Ruth Kelly: I should begin by setting out the background to settlor-interested trust provisions. I shall then explain what the clause does, before dealing with why I believe that the amendment should be rejected.
People set up trusts for many and varied reasons. Some are purely tax-related; others are nothing to do with tax. The tax system respects the fact that there are trusts and that they are separate entities, but we must ensure that people cannot obtain an unfair tax advantage by putting assets into a trust. For that reason, we have long had special rules that charge the person who set up the trustthe settlortax in respect of gains realised by the trustees of a trust. The special rules apply when the settlor, or his or her close family, can benefit from the trust. The rules ensure that the right amount of tax is collected. The settlor may claim reimbursement from the trustees for the tax that he or she pays.
In broad terms, the clause restores the rules that applied before the introduction of the Finance Act 1998, so that settlors can set their available capital losses against gains that are attributed to them in that way. I readily admit that doing so will introduce complexity into the rