcome the decision of the Met commissioner, Bernard Hogan-Howe, to restrict section 60 stops and searches and some of the work that he has done since then.

However, I think that it is right to go further, especially in the light of the Equality and Human Rights Commission report on stop and search three years ago. The Home Secretary knows that that report found that

“some forces are using their powers disproportionately suggesting they are stopping and searching individuals in a way that is discriminatory, inefficient, and a waste of public money.”

It also found:

“The evidence points to racial discrimination being a significant reason why black and Asian people are more likely to be stopped and searched”.

It concluded:

“A reduction in disproportionality does not have to result in a rise in crime—on the contrary in the case of both Staffordshire and Cleveland”

where the EHRC worked with those forces,

“it has gone hand in hand with reduced crime rates and increased levels of public confidence in the police.”

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Will the Home Secretary set out what has been done since the EHRC reported in 2010 to address the concerns that it raised?

The Home Secretary announced after the 2011 riots that she had asked the Association of Chief Police Officers to review stop and search. Has that review happened and will she publish the results?

Does the Home Secretary share my concern that that proportion of stops and searches that lead to an arrest has fallen, not risen, in the past five years? Previously, 12% of searches led to an arrest; now, a proportion of 9% is more likely. The right hon. Lady did not set out any specific proposals in her statement. What proposals in her consultation might make a difference to those figures and tackle the problem of searches being disproportionately targeted at ethnic minorities? Some of the figures that she quoted are seriously worrying. She will know that the EHRC examined evidence to see whether there are any explanations for those figures and found none sufficient to justify the disproportionate number of searches. The EHRC made specific recommendations for individual forces and for policing as a whole. Three years on, have those recommendations been implemented and what results have been delivered? Can she assure the House that her proposals will not jeopardise the recording of whether ethnic minorities are being targeted disproportionately? Clearly, we need to have that information.

I welcome the intention behind today’s statement and the consultation. The Home Secretary is right to support the principle of stop and search and right also to say that practice needs to be reformed to make sure that there is no discrimination and that it does not waste money or cause more problems in communities. However, it would help if she were more specific about her consultation proposals and how she plans to address the concerns.

Mrs May: I welcome the shadow Home Secretary’s support for the consultation on stop and search going ahead. As she says, there has been a number of reports on the operation of stop and search. The EHRC, whose report was published a matter of weeks ago, looked again at the issue in five forces, including the Met and Thames Valley police. It identified that it had been possible for those forces to reduce the number of stop and searches, perhaps by targeting them better on an intelligence-led basis, and that doing so had also had an impact on the search-to-arrest ratio, but no discernible effect on public safety. The EHRC reinforced the view that we can get stop and search right; that if we get it right, it can be the valuable tool we want it to be; but that we can reduce the number of stops and searches without having an impact on public safety.

I did indeed ask ACPO to look at stop and search and best practice across the country, and it has done so. I also asked HMIC to do a piece of work across forces on how stop and search is used and recorded. I think that that report, which comes out next week, will, by providing information on the practices used on the ground, give the best evidence base on which to look ahead.

The right hon. Lady asked about recording. At a very early stage, we made changes to the amount of information that needs to be recorded on stop-and-search forms, but we retained, for example, ethnicity as one of the matters

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that should be recorded. We were able to reduce bureaucracy somewhat, but it remains the case that if a stop and search is undertaken when it is not necessary—when there is not reasonable suspicion—it can be a waste of police time.

The right hon. Lady’s main accusation seemed to be that, in my statement, I had not set out any firm proposals on stop and search, but the whole point of the public consultation is to go out and ask members of the public what has been their experience of stop and search, how they feel it should be used and what changes, if any, they think should be made. The consultation will include questions such as whether local communities should be more involved in working out how stop and search should be used in their area. There are some good examples, including in the London borough of Brent, of work being done with the local community. The point of the consultation is to ask people what they think; then, we will look the results alongside the evidence base in the HMIC report and come to the House in due course with firm proposals that I believe will enable us to get stop and search right.

Sir Edward Garnier (Harborough) (Con): My right hon. Friend said that the percentage of stops and searches that led to arrest were far too low for comfort. What figure would make her comfortable?

Mrs May: My hon. and learned Friend will know that I am not naturally inclined to set targets in these matters, and I do not think it would be appropriate at this stage if I were to state a figure. The Met Commissioner has done so, having set a 20% target, and, as I said, recent figures have been far closer to that 20%. But let us look at the evidence base and hear what the public have to say about how stop and search should operate.

Keith Vaz (Leicester East) (Lab): This is an excellent statement, which I warmly welcome. The Home Secretary gave us a figure of 7%; in fact, under section 60, a black or Asian person is 25 times more likely to be stopped and searched than a white person. It cannot be right that, in Britain, anyone should be targeted because of the colour of their skin.

It is also important to look at the diversity of the police force, and I urge the right hon. Lady to read the report of the Select Committee on Home Affairs, to be published on Monday. If the public are to have confidence in the police, the police need to reflect the public as a whole.

Finally, I hope that the consultation will not be merely a paper exercise, but that the Home Secretary and Ministers will go our major cities themselves. I am happy to invite her to Leicester, where we could sit on the same side of the table, rather than on opposite sides, as we do during Select Committee meetings. Rather than have just an online consultation, it is important that Ministers hear what communities have to say about this practice.

Mrs May: The right hon. Gentleman is right about the number of times members of black or minority ethnic communities are stopped and searched under section 60; the number is significantly higher than for white people. The Met police have already looked at

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their planned section 60 authorisations and significantly reduced the number—from 103 in June 2011, to just six in June last year, for example.

The right hon. Gentleman tempts me with an invitation to come to Leicester and to stand on the same side as him and listen to the community. Nearly two years ago, I visited a charity involved with the Met that works on getting young people more involved with the police and improving their interaction. I remember that stop and search was raised by two members of the group of young people I met on that occasion. As the right hon. Gentleman says, it makes an impact when one hears people who have been subject to stop and search talk about their concerns and their feelings about the police as a result of how it was conducted.

Richard Fuller (Bedford) (Con): I welcome my right hon. Friend’s statement and her recognition of how corrosive it can be to the spirit of young people when they are stopped and searched for no better reason than the colour of their skin. I echo the Chair of the Home Affairs Committee in encouraging my right hon. Friend to have an extensive consultation. Can she provide some examples of how she will engage communities in the consultation? It is a fantastic initiative, but it must have teeth if it is to bring real hope to people who have suffered from prejudice for far too long.

Mrs May: There will be a place for responses to the consultation on the website, but we intend also to hold a number of consultation meetings with people who are involved in the issue. Obviously, we want to speak with those who administer stop and search, as well as groups who have commented on it in the past, but I am sure that there will be opportunities to hear directly from people who have been subject to stop and search, as well as from communities about how they feel stop and search should be used in their community.

Ms Diane Abbott (Hackney North and Stoke Newington) (Lab): The Home Secretary will be aware that no single police activity causes more unhappiness and antagonism between the police and young black people than stop and search. That goes all the way back to the 1980s and the Brixton riots. Even after the 2011 riots, when I spoke to young people in Hackney about what triggered the riots, they said, “Stop and search.”

Will the Home Secretary join me in welcoming the work of Chief Superintendent Matthew Horne at Stoke Newington police station, who is responsible for the improved figures on the efficacy of stop and search in Hackney? Does she appreciate that it is not just that respectable young black men who get stopped on a weekly basis do not like it? What they object to is not the simple fact of being stopped and searched, but the way the police talk to them. There is a lot to be done in training. Stop and search is an important weapon for the police, but proper training should stop its being used in a way that is detrimental to community relations.

Mrs May: The hon. Lady rightly speaks from experience of an issue that I know she has spoken about on a number of occasions in the House, and I am happy to commend the work of the chief superintendent at Stoke Newington who has been working to ensure a different approach and those different figures in Hackney. She is

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also right—when I talk to police officers, they will often say it is how they do it as much as what they are doing that can be the issue for those who are being stopped and searched. That is why there is some very good practice across the country, and also good practice with communities, explaining why stop and search is being undertaken in a particular community at a particular time so that people understand it, rather than feeling that it is something that is just being done to them within the community.

Jessica Lee (Erewash) (Con): I welcome my right hon. Friend’s statement. Does she agree that what the public are seeking is consistency in the conduct of the police across the country? In my constituency, Erewash, the police work hard to get the right balance between keeping residents safe and respecting citizens going about their business. A review of the guidelines can only help to achieve that consistent practice that the public expect.

Mrs May: I thank my hon. Friend for her comments. She is right. People expect such powers to be used fairly and consistently. There are many good examples where the police are working hard in the application of the powers but, sadly, the figures show us that we need to look at the guidance that is being offered and at the training of police officers—I did not respond on training to the hon. Member for Hackney North and Stoke Newington (Ms Abbott)—to ensure that stop and search is always used fairly and properly.

David Simpson (Upper Bann) (DUP): I thank the Home Secretary for her statement. I am glad to see that the police will retain the power of stop and search. Of course there needs to be fairness. It should not be the case that someone is stopped because of the colour of their skin. But does the right hon. Lady agree that at the height of the troubles in Northern Ireland stop-and-search powers saved many lives from terrorists?

Mrs May: Yes, I absolutely agree with the point that the hon. Gentleman makes. As I said in my statement and as he acknowledged, stop and search, properly used, at its best, is a vital tool for the police, and long may that continue.

Dr Julian Huppert (Cambridge) (LD): Stop and search has far too often been misused, weakening trust in the police, particularly among those from black and ethnic minority backgrounds, so I welcome the Home Secretary’s statement, although it is a slightly novel approach to launch a consultation the week before the evidence base comes out. I assume that there are reasons for that. Does she agree that when the police do ask people for information, such as name and address, they should make it clear whether compliance with the request is a requirement or purely voluntary?

Mrs May: My hon. Friend talked about the launch of the public consultation this week. This is a different thing from the report that Her Majesty’s inspectorate of constabulary will be producing, which will provide an evidence base. We have figures already that I think make it right for us to question whether stop and search

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is always used appropriately. It is therefore right to say to the public, “We think this is a matter on which we want to hear the public’s views.” On the matter of what information needs to be recorded and what information will need to available under any changes that are made to the guidance and so forth, I can assure my hon. Friend that we will, of course, make it clear where information is required and where it is voluntary.

Seema Malhotra (Feltham and Heston) (Lab/Co-op): I thank the Home Secretary for her statement. I think all Members of the House will welcome the consultation, which I hope will put an end to the experience of many young people of repeated stop and search. But as we are approaching the summer break, can she explain the timing of the consultation and why she thinks six weeks might be long enough, bearing in mind that people may be going on leave? It gives very little time for extending the consultation out into our communities.

Mrs May: I encourage the hon. Lady to do just that, and I hope she will be able to ensure that in her constituency people are aware of the consultation and are able to respond. I think six weeks is an appropriate length of time for us to be able to undertake the consultation. We will then be able to come back to the House in the autumn on the basis of both the consultation and the HMIC report, and make firmer proposals to the House on stop and search going forward.

Mr Philip Hollobone (Kettering) (Con): I am obliged to declare my interest as a special constable of the British Transport police and, in that role, as someone who has conducted stops and searches. May I urge the Home Secretary to use this opportunity to clear up the law with regard to face coverings? If there were a riot in Parliament square and, under section 60AA of the Criminal Justice and Public Order Act 1994, an inspector or above banned the covering of people’s faces with a balaclava, the British Transport police in Westminster tube station would not, as I understand it, be able to stop and search people for having a balaclava on their person, and if they did discover such balaclavas, they would not be able to remove them. That is an anomaly which could be addressed by the consultation.

Mrs May: I commend my hon. Friend for the work that he does as a special constable, and the limited number of Members of this House who are special constables both with the Met and other police forces and with the BTP. I am happy to look at the issue that he raised. We are looking at a number of matters in relation to the various powers of the police more generally and of the British Transport police, looking to iron out any anomalies, so I will certainly take that on board and have a look at it.

Jonathan Edwards (Carmarthen East and Dinefwr) (PC): Does the Secretary of State have figures for the search-to-arrest ratios for the Welsh police forces?

Mrs May: I do not have the figures to hand for the ratios for the Welsh police forces. I am happy to write to the hon. Gentleman in relation to that matter.

Andrew Stephenson (Pendle) (Con): I welcome today’s statement and the public consultation. Owing to the

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sensitivity of stop and search, it is important that we balance genuine public concerns about the effect that that has on public confidence in the police’s legitimate need for stop-and-search powers. In my area, Lancashire police formed a group within the community to act as an advisory group to help monitor police actions and provide them with community feedback, which I warmly welcome. May I urge my right hon. Friend to ensure that, in addition to community meetings, details of the consultation are sent to all mosques and faith-based groups across the country so that we can ensure that all parts of the community are able to respond in good time?

Mrs May: My hon. Friend raises an interesting point. We will make sure that knowledge of the consultation is as widespread as possible to enable all those who may have a great interest in responding to do so. The example that he referred to in Lancashire, of the work being done with the local community, is a good example—and there are others across the country—where police have actively tried to work with the community to explain the purpose of stop and search so that communities become more responsive to it and more willing to accept it when it takes place.

Jim Shannon (Strangford) (DUP): I, too, thank the Secretary of State for her statement. Every time I come to Westminster the news records yet another vicious knife attack, and often a fatal attack. Many people feel that stop and search is a necessity and must continue. The Secretary of State mentioned that 3,212 criminals were stopped and found with weapons, and many people in the community feel that that should continue. Will

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she give an assurance to those who wish to see stop and search continue that that will happen?

Mrs May: Yes, I am absolutely clear that stop and search, when used properly, is a vital tool for the police and it is right that it should continue. As I said in my statement, as long as I am Home Secretary it will continue. But when we see half a million stops and searches in the Metropolitan police area and an arrest-to-search ratio of 9%, with 45,000 criminals being arrested as a result—the numbers for the Metropolitan police in terms of arrests have been increasing and the number of stops and searches reducing—it is right that we ask whether it is always used as appropriately as it should be. However, it should stay as a tool.

Gavin Barwell (Croydon Central) (Con): In the past my party has not taken seriously enough the concerns of London’s black and minority ethnic communities about the way in which they are policed. It reflects huge credit on the Home Secretary that she is addressing this ongoing concern. Given that policing in this country is based on the principle of consent, does she agree that stop and search is a technique that can protect young people, but that it must be done with respect, it has to be based on intelligence and it has to enjoy the support of those who are being policed?

Mrs May: My hon. Friend has neatly put his finger on the issue. Stop and search is a valuable tool, but it must have the confidence and support of the community. It can be a vital tool in the protection of young people, as he says, but it has to be dealt with on a basis of respect and intelligence, and with the support of the community.

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Letting Agents (Competition, Choice and Standards)

Motion for leave to bring in a Bill (Standing Order No. 23)

2.9 pm

John Healey (Wentworth and Dearne) (Lab): I beg to move,

That leave be given to bring in a Bill to establish a national mandatory licensing scheme for letting and managing agents, with established standards and redress for landlords, tenants and leaseholders, and prohibition of letting and management agent fees; to enable local authorities to administer and enforce the scheme; to require that tenants, landlords and leaseholders have written agreements; and to empower local authorities, either alone or in partnership, to trade as letting and managing agents.

The Bill is unfinished business for me. As Housing Minister in the last year of the Labour Government, my priorities were driven largely by the extraordinary economic circumstances we faced: helping people keep their homes, preventing the collapse of private house building and launching a new wave of social house building, especially council housing, to kick-start the economy in the wake of the global financial crisis. All of that we did successfully.

However, I ran out of time to reform the private rented sector and, in particular, deal with the growing problem of the housing market middle men who answer to no one—letting and managing agents. The detailed plans for reform that I set out in 2010, following the Rugg review, did not make it into legislation and were all dropped by coalition Ministers. I am now making the case for change anew, with cross-party support and backing from housing charities and industry bodies.

There is a silent crisis in the private rented sector. More than 9 million people now rent their home from a private landlord, a higher proportion than at any time for almost half a century. It is no longer just the young and mobile biding their time until they can buy their own home; half of those in private rented homes are over 35 and more than 1 million families with children are basing their lives on landlords who can evict them at a month or two’s notice.

“Generation rent” has no organised voice and little market muscle. We have better consumer rights when buying a fridge or hiring a car than we do when renting a home. Now that the majority of private tenancies are let through agencies, anyone can set up as a letting or managing agent, even if they have a bad track record or a criminal record. There is no system of licensing or standards, no requirement for a money protection scheme or a system of redress, and no legal right to a written tenancy contract.

In addition, tenants are often hit by huge and hidden up-front fees. Multiple charges for administration, inventories, references, credit checks, deposit handling, contract preparation and tenancy renewal are common. In our local area in Rotherham, the council reckons that tenants are being asked to pay hundreds of pounds for such fees. Research recently released by Shelter reveals that the average cost of up-front fees charged by letting agents is almost £350, and Which? reported last year that none of the 32 letting agents it surveyed

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had information about their fees on their website. One lady in Shelter’s report speaks for all private renters. She was charged £540 in administration fees alone. She said:

“The rental market is a horrible place right now… While I’m not on the cusp of poverty, this sort of thing could easily spiral. Frankly it is terrible that the government does not see this sort of thing as a priority matter.”

She is right. This affects not only people on low incomes, but people like her on middle incomes.

However, it would be a mistake to think that only tenants suffer from sharp practice. Landlords often report letting or managing agents failing to provide the services expected or hitting them with hidden and excessive charges. Even people who own their own home as leaseholders can suffer when managing agents acting for the freeholder adopt the same high-cost, low-standards business model that plagues so many other parts of the sector.

The worst drag down the reputation of the rest, which is why many of the legal changes I propose are backed by the associations representing letting agents, managing agents and landlords. The Association of Residential Letting Agents, the Association of Residential Managing Agents, the Southern Landlords Association and the British Property Federation have all joined Shelter, Crisis, Which? and the National Union of Students to support my call for regulation to raise standards in the sector. Self-regulation has failed. Legal regulation is required to improve choice, competition and standards in the market. That is exactly what my Bill would do.

The Government were recently forced by Labour in the Lords, led by Baroness Hayter, to agree to introduce a redress scheme. That is widely seen as necessary but nowhere near sufficient. It will only offer help after the damage has been done. Therefore, the legal changes in my Bill would include a legal right to a written tenancy agreement, a ban on agency charges beyond a deposit and rent in advance, a comprehensive redress scheme when things go wrong, and mandatory national licensing for all agents, with core standards and a “fitness to practise” test. For those rightly concerned about the cost of regulation, the Royal Institute of Chartered Surveyors has used the Department for Business, Innovation and Skills impact assessment model to show that such basic legislation would have an initial cost of £46 million but would bring net benefits of over £20 million a year.

However, the changes simply cannot be done from the centre. Local authorities must be at the heart of improvements in the lettings market. That is why my Bill would also give councils strong enforcement powers and new powers to set up their own local letting agencies as public sector comparators and competitors to their private sector counterparts. That model of market challenge by the public sector already works well for low-end rented properties in places such as Derby, Lewisham and Newham. I believe that a new system of mid-market local letting agents, run by the public service, would help drive up standards and drive down fees. Councils could run such operations under their existing trading powers, so local tenants and landlords would benefit and local council tax payers could too.

Our home is our biggest financial outlay, whether we buy or rent. The basic regulation now in place for estate agents is still missing for letting and managing agents. The private rented market is now failing too many despairing tenants who feel let down by low standards

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and ripped off by high fees. This sector has been called the property market’s wild west. It is high time Parliament brought the rule of law to bear on the cowboys, and my Bill would do just that.

Question put and agreed to.


That John Healey, Mr Gareth Thomas, Lucy Powell, Sir Peter Bottomley, Andrew George, Lilian Greenwood, Ian Mearns, Mr Steve Reed, Clive Efford, John Pugh, Derek Twigg and Natascha Engel present the Bill.

John Healey accordingly presented the Bill.

Bill read the First time; to be read a Second time on Friday 18 October, and to beprinted (Bill 83).

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Finance Bill

[2nd Allocated Day]

Further consideration of Bill, as amended in the Public Bill Committee

New Clause 7

Restrictions on interim payments in proceedings relating to taxation matters

‘(1) This section applies to an application for an interim remedy (however described), made in any court proceedings relating to a taxation matter, if the application is founded (wholly or in part) on a point of law which has yet to be finally determined in the proceedings.

(2) Any power of a court to grant an interim remedy (however described) requiring the Commissioners for Her Majesty’s Revenue and Customs, or an officer of Revenue and Customs, to pay any sum to any claimant (however described) in the proceedings is restricted as follows.

(3) The court may grant the interim remedy only if it is shown to the satisfaction of the court—

(a) that, taking account of all sources of funding (including borrowing) reasonably likely to be available to fund the proceedings, the payment of the sum is necessary to enable the proceedings to continue, or

(b) that the circumstances of the claimant are exceptional and such that the granting of the remedy is necessary in the interests of justice.

(4) The powers restricted by this section include (for example)—

(a) powers under rule 25 of the Civil Procedure Rules 1998 (S.I. 1998/3132);

(b) powers under Part II of Rule 29 of the Rules of the Court of Judicature (Northern Ireland) (Revision) 1980 (S.R. 1980 No.346).

(5) This section applies in relation to proceedings whenever commenced, but only in relation to applications made in those proceedings on or after 26 June 2013.

(6) This section applies on and after 26 June 2013.

(7) Subsection (8) applies where, on or after 26 June 2013 but before the passing of this Act, an interim remedy was granted by a court using a power which, because of subsection (6), is to be taken to have been restricted by this section.

(8) Unless it is shown to the satisfaction of the court that paragraph (a) or (b) of subsection (3) applied at the time the interim remedy was granted, the court must, on an application made to it under this subsection—

(a) revoke or modify the interim remedy so as to secure compliance with this section, and

(b) if the Commissioners have, or an officer of Revenue and Customs has, paid any sum as originally required by the interim remedy, order the repayment of the sum or any part of the sum as appropriate (with interest from the date of payment).

(9) For the purposes of this section, proceedings on appeal are to be treated as part of the original proceedings from which the appeal lies.

(10) In this section “taxation matter” means anything, other than national insurance contributions, the collection and management of which is the responsibility of the Commissioners for Her Majesty’s Revenue and Customs (or was the responsibility of the Commissioners of Inland Revenue or Commissioners of Customs and Excise).’.—(Mr Gauke.)

Brought up, and read the First time.

2 July 2013 : Column 787

2.19 pm

The Exchequer Secretary to the Treasury (Mr David Gauke): I beg to move, That the clause be read a Second time.

New clause 7 makes changes to the procedure for the granting of interim payments in common law court claims relating to taxation matters. Its effect will be to limit the circumstances in which interim payments may be granted in the rare tax cases originating in a common law claim as opposed to appeal through the tax tribunal. The new clause will bring the treatment of tax cases under the two routes into closer alignment. It will simplify the process and lessen administrative burdens for the Revenue and for claimants.

I should like to set out some of the background to this change. It corrects a difference in treatment with respect to the granting of interim remedies on tax disputes that arise depending on whether the claim is appealed to the tax tribunal or originates before the High Court, or the Court of Session if in Scotland. Generally speaking, appeals against a decision by Her Majesty’s Revenue and Customs on a tax matter are appealed to the tax tribunal. This system is provided for in statutory tax legislation and is the standard route of appeal for a taxpayer who disagrees with a decision by HMRC.

There is no procedure for the granting of interim payments under this system. Instead, tax is paid or repaid as appropriate when a decision is made on the case. This is a sensible arrangement. The interim award procedure was not designed to be a remedy in a tax dispute. Its common application is to victims who have suffered serious injury to their health but the long-term prognosis leaves it unclear how much they should receive. An interim payment allows them to have enough money to make adaptation to their homes and to pay for care. Clearly, the complex adjudication of a tax dispute is a very different circumstance unsuited to the application of anticipatory payments in advance of final judgment. It is therefore right that the normal practice in tax disputes is not to grant an interim payment.

However, difficulty arises where a tax claim originates in common law. In such circumstances, it would currently fall outside the scope of the tribunal system and would therefore be appealed instead to the High Court. Here claimants may obtain interim payment before the matter is finally settled. Such payments may then need to be returned to the Revenue as the direction of jurisprudence changes at different stages of litigation. This back-and-forth process is administratively burdensome on both parties and adds to the cost of the litigation. Furthermore, it exposes the Revenue to a risk of non-recovery in the event that the taxpayer becomes insolvent after obtaining an interim payment that it is later required to hand back.

Let me set out a little more detail on the new clause. The measure will operate by limiting the power of a court to grant an interim payment to a claimant whose application for such payment is founded, at least in part, on a point of law which has yet to be finally determined. The court will, however, still be able to grant an interim payment to whatever extent is necessary to fund the ongoing litigation, as well as in some other defined circumstances where there is a strong case for granting such award. The measure relates only to those

2 July 2013 : Column 788

rare tax cases that fall outside the scope of the tribunal system. It is a procedural matter, not a change in tax policy.

John Healey (Wentworth and Dearne) (Lab): The Minister said that such cases are rare. How many are there each year, and how quickly will they be dealt with under the system proposed in new clause 7 as compared with now?

Mr Gauke: How quickly a particular case will be dealt with depends on the length of time it takes to be resolved. The right hon. Gentleman will know from his considerable experience as a Treasury Minister that some of these cases can take a number of years. It is worth pointing out that, by and large, large corporates tend to be involved in this type of litigation. The length of time it will take for a case to be resolved is ultimately unaffected by these changes. Their only significance is that there will not be interim payments in these rare cases.

The right hon. Gentleman asked how many cases there are per year. I cannot give him the number straight away, but it is very low. In the vast majority of cases, disputes are taken through the tax tribunal. As I say, this is about making common law cases consistent with tax tribunal cases. It is difficult to give the precise number of cases per year, but we are talking about low numbers.

Catherine McKinnell (Newcastle upon Tyne North) (Lab): I thank the Minister for responding to my right hon. Friend’s useful question. Will he clarify why the Government are proposing this change as a new clause to the Finance Bill? What has come to light between the initial drafting of the Bill and this stage in the proceedings, which is clearly very late given that the Bill is due to receive its Third Reading today?

Mr Gauke: We have introduced it at this point because recent jurisprudence has crystallised our view in this regard. As I say, we want consistency between common law cases and tax tribunal cases. A degree of volatility has been created in terms of tax revenues that none of us should welcome. In short, the answer to the hon. Lady’s question is that the reason is recent jurisprudence.

Let me give the right hon. Gentleman a little more detail in response to his question about rare cases. HMRC is aware of fewer than 10 strands of litigation where tax issues are being handled through the High Court. That is not to say that they would necessarily all involve interim payments, but I hope that that gives some sense of the scale of the issue. As I say, it is a procedural matter.

John Healey: It is helpful of the Minister to give the House an indication of the scale in terms of the number of cases. Can he also indicate the scale in terms of the amount of tax at stake in such cases?

Mr Gauke: The first point to make is that this does not ultimately change the amount of tax at stake, because a litigant will either win or not win. If a litigant who ultimately wins has not had access to an interim payment as a consequence of this measure, that does not change what they will ultimately receive. Some of these cases involve large sums of money, sometimes

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many millions of pounds. In some cases, interim payments have been very significant. However, I stress that this does not ultimately change how much money will end up in the pocket of the litigant. It is a question of timing and ensuring that we have some consistency.

Turning to why we are doing this now, it follows recent jurisprudence of the Court relating to the application of the interim awards procedure. This jurisprudence has crystallised our view that the interim payment procedure is not suitable for complex tax disputes. There is also an element of risk management in this. HMRC is routinely involved in litigation where the tax at stake may be for very high sums of money. The granting of payments on an interim basis before a final decision has been reached contributes to the volatility of tax revenues. By limiting the application of the interim payment procedure in common law court claims relating to taxation matters, and bringing the system into better alignment with what is standard practice in the tax tribunal, the new clause will cut down on complex work associated with calculating claims on a contingent basis before matters relating to liability and quantum have been resolved by the judiciary.

Catherine McKinnell: The information being provided by the Minister is very helpful. The impact note states that the change will have no Exchequer impact, but that Her Majesty’s Revenue and Customs will benefit from reduced administrative costs and burdens. Is the Minister able to put a sum on that economic benefit to the Treasury?

2.30 pm

Mr Gauke: That is a fair question and there will be a benefit to HMRC, but it is difficult to put a sum on it. I do not want to overstate the argument—we are not talking about an administrative saving of many millions of pounds—but clearly these cases are difficult to deal with. They involve the additional complexity involved in large-scale litigation matters that are taken through the courts. There is a saving, but I do not want to overstate it. The hon. Lady raises a perfectly fair question, but it is difficult to provide a precise number.

At a time when there is considerable pressure on resources, it is difficult to justify the considerable additional work that the interim payment procedure creates for the Revenue by adding stages to the litigation process. We have, therefore, taken the decision to legislate now in order to achieve better alignment between the treatment of different tax cases at the earliest opportunity. The Government believe that this will help bring an end to misalignment whereby the availability of interim payments in the context of tax differs depending on whether claims are brought in the court system or the tribunal system.

Catherine McKinnell: I thank the Minister for his comprehensive account of new clause 7 and for responding to our queries. As he has said, the Government want to introduce a number of new clauses and amendments to the Bill. Could you clarify, Mr Deputy Speaker, whether we are dealing with just new clause 7 at this stage, or are we taking any other amendments?

Mr Deputy Speaker (Mr Lindsay Hoyle): Just new clause 7.

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Catherine McKinnell: Thank you, Mr Deputy Speaker; I appreciate that clarification.

New clause 7 makes changes to the procedure for the granting of interim payments in common law claims relating to taxation matters so that the treatment of tax cases commenced under common law court claims and tax tribunals will be more closely aligned in future. We support this simplification process, and the Minister’s response to our probing questions during his generous explanation of the new clause has clarified the issue.

Harriett Baldwin (West Worcestershire) (Con): Is it appropriate, Mr Deputy Speaker, that I now speak to amendments 52 and 53, tabled in my name?

Mr Deputy Speaker: No.

Question put and agreed to.

New clause 7 read a Second time, and added to the Bill.

Clause 175

Election to be treated as domiciled in the United Kingdom

Mr Gauke: I beg to move amendment 1, page 105, leave out lines 4 to 13 and insert—

‘(3) Condition A is that, at any time on or after 6 April 2013 and during the period of 7 years ending with the date on which the election is made, the person had a spouse or civil partner who was domiciled in the United Kingdom.

(4) Condition B is that a person (“the deceased”) dies and, at any time on or after 6 April 2013 and within the period of 7 years ending with the date of death, the deceased was—

(a) domiciled in the United Kingdom, and

(b) the spouse or civil partner of the person who would, by virtue of the election, be treated as domiciled in the United Kingdom.’.

Mr Deputy Speaker (Mr Lindsay Hoyle): With this it will be convenient to discuss Government amendments 2 to 7 and 35 to 51.

Mr Gauke: These Government amendments make important changes to the UK’s inheritance tax rules.

Amendments 1 to 7 will bring in greater flexibility and provide more individuals with the option to elect to be treated as UK domiciled for the purposes of inheritance tax. They demonstrate the Government’s willingness to listen to the views of external interested parties and act where there is a principled case for change.

Amendments 35 to 51 are being made as a result of comments by interested parties. They clarify the technical interpretation of the legislation and change the commencement provisions with respect to certain liabilities.

Let me turn first to amendments 1 to 7 to clause 175. The clause reforms the inheritance tax treatment of transfers between UK-domiciled individuals and their non-UK-domiciled spouses or civil partners. The changes allow individuals who are not domiciled in the United Kingdom but who have a UK-domiciled spouse or civil partner to elect to be treated as domiciled in the UK for the purposes of inheritance tax.

2 July 2013 : Column 791

The amendments are being made following comments from two key interested parties—the Chartered Institute of Taxation and the London Society of Chartered Accountants—about how the Finance Bill as drafted amends the inheritance tax treatment of spouses and civil partners not domiciled in the UK. Their further representations since the publication of the Bill in March have helped us understand the concerns raised in more detail. Considering the points raised has taken time, but the amendments will resolve these issues.

The clause as drafted stipulates that a person must be non-UK-domiciled and married at the time they make an election. Consequently, a person who has recently become UK domiciled would not be able to make a retrospective election that would cover a period when he or she had been non-domiciled. Effectively, they are trapped if they are not aware of the possible IHT consequences at the point just before they become UK domiciled—for example, if they decide to remain in the UK indefinitely after having children here. This might be especially harsh in situations where the original UK-domiciled spouse dies suddenly having made potentially exempt transfers to the surviving spouse.

Similarly, the Bill as drafted requires a person to remain married to, or in a civil partnership with, the UK-domiciled spouse or civil partner throughout the “relevant period” preceding the election, which can be up to seven years. Therefore, in circumstances where the marriage or civil partnership has been dissolved and the person is a non-domiciled individual, they are prevented from making an election retrospectively and hence prevented from gaining access to spousal relief for the period when they were married in return for their overseas assets being brought into IHT. That was not the intention of the policy.

Amendments 1 to 7 remove the condition that a person must be non-UK-domiciled at the time of making an election. They also remove the requirement that the person making the election is married or in a civil partnership with the UK-domiciled individual throughout the relevant period. The amended clause stipulates instead that they were married or in civil partnership at any time during the relevant period.

As a result of these amendments, individuals who are domiciled in the UK but who were previously domiciled elsewhere will be able to make a retrospective election. Similarly, the amendments will also enable individuals previously married or in a civil partnership to make a retrospective election following divorce or dissolution. This will ensure that changes in domicile or marriage status do not restrict the ability of individuals to elect to be within the UK inheritance tax system.

Amendment 1 simply removes a sub-paragraph that is no longer required as a consequence of amendments 2 to 6, while amendment 7 provides clarity that the provision for revoking an election applies only to the person who made the election and not to that person’s personal representatives.

Let me now turn to amendments 35 to 51 to schedule 34. Clause 174 and schedule 34 reform the inheritance tax treatment of outstanding liabilities. They introduce new conditions and restrictions on when a liability can be deducted from the value of an estate.

2 July 2013 : Column 792

The current rules allow almost all outstanding liabilities at death to reduce the value of an estate, irrespective of how the borrowed moneys have been used, or whether the loan is repaid following the death. That creates opportunities for avoidance and can lead to decisions and arrangements being made purely for tax reasons. A range of contrived arrangements and avoidance schemes on the market seek to exploit the current rules. The number of those is expected to grow as other avoidance routes are closed off.

There is an inconsistency in how the current rules treat liabilities that are used to acquire assets that qualify for relief, but that are secured against different types of assets. That creates an advantageous tax position and distorts decision making by encouraging individuals to secure business loans against their personal property where there may be no need to do so. The Government believe that the tax system should neither encourage nor penalise the choice of one form of security over another.

Clause 174 and schedule 34 address those opportunities for avoidance and inconsistency in three ways. First, deductions will be disallowed where the loan has been used to acquire excluded property—that is, property which is excluded from the charge to inheritance tax. Secondly, where the loan has been used to acquire relievable property—that is, property which qualifies for a relief—the relief will be allowed against the net value of the property after deducting the loan. Thirdly, the loan will generally be allowable as a deduction only if it has been repaid from assets in the estate.

The Government are making those changes to improve the integrity and fairness of the inheritance tax system, close avoidance opportunities and remove the inconsistency in the treatment of loans.

Following the publication of the Finance Bill in March, Her Majesty’s Revenue and Customs has received comments from representative bodies, practitioners and individuals that have highlighted sections of the legislation that could be clarified. Interested parties have also expressed concern that the new provisions will apply retrospectively where individuals have secured business loans on their non-business property for commercial reasons, rather than for avoidance purposes, before the changes were announced. Those individuals would face a higher IHT bill if they died before the debt was repaid.

Amendments 35 to 49 clarify the interpretation of the legislation to ensure that it works as intended, and address some of the technical issues identified in feedback. If a loan has been used to acquire excluded property, which later becomes chargeable to IHT, amendment 37 will allow the deduction for the liability. Conversely, if chargeable property subsequently becomes excluded property, the amendment will deny the deduction.

Where a loan has been used to acquire relievable property and that property is given away before death, amendments 41 and 42 will ensure that the liability is not deducted again against other types of property if it has already been taken into account. Amendment 45 will widen the meaning of “estate” to allow the liability to be repaid from property that is usually treated as being outside a person’s estate for IHT purposes, such as foreign property that is owned by an individual who is not domiciled in the UK. Where a loan has not been repaid and the deduction is disallowed, amendment 47

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will make it clear that the liability will not reduce the amount that would be eligible for the inheritance tax exemption for transfers between spouses or civil partners.

The Government recognise that some lenders may require security in the form of personal assets and that individuals who have secured existing loans against their personal property to finance business investment may not be able to restructure the loan or unwind the arrangements. Amendments 50 and 51 will therefore amend the commencement date so that the new rules dealing with liabilities incurred to acquire relievable property will apply only to new loans taken out on or after 6 April 2013. That will mean that someone who took out a business loan in the past secured against their other assets will not be affected by the new provisions.

The commencement date for the other provisions in schedule 34 will remain unchanged as the date of Royal Assent. Those provisions will apply to other liabilities, irrespective of when they were incurred.

Catherine McKinnell: The Minister is again providing a thorough explanation of the Government amendments. He may recall that the Chartered Institute of Taxation expressed concerns that clause 174 and schedule 34 were “profoundly anti-business” and did “not recognise economic realities”. Will the Minister provide reassurance that the Government are confident that those concerns are addressed by today’s amendments?

Mr Gauke: We have sought to address many of the concerns that have been raised. It is perhaps worth outlining the policy objective of limiting the deduction for liabilities. It removes a tax advantage that certain schemes and arrangements seek to achieve. It removes an anomaly in the current rules that may distort business financing decisions. The measures will ensure that the value of an estate that is subject to IHT reflects the normal economic consequences of incurring a liability. They support our policies on anti-avoidance and fairness.

2.45 pm

We have demonstrably listened to the concerns that have been raised. We are seeking not to prevent or deter individuals from starting a business or investing in an existing business, but to close down an avoidance opportunity. The change will not prevent a business from securing a loan against non-business assets or disrupt business activity. It will only remove the anomaly that can provide a tax advantage for restructuring debts in one way over another.

The amendments will improve the inheritance tax rules. They will bring greater flexibility and provide more individuals with the option to elect to be treated as UK domiciled for the purposes of inheritance tax. They will ensure that the new provisions in clause 174 and schedule 34 reduce potential tax losses and reduce the role of inheritance tax in business financing decisions, while minimising the impact on legitimate arrangements.

Catherine McKinnell: Amendments 1 to 7 will make technical changes to clause 175, which introduces provisions by which an individual who is or has been married to or who is or has been in a civil partnership with someone who is domiciled in the UK can elect to be treated as UK domiciled for inheritance tax purposes. The Minister has set out in detail the reasons for the changes and the expected impact.

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I have one additional question. The impact note that was published with the amendments states that there will be a negligible impact in this year, but that in future years there is expected to be a £5 million negative impact on the Exchequer. Will the Minister clarify how and why that negative impact will be realised?

Amendments 35 to 51 will alter schedule 34 and clause 174 on the treatment of liabilities for inheritance tax purposes. Understandably, the Minister focused on those proposals for the majority of his remarks, because they have been the subject of significant concern from a number of quarters. As he explained, the clause was drafted in response to avoidance schemes and arrangements that sought to exploit the inheritance tax rules that allow for a deduction for liabilities owed by the deceased against the value of an estate, regardless of whether the debt is paid after death.

HMRC has outlined some of those arrangements. Some involve contrived debts that are subsequently not repaid, so there is no real reduction in the value of the estate. Others involve loans that are used to acquire assets that are not chargeable to inheritance tax or which qualify for a relief so that the value of the estate is doubly reduced. The policy intention of the measure is to remove the tax advantage that such schemes and arrangements seek to achieve through the exploitation of that loophole. Obviously, that is an aim that the Opposition support.

The impact assessment shows a net positive return to the Exchequer of £5 million in 2013-14, rising to £20 million in 2014-15, then falling and remaining steady at £15 million after 2017-18. It is obvious why the impact will be lower in 2013-14, but it would be helpful if the Minister would clarify why the return is expected to peak at £20 million and peter down to £15 million on an ongoing basis. Presumably, individuals who are aware of the changes will, as executors, adjust their tax planning behaviour, but it would be interesting to understand why we expect that increase in 2014-15, and why the return will continue at £15 million on an ongoing basis. Is that return expected to continue indefinitely in terms of tax protected by the Exchequer?

A number of concerns about this measure were raised in Committee, and also expressed by several external organisations that the Minister mentioned. Most notably, there is concern that the new rules are too broad and may unintentionally catch genuine existing arrangements, rather than solely avoidance behaviour. It is welcome that amendments 35 to 51 seek to focus the new rules more tightly, and clarify the legislation where appropriate to minimise the impact on those with innocent arrangements. Despite the amendments, there are still a number of concerns about clause 174 and schedule 34. I have already asked the Minister whether he is confident that those concerns have been addressed, because even despite the amendments, concerns continued to be raised. It would be helpful if the Minister would provide comfort to the House, members of the public and tax professionals who are concerned about the clause.

The key concern expressed by the Chartered Institute of Taxation relates to debts that are not discharged from the estate of a deceased person. New provisions in clause 174 appear to mean that if a debt has not been discharged directly out of an estate, it will not be deductible for inheritance tax purposes. For example, if the deceased’s estate contains a house subject to a

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mortgage, the mortgage debt might be repaid from the proceeds of an insurance policy, payable directly to the beneficiary. Although a spouse or civil partner would not be subject to inheritance tax under such circumstances, a cohabitee or orphan child would be. Alternatively, if there is no insurance to pay off the mortgage, the beneficiary might take on the mortgage debt. In either case, as liability will not have been discharged directly out of the estate, which is a requirement of the new provision, it appears that it will not therefore be deductable.

I understand that HMRC intends to deal with such scenarios in its guidance, but it would be helpful for the Minister to clarify the position in his response. The Chartered Institute of Taxation previously expressed concerns that the measures are “profoundly anti-business” and do “not recognise economic realities”. Indeed, it went so far as to state

“we can hardly think of a more counter-productive measure than to deny relief for lending related to business.”

I am sure the Government will want to respond to that strong concern, given current economic conditions and their stated desire to stimulate economic growth. I am sure it is not their intention to enact measures that could be counter-intuitive to that desire.

The Government’s amendments mean that new rules on liabilities incurred to acquire a relievable property will apply to loans taken out or varied on or after 6 April 2013. That is important because of the retroactive nature of schedule 34, which has been criticised given the significant implications for business loans taken out many years ago and secured against a person’s house.

The Chartered Institute of Taxation continues to be concerned that the amendments do not provide adequate protection for small businesses. If a business loan was taken out many years ago but is varied after 6 April 2013, the transitional protection offered by the amendments falls away. That could trap small business owners into existing loans, or hinder anyone whose loan comes to an end, where the bank wants to alter the terms, or if the individual wants to refinance. Ultimately, the Chartered Institute of Taxation fears that that could result in people facing an unenviable choice between selling the family home and selling their business if the business owner dies. I would be grateful to hear the Minister’s comments on those concerns.

To return briefly to my comments on amendments 1 to 7, the impact assessment states that the proposed changes could impact on small businesses. There has been no consultation with small firms or any other groups, so perhaps the Minister will confirm that both sets of changes will not have the detrimental impact on small businesses and business lending that many tax professionals are concerned about.

Mr Gauke: I will try to address the hon. Lady’s points. First, on inheritance tax and non-domiciled spouses, she correctly mentioned the costs of the policy, which are largely due to an increase in the lifetime limit set out in the Budget documents. Clause 176 increases that limit from £55,000 to £325,000—it has not been increased since 1982, and we wanted to address that to be fair to non-domiciled spouses. That is the reason for the cost.

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The yield from measures in clause 134 and schedule 34 comes from two main types of avoidance scheme that will be closed by these provisions. The main impact on one will be relatively short-lived. The hon. Lady is right to point out that we expect tax agents providing tax avoidance schemes to move on to new schemes in other parts of the tax code, and that will have a behavioural impact. That explains the peak in one year—2014-15—and the £15 million yield for subsequent years.

The hon. Lady mentioned the impact on business and I refer her to my earlier remarks—as you will have noted, Mr Deputy Speaker, I covered quite a lot of ground in a fairly lengthy speech. Estates will continue to get a deduction for loans or liabilities, provided they are not used to acquire assets that are not chargeable to inheritance tax and are repaid after death, unless there are genuine commercial reasons for non-repayment. Business and investment decisions are made on a range of factors, including tax. One of the Government’s key principles for good taxation is that the tax system should be efficient. It should neither favour nor penalise one form of lending or security over another. The new provisions will ensure that this is the case.

3 pm

The hon. Lady referred to a point raised by the Chartered Institute of Taxation that debts not discharged directly out of the estate will not be IHT deductable. The definition of “out of estate” will be extended by amendment 45 to include indirect assets not normally included in the estate, such as excluded property. Otherwise, no deduction will be due, but this reflects the economic consequence of incurring a liability and repaying it. It would disadvantage the Exchequer to provide for relief where debts are not repaid and do not reduce the inheritance tax being passed on.

On whether that will harm business, and whether the amendments deal with concerns that have been raised, it is worth pointing out that independent research published in the SME Finance Monitor suggests that the majority of business overdrafts and loans are unsecured. Where security is provided, it is typically in the form of a charge on business property, such as commercial mortgages. That is supported by a review of recent IHT returns. Most estates with such liabilities will therefore be unaffected by the changes.

On consultation, the provisions are designed primarily to tackle avoidance schemes, such as those involving debts between connected parties. As is normal practice for such measures, there was no consultation and draft legislation was not published in advance. To do so would have exposed the avoidance schemes to greater publicity, potentially encouraging more schemes to be set up. Following the publication of the Finance Bill, the Government, as expected, received comments from interested parties and are responding to the many concerns raised by tabling amendments on Report to clarify and improve the Bill.

Catherine McKinnell: I appreciate the Minister’s point, but I question the reference to how the majority of small businesses manage to secure funding. Small businesses in particular are struggling to obtain funding from banks.

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Mr Deputy Speaker (Mr Lindsay Hoyle): Order. We are wandering away from the amendment, and I know the hon. Lady just wanted to make a point on the amendment.

Catherine McKinnell: My point relates specifically to the amendment, Mr Deputy Speaker. Many businesses that manage to obtain funding are often required to provide their home as security. If this provision has a detrimental impact on small businesses and puts family homes in jeopardy, will the Government keep it under review?

Mr Gauke: I can appreciate why the hon. Lady raises that point, but recent evidence from inheritance tax returns suggests that the majority of business overdrafts and loans continue to be unsecured. There may well have been changes to the balance between secured and unsecured business overdrafts and loans in recent years, but it remains the case that the majority are unsecured. Where security is provided, it is typically in the form of a charge on a business property. I understand why she raises the point, but the evidence suggests that this will not cause the concern that she anticipates. All measures are kept under review and this will be no exception, but we believe that we have got the balance right. This will address a distortion and an avoidance opportunity. I therefore hope that these proposals, as refined by the amendments, will become part of the Bill.

Amendment 1 agreed to.

Amendments made: 2, page 105, leave out lines 39 to 43.

Amendment 3, page 106, line 4, leave out ‘spouse or civil partner’s’ and insert ‘deceased’s’.

Amendment 4, page 106, line 7, leave out from first ‘date’ to end of line 19 and insert—

‘if, on the date—

(a) in the case of a lifetime election—

(i) the person making the election was married to, or in a civil partnership with, the spouse or civil partner, and

(ii) the spouse or civil partner was domiciled in the United Kingdom, or

(b) in the case of a death election—

(i) the person who is, by virtue of the election, to be treated as domiciled in the United Kingdom was married to, or in a civil partnership with, the deceased, and

(ii) the deceased was domiciled in the United Kingdom.’.

Amendment 5, page 106, line 21, leave out ‘spouse or civil partner’ and insert ‘deceased’.

Amendment 6, page 106, line 27, leave out ‘or (4)(b)’.

Amendment 7, page 106, line 41, leave out ‘a lifetime or death election’ and insert

‘an election under section 267ZA(1)’.—(Mr Gauke.)

Schedule 2

Tax advantaged employee share schemes

Mr Gauke: I beg to move amendment 8, page 144, line 34, at end insert—

“(10A) For the purposes of subsection (10) it does not matter if the general offer is made to different shareholders by different means.’.

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Mr Deputy Speaker: With this it will be convenient to discuss Government amendments 9 to 16.

Mr Gauke: Clause 14 and schedule 2 provide a wide-ranging simplification of the four tax advantaged employee share schemes, following recommendations by the Office of Tax Simplification. The Government are introducing amendments 8 to 16 to provide further clarity on the rules that apply where company events involving “general offers” take place. When clause 14 was discussed in Committee, we highlighted some of the improvements that we are making to simplify the tax advantaged employee share schemes, and I shall provide hon. Members with some background on the specific provisions relating to these amendments.

Current legislation allows employees affected by certain company events, such as takeovers, to exchange their original scheme shares or options for shares or options in the acquiring company. The schedule also creates new rights for participants to realise scheme shares or exercise options without tax liability in the event of a cash takeover of their company.

Earlier this year, a tax tribunal hearing a particular case published a decision on what constitutes a “general offer” for the whole of the ordinary share capital of a company. Following this decision, and a number of requests from taxpayers and advisers, the Government consider it desirable to clarify the scope of what constitutes a “general offer” for the purposes of the provisions. The amendments clarify the position across all four tax advantaged employee share schemes, and confirm the rules as they have been consistently applied by HMRC. Our aim is to remove any uncertainty for advisers and taxpayers, consistent with the general simplification theme of the changes. The amendments, alongside the changes that already form part of the Bill, demonstrate the Government’s commitment to simplifying and clarifying the tax rules where possible.

Catherine McKinnell: These are technical amendments tabled in response to concerns about the operation of the share incentive plans in section 498 and schedule 2 to the Income Tax (Earnings and Pensions) Act 2003. The amendments will clarify save-as-you-earn option schemes. We support the clarification of the rules that apply when general offers take place.

Amendment 8 agreed to.

Amendments made: 9, page 144, line 45, after ‘“(7)’, insert—

‘For the purposes of sub-paragraph (5) it does not matter if the general offer is made to different shareholders by different means.

(8) ’.

Amendment 10, page 146, line 20, at end insert—

“(3DA) In subsection (3D)(a) the reference to the issued ordinary share capital of the relevant company does not include any capital already held by the person making the offer or a person connected with that person and in subsection (3D)(b) the reference to the shares in the relevant company does not include any shares already held by the person making the offer or a person connected with that person.

(3DB) For the purposes of subsection (3D)(a) and (b) it does not matter if the general offer is made to different shareholders by different means.’.

Amendment 11, page 147, line 16, at end insert—

‘(1A) After sub-paragraph (3) insert—

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(3A) In sub-paragraph (3)(a) the reference to the issued ordinary share capital of the company does not include any capital already held by the person making the offer or a person connected with that person and in sub-paragraph (3)(b) the reference to the shares in the company does not include any shares already held by the person making the offer or a person connected with that person.

(3B) For the purposes of sub-paragraph (3)(a) and (b) it does not matter if the general offer is made to different shareholders by different means.”

(1B) A SAYE option scheme approved before the day on which this Act is passed which contains provision under paragraph 37(1) of Schedule 3 to ITEPA 2003 by reference to paragraph 37(2) has effect with any modifications needed to reflect the amendment made by sub-paragraph (1A).’.

Amendment 12, page 147, line 37, leave out sub-paragraph (1) and insert—

‘(1) In Part 7 of Schedule 3 (exercise of share options) paragraph 38 (exchange of options on company reorganisation) is amended as follows.

(1A) In sub-paragraph (2)(c)—

(a) after “982” insert “or 983 to 985”, and

(b) after “shareholder” insert “etc”.

(1B) After sub-paragraph (2) insert—

“(2A) In sub-paragraph (2)(a)(i) the reference to the issued ordinary share capital of the scheme company does not include any capital already held by the person making the offer or a person connected with that person and in sub-paragraph (2)(a)(ii) the reference to the shares in the scheme company does not include any shares already held by the person making the offer or a person connected with that person.

(2B) For the purposes of sub-paragraph (2)(a)(i) and (ii) it does not matter if the general offer is made to different shareholders by different means.”’

Amendment 13, page 149, line 34, at end insert—

“(2HA) In subsection (2H)(a) the reference to the issued ordinary share capital of the relevant company does not include any capital already held by the person making the offer or a person connected with that person and in subsection (2H)(b) the reference to the shares in the relevant company does not include any shares already held by the person making the offer or a person connected with that person.

(2HB) For the purposes of subsection (2H)(a) and (b) it does not matter if the general offer is made to different shareholders by different means.’.

Amendment 14, page 150, line 31, at end insert—

“(3A) In sub-paragraph (3)(a) the reference to the issued ordinary share capital of the company does not include any capital already held by the person making the offer or a person connected with that person and in sub-paragraph (3)(b) the reference to the shares in the company does not include any shares already held by the person making the offer or a person connected with that person.

(3B) For the purposes of sub-paragraph (3)(a) and (b) it does not matter if the general offer is made to different shareholders by different means.’.

Amendment 15, page 151, line 6, leave out sub-paragraph (1) and insert—

‘(1) In Part 6 of Schedule 4 (exercise of share options) paragraph 26 (exchange of options on company reorganisation) is amended as follows.

(1A) In sub-paragraph (2)(c)—

(a) after “982” insert “or 983 to 985”, and

(b) after “shareholder” insert “etc”.

(1B) After sub-paragraph (2) insert—

“(2A) In sub-paragraph (2)(a)(i) the reference to the issued ordinary share capital of the scheme company does not include any capital already held by the person making the offer or a

2 July 2013 : Column 800

person connected with that person and in sub-paragraph (2)(a)(ii) the reference to the shares in the scheme company does not include any shares already held by the person making the offer or a person connected with that person.

(2B) For the purposes of sub-paragraph (2)(a)(i) and (ii) it does not matter if the general offer is made to different shareholders by different means.”’.

Amendment 16, page 151, line 13, at end insert—

‘Enterprise management incentives

30A (1) In Part 6 of Schedule 5 (company reorganisations) in paragraph 39 (introduction) after sub-paragraph (3) insert—

“(4) In sub-paragraph (2)(a)(i) the reference to the issued share capital of the company does not include any capital already held by the person making the offer or a person connected with that person and in sub-paragraph (2)(a)(ii) the reference to the shares in the company does not include any shares already held by the person making the offer or a person connected with that person.

(5) For the purposes of sub-paragraph (2)(a)(i) and (ii) it does not matter if the general offer is made to different shareholders by different means.”

(2) The amendment made by this paragraph comes into force on such day as the Treasury may by order appoint.’.—

(Mr Gauke.)

Schedule 9

Qualifying Insurance Policies

The Economic Secretary to the Treasury (Sajid Javid): I beg to move amendment 17, page 205, line 7, after ‘(g)’, insert ‘or (4A)’.

Mr Deputy Speaker (Mr Lindsay Hoyle): With this it will be convenient to discuss the following:

Government amendments 18 to 29.

Amendment 52, page 213, line 2, at end insert—

‘(aa) the policy has an annual premium of £3,600 or less.’.

Amendment 53, page 213, line 2, at end insert—

‘(ab) the policy is subject to capital gains tax.’.

Sajid Javid: Amendments 17 to 29 make a number of technical changes to schedule 9 and clause 25 to ensure that the qualifying insurance policy regime works as intended. Let me set out some brief background to these changes. The qualifying policy regime was introduced in 1968 to preserve pre-existing tax treatment for traditional moderate value, long-term, regular premium savings policies that contain a significant element of life insurance.

No upper limit was set for the investment premiums that could be paid into a QP, which allowed individuals to obtain unlimited relief from higher rates of income tax. In the 2012 Budget, the Government announced a restriction to the tax relief available for QPs. Clause 25 and schedule 9 introduce an annual premium limit of £3,600 on qualifying life insurance policies. This restriction limits the amount of premiums payable into QPs for an individual to no more than £3,600 in any 12-month period, with effect from 6 April 2013.

This measure supports the Government’s objective of promoting fairness in the tax system by ensuring that tax reliefs for QPs are correctly targeted. Consultation since the Bill was introduced has continued and identified the need for Government amendments to clause 25 to deal with points of detail in 13 areas. None of these represents a change of policy; as I have said, they are technical adjustments to ensure that the rules operate effectively and as intended. The amendments have been discussed with industry representatives and have benefited from the comments received.

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Let me briefly explain the amendments in slightly more detail. The purpose of the changes is to provide flexibility to deal with potential future exclusions from the non-assignment rule and potential future exclusions from the circumstances under which beneficiaries must make statements, to extend the period by which an individual must first make a statement and to clarify what information an insurer must provide and obtain from a policy beneficiary and what an insurer must provide to HMRC. In addition, a number of amendments make minor corrections or consequential changes to the more material changes that I have described.

If I may, Mr Deputy Speaker, I will speak to amendments 52 and 53, standing in the name of my hon. Friend the Member for West Worcestershire (Harriett Baldwin), at the end of the debate.

Harriett Baldwin: I rise to speak to amendments 52 and 53, standing in my name and the names of my hon. Friends the Members for City of Chester (Stephen Mosley) and for Finchley and Golders Green (Mike Freer).

I tabled these amendments to schedule 9 after being alerted recently to the consequences of the proposed changes to the life insurance qualifying policy regime for a small business in Malvern in my constituency, which is a market maker in traded endowment policies. The business provides a price at which it will both buy and sell an endowment policy, which creates welcome liquidity in these financial instruments. The firm has been recognised for its work with a Queen’s export award for industry.

The Association of Policy Market Makers estimates that the traded endowment policy market involves about 7,000 policies a year, out of the 20 million policies outstanding, and has a value estimated at approximately £150 million. The reasons why someone might want to sell an endowment policy vary. The most significant reason —accounting for 20%—is poor investment performance, although someone might be selling their house or trying to get some equity release. People sell endowment policies when they want to reduce their mortgage or improve their home—perhaps at retirement or when they lose their jobs, are bereaved or are getting divorced. Someone might want to buy a second-hand endowment policy to get a better rate of return than cash without a stock market risk. Endowment policies are also popular products with people with lump sums—such as victims of accidents who receive large payouts—because they have capital protection at maturity and tend to be priced to beat inflation.

The market is in natural decline, as endowment policies are no longer very popular and the existing 20 million policies have a finite end date. Nevertheless, there are thought to be seven such small businesses in the UK, employing about 200 people, including in the constituencies of my hon. Friends the Members for City of Chester and for Finchley and Golders Green. These firms worry that they will be put out of business by the change of tax treatment for these policies contained in schedule 9.

3.15 pm

I completely understand, support and appreciate the Chancellor’s desire to restrict tax relief for higher-rate taxpayers to £3,600 a year for all new policies that are issued. What I am raising is the impact on existing qualifying policies, which have hitherto been subject to

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capital gains tax after they change hands. However, the tax treatment might now become so unattractive that the secondary market will dry up. I fear that the Chancellor and the Exchequer will lose out on the potential capital gains tax created by future transfers of such policies. The potential capital gains from the industry as a whole are estimated at £750 million, depending on how much changes hands and the rate of capital gains tax at the time. That is a not inconsiderable sum of money.

In setting the £3,600 annual limit for new policies, the Treasury needs at the same time to limit the number of qualifying second-hand endowment policies that any one individual can buy. My amendments simply seek to set the same annual premium limit for existing policies as that for new policies under this legislation. That would create a fair and level playing field between new policies, which are being restricted, and any outstanding existing policies that might change hands. I know that the Minister would not want to close down small financial services businesses because of this change in the tax treatment of policies issued many years ago. I think that we can all agree that that would be excessive and retrospective.

I hope that by considering my amendments the Government will find a way to restrict the tax relief on new policies in the future—while still allowing the secondary market in existing qualifying policies to continue—and continue to allow those capital gains tax revenues for the Exchequer. I appreciate that we are talking about a small, specialised secondary market—I was not aware that it existed until 10 days ago. I also appreciate that the industry was not able to feed into the consultation at the end of the year—it was not alerted to the potential change—but it has now fed into the process, via the business in my constituency. I hope that by giving serious consideration to my amendments—and, I hope, accepting them—the Government will allow the industry and the endowment policy market to die of natural causes in due course, as the policies mature, rather than killing it off suddenly with the Bill.

Sajid Javid: Allow me now to turn to amendments 52 and 53, in the name of my hon. Friend the Member for West Worcestershire (Harriett Baldwin). I recognise that she speaks from experience and in support of concerns raised by her constituents. I have listened very carefully to those points, and I welcome the opportunity to debate this issue. In providing some additional background to the annual premium limit, I hope that she will be reassured by the safeguards that we have introduced—and the reasons for introducing them—and will consider not pressing her amendments. Amendments 52 and 53 ask that the Government exclude assignments that make a policy non-qualifying where either the policy has an annual premium of £3,600 or less, or the policy is subject to capital gains tax.

Let me respond to some of the points raised by my hon. Friend. She commented that seven small businesses selling second-hand endowment policies could close as a result of the change to the tax treatment of qualifying policies. We recognise that these policies are likely to sell for less on the market where the purchaser is an individual who is a higher or additional rate taxpayer, due to the income tax charge when the policy matures. Let me reassure her that there is currently no bar to the sale of non-qualifying policies on the market and that research

2 July 2013 : Column 803

from the industry shows that non-qualifying policies are currently sold in the market. We envisage that this market might actually increase as a result of fewer QPs being available for sale.

Let me reassure the House that any adverse impact of the tax changes will be limited to those purchasers who are higher or additional rate taxpayers. Where a second-hand endowment policy is bought by a corporate investor or a basic rate taxpayer, there will be no impact on the tax position of the buyer when the policy matures. As a result, the loss of QP status will not make these policies any less attractive for those investors.

My hon. Friend made a point about capital gains. Previously, the purchaser of a traded endowment policy would have been liable to tax under the capital gains tax regime. That tax treatment was based on the maturity proceeds, less what the purchaser paid to acquire and maintain the policy. Capital gains tax treatment was more favourable, in that no additional tax would be payable unless the gains exceeded the annual exempt amount. In practice, it is likely that higher or additional rate taxpayers structured their affairs so as to ensure that little or no capital gains tax would be payable by using their full annual exempt allowance for a tax year. For 2013-14, that amount is £10,900. There is an additional safeguard for basic rate taxpayers who fall into the higher tax bracket as a result of the policy maturing. If that happens, the individual will get top-slicing relief, which reduces any additional tax payable. The relief is not available if the taxpayer is already a higher or additional rate taxpayer when the policy matures.

My hon. Friend has stated that her amendments would set the same annual premium limit for traded endowment policies as that set for new policies and existing policies. The annual premium limit of £3,600 applies to each individual rather than to a single policy. The effect of amendment 52 would be to exclude a policy from the limit if it had an annual premium payable of £3,600 or less. Purchasers of traded endowment policies will already have an annual premium limit of £3,600 applying to their own policies. As a result of that amendment, they would also be able to acquire as many traded endowment policies as they could afford, so long as each of those policies had premiums payable under the threshold. That would put an individual who had taken out a qualifying policy from the outset at a disadvantage to an individual who later acquired a policy. Amendment 52 would not result in a level and fair playing field. Rather, it would inadvertently create an unfair advantage for purchasers of these traded endowment policies.

My hon. Friend understandably referred to the restrictions on assignments for consideration, which are an essential part of the policy. The aim of our measure is to help to promote fairness in the tax system by limiting the tax relief available to higher rate and additional rate taxpayers. Without this restriction, individuals in a financial position to purchase traded endowment policies would be able to acquire qualifying policies without limit, while everyone else would be subject to the £3,600 annual premium limit. That would put an individual who had taken out a qualifying policy from the outset at a disadvantage to an individual who later acquired a policy, which would be unfair and inconsistent.

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My hon. Friend considers that there is an element of retrospection about applying the annual premium limit to any QPs existing before 6 April 2013. Let me reassure her that there is no element of retrospection. The sale of a traded endowment policy on or after 6 April 2013 is treated no differently from an individual varying an existing policy after that date either to change the term or to vary the annual premiums payable. In all those cases, an individual will have made a conscious decision with regard to an existing product in full knowledge of the tax consequences resulting from that decision. The Government’s position is therefore that it would be unfair, inconsistent and disproportionate to allow all pre-6 April 2013 policies to remain qualifying following assignment to maintain the secondary traded endowment market.

The Government have listened to my hon. Friend’s concerns, however. As a result of the representations made, we would like to remind her that amendment 19 proposes giving HMRC a power to deal, in regulations, with any additional circumstances for which exclusion may be appropriate. I will ask officials to meet my hon. Friend’s constituents and to work with the industry to ensure that the annual premium limit remains proportionate as it beds in. I want to reassure her that if the evidence shows that the impact of the annual premium limit would prematurely bring to an end the traded endowment market, as she fears, the Government would consider using their power in amendment 19 to address the matter in a proportionate way, following discussions with interested parties. I hope that that provides her with a degree of reassurance that the Government are listening, and I respectfully ask her not to press her amendments to a vote.

These important technical changes enjoy the broad support of the life insurance industry. They will provide a more effective and more proportionate regime for the operation of the annual premium limit on QPs, and help to ensure that tax reliefs for QPs are appropriately given. I therefore commend Government amendments 17 to 29 to the House.

Amendment 17 agreed to.

Amendments made: 18, page 206, line 32, after ‘(g)’, insert ‘or (4A)’.

Amendment 19, page 213, line 25, at end insert—

“(4A) The Commissioners for Her Majesty’s Revenue and Customs may by regulations provide that sub-paragraph (2) does not apply if prescribed conditions are met in relation to the assignment.

“Prescribed” means prescribed by the regulations.

(4B) Regulations under sub-paragraph (4A) may—

(a) make different provision for different cases or circumstances, and

(b) contain incidental, supplementary, consequential, transitional, transitory or saving provision.’.

Amendment 20, page 213, line 27, after ‘(3)’, insert ‘or (4A)’.

Amendment 21, page 213, line 48, after ‘(g)’, insert ‘or (4A)’.

Amendment 22, page 214, line 33, at end insert—

“(6A) The Commissioners for Her Majesty’s Revenue and Customs may by regulations provide that an individual is not required to comply with sub-paragraph (2) if prescribed conditions are met.

“Prescribed” means prescribed by the regulations.

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(6B) Accordingly, if by virtue of regulations under sub-paragraph (6A) an individual is not required to comply with sub-paragraph (2), sub-paragraph (3) does not apply because that individual does not comply with sub-paragraph (2).’.

Amendment 23, page 214, line 42, leave out ‘Finance Act 2013 is passed’ and insert—

‘first regulations under paragraph (c) below come into force’.

Amendment 24, page 215, line 12, at end insert—

“(8A) Sub-paragraph (8B) applies in relation to a policy if the obligations under the policy of its issuer are at any time the obligations of another person (“the transferee”) to whom there has been a transfer of the whole or any part of a business previously carried on by the issuer.

(8B) In relation to that time, in sub-paragraph (2) the reference to the issuer of the policy is to be read as a reference to the transferee.’.

Amendment 25, page 215, line 13, after ‘sub-paragraph’ insert ‘(6A) or’.

Amendment 26, page 221, line 38, leave out from ‘regulations’ to end of line 9 on page 222 and insert ‘—

(a) requiring relevant persons—

(i) to provide prescribed information to persons who apply for the issue of qualifying policies or who are, or may be, required to make statements under paragraph B3(2) of Schedule 15;

(ii) to provide to an officer of Revenue and Customs prescribed information about qualifying policies which have been issued by them or in relation to which they are or have been a relevant transferee;

(b) making such provision (not falling within paragraph (a)) as the Commissioners think fit for securing that an officer of Revenue and Customs is able—

(i) to ascertain whether there has been or is likely to be any contravention of the requirements of the regulations or of paragraph B3(2) of Schedule 15;

(ii) to verify any information provided to an officer of Revenue and Customs as required by the regulations.’.

Amendment 27, page 222, line 10, leave out ‘(2)’ and insert ‘(1)(b)’.

Amendment 28, page 222, leave out lines 20 and 21.

Amendment 29, page 222, leave out lines 29 and 30 and insert—

‘“relevant person” means a person—

(a) who issues, or has issued, qualifying policies, or(b) who is, or has been, a relevant transferee in relation to qualifying policies.

(6) For the purposes of this section a person (“X”) is at any time a “relevant transferee” in relation to a qualifying policy if the obligations under the policy of its issuer are at that time the obligations of X as a result of there having been a transfer to X of the whole or any part of a business previously carried on by the issuer.”’.—(Sajid Javid.)

Schedule 34

Treatment of liabilities for inheritance tax purposes

Amendments made: 35, page 424, line 36, leave out ‘subsection (2) or (3)’ and insert ‘subsections (2) to (3A)’.

Amendment 36, page 424, line 38, leave out ‘excluded property’ and insert ‘property mentioned in subsection (1)’.

Amendment 37, page 425, leave out lines 11 to 14 and insert—

‘(3) The liability may be taken into account up to an amount equal to the value of such of the property mentioned in subsection (1) as—

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(a) has not been disposed of, and

(b) is no longer excluded property.

(3A) To the extent that any remaining liability is greater than the value of such of the property mentioned in subsection (1) as—

(a) has not been disposed of, and

(b) is still excluded property,

it may be taken into account, but only so far as the remaining liability is not greater than that value for any of the reasons mentioned in subsection (3D).

(3B) Subsection (3C) applies where—

(a) a liability or any part of a liability is attributable to financing (directly or indirectly)—

(i) the acquisition of property that was not excluded property, or

(ii) the maintenance, or an enhancement, of the value of such property, and

(b) the property or part of the property—

(i) has not been disposed of, and

(ii) has become excluded property.

(3C) The liability or (as the case may be) the part may only be taken into account to the extent that it exceeds the value of the property, or the part of the property, that has become excluded property, but only so far as it does not exceed that value for any of the reasons mentioned in subsection (3D).

(3D) The reasons are—’.

Amendment 38, page 425, line 19, leave out ‘excluded’.

Amendment 39, page 425, line 20, leave out ‘subsection (3)(a)’ and insert ‘this section’.

Amendment 40, page 425, line 23, at end insert—

‘“remaining liability” means the liability mentioned in subsection (1) so far as subsections (2) and (3) do not permit it to be taken into account;’.

Amendment 41, page 426, leave out lines 12 to 19.

Amendment 42, page 426, line 37, at end insert—

‘(7A) Subject to subsection (7B), to the extent that a liability is, in accordance with this section, taken to reduce value in determining the value transferred by a chargeable transfer, that liability is not then to be taken into account in determining the value transferred by any subsequent transfer of value by the same transferor.

(7B) Subsection (7A) does not prevent a liability from being taken into account by reason only that the liability has previously been taken into account in determining the amount on which tax is chargeable under section 64.

(7C) For the purposes of subsections (1) to (4) and (7A), references to a transfer of value or chargeable transfer include references to an occasion on which tax is chargeable under Chapter 3 of Part 3 (apart from section 79) and—

(a) references to the value transferred by a transfer of value or chargeable transfer include references to the amount on which tax is then chargeable, and

(b) references to the transferor include references to the trustees of the settlement concerned.’.

Amendment 43, page 426, line 45, after ‘162A(1)’, insert ‘or (3B)’.

Amendment 44, page 427, line 13, after ‘162A(1)’, insert ‘or (3B)’.

Amendment 45, page 427, line 22, after ‘estate’, insert—

‘or from excluded property owned by the person immediately before death’.

Amendment 46, page 427, leave out lines 32 to 34 and insert—

‘(b) securing a tax advantage is not the main purpose, or one of the main purposes, of leaving the liability or part undischarged, and’.

2 July 2013 : Column 807

Amendment 47, page 427, line 42, at end insert—

‘( ) Where, by virtue of this section, a liability is not taken into account in determining the value of a person’s estate immediately before death, the liability is also not to be taken into account in determining the extent to which the estate of any spouse or civil partner of the person is increased for the purposes of section 18.’.

Amendment 48, page 427, line 43, leave out from ‘(2)(b)’ to end of line 46.

Amendment 49, page 428, line 9, after ‘162A(1)’, insert ‘or (3B)’.

Amendment 50, page 428, line 19, leave out ‘The’ and insert—

‘(1) Subject to sub-paragraph (2), the’.

Amendment 51, page 428, line 21, at end insert—

‘(2) Section 162B of IHTA 1984 (inserted by paragraph 3) only has effect in relation to liabilities incurred on or after 6 April 2013.

(3) For the purposes of sub-paragraph (2), where a liability is incurred under an agreement—

(a) if the agreement was varied so that the liability could be incurred under it, the liability is to be treated as having been incurred on the date of the variation, and

(b) in any other case, the liability is to be treated as having been incurred on the date the agreement was made.’. —(Sajid Javid.)

New Clause 10

Impact of the Spending Round 2013 on tax revenue

‘The Chancellor shall publish, within six months of Royal Assent, a review of the impact on revenue from rates and measures in this Act, resulting from the Spending Round 2013. He shall place a copy of the Review in the House of Commons Library.’.—(Catherine McKinnell.)

Brought up, and read the First time.

Catherine McKinnell: I beg to move, That the clause be read a Second time.

The Opposition’s new clause 10 challenges the Chancellor to publish, within six months of Royal Assent, a review of the impact of last week’s spending review announcements on tax receipts. Should the Government agree to undertake such a review, as we hope they will, we suspect that its conclusions would be pretty short, given the Chancellor’s comprehensive failure to deliver the economic boost that this country so desperately needs. It was a dead duck of a spending review, and it was even more disappointing, given the context in which it was made. The Chancellor did not want to come to the House to announce a spending review last week, but he was forced to announce a further £11.5 billion of spending cuts in 2015-6. Why? Because his economic plan has utterly and categorically failed.

David T. C. Davies (Monmouth) (Con): Is the hon. Lady suggesting that the Government should be borrowing even more billions of pounds than is already the case, or that they should make further cuts? If it is the latter, she should not be surprised if she gets some support from the Government side of the House.

Catherine McKinnell: I am pleased to hear the hon. Gentleman suggesting that those on the Government Benches are considering supporting our proposal. I wonder

2 July 2013 : Column 808

whether he has realised that his Government are borrowing £245 billion more than they planned, because they have failed. Their economic plan has failed—it has failed on living standards, on growth and on getting the deficit down. The Chancellor promised in 2010 that by 2015 he would have balanced the books, yet he is borrowing £245 billion more than he planned—and those books will not get balanced in the time frame that he promised.

Andy Sawford (Corby) (Lab/Co-op): I support new clause 10 because it is really important to see whether the measures in the spending review will increase tax receipts. My hon. Friend is highlighting the failure over the last three years to get the economy growing and the impact of that on tax receipts. That explains the reality of the further and deeper cuts that the Chancellor promised us we would not have to face.

Catherine McKinnell: I thank my hon. Friend for that interjection, which gets to the crux of the matter. The Chancellor had to come here last week to announce further spending cuts in 2015-16, planning for future failure, because he is failing to deal with the economic reality that we face today. Ultimately, we are tabling this new clause because we hope that the Government will take stock of the situation in which they are leaving households up and down this country. The price of the failure of the Chancellor’s economic plan is not being paid by those at the top. We debated at great length yesterday the fact that the top-earning taxpayers are getting a tax cut from this Government, while it is ordinary families that rely on public services that are paying the price for this economic failure throughout the country.

3.30 pm

Despite the pain being meted out to those who are least able to bear it, the coalition’s self-defeating economic policies have resulted in the Government failing their own economic tests. They are borrowing more than they planned and they are not going to balance the books by 2015. Rather than spending his time planning how to boost jobs and growth now, the Chancellor is planning for failure in 2015. He should be laser-focused on injecting a stimulus into the economy to secure jobs and growth now, so that we no longer need to plan for failure and for further cuts in 2015. It is common sense.

Andy Sawford: My reading of the new clause is that the review would have to be placed in the House of Commons Library within six months. Is it my hon. Friend’s intention to urge the Government to look at infrastructure spending in the review and, specifically, to include the figures on the impact of cutting capital investment again, year on year, in the spending review and what that does for our economy?

Catherine McKinnell: Indeed, it is very much the hope that the Government will shine this laser focus on measures to boost spending and boost jobs and growth now in order to stimulate the economy, get people into work and get the welfare bill down. We know that that bill is rising as a result of the failure of the Government’s economic plan. They should focus on infrastructure spending, which is not just what we say, but what the IMF says, too.

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John Pugh (Southport) (LD): How does the hon. Lady think she could work out the true implications and effect of the spending review in only three months? Why did she choose three months rather than six months, nine months or one year?

Catherine McKinnell: That is an interesting question because the new clause suggests that the review should be published “within six months”, so I wonder whether the hon. Gentleman has simply misread our new clause. We feel that there is no time to lose, but that six months is a reasonable period to give the Government time to consider the likely impact of the spending round in 2013 on tax receipts. Ultimately, if we are to balance the books and get borrowing down, we are going to have to increase our tax receipts into the Exchequer.

John Pugh: Does the hon. Lady recognise that one of the biggest effects of the spending review will be on local government expenditure, which of course has to be dealt with in the following May—falling outside the six-month period? Some of the greater impact of the spending review will be felt after she has asked the Government to produce the report.

Catherine McKinnell: I am pleased that we have the hon. Gentleman’s support in principle for the fact that the Government need to take stock of the impact of these spending decisions and his acknowledgement of the devastating impact of the cuts to local authority projects, which we have rehearsed many times here, particularly in areas such as the one I represent. We will not see the impact straight away; we will see it in six months, 12 months, 18 months or two years’ time. The Government have imposed cuts without allowing the economy time to grow, create jobs and consolidate the debt in a responsible way, so we will face the consequences of this economic approach for many years to come. I am pleased, as I say, that the hon. Member for Southport (John Pugh) recognises that.

Andy Sawford: My hon. Friend has mentioned local government cuts. According to my reading of the spending review, capital spending in the budget of the Department for Communities and Local Government is to be cut by 35.6%. Could the review take account of that, although it will be some time before we are aware of its full impact on the economy?

Catherine McKinnell: The purpose of the proposed review is to encourage the Government to become laser-focused on the impact of their spending review. My hon. Friend is certainly laser-focused—not just on the impact of the cuts on local authority budgets, but on their impact on jobs and economic growth up and down the country.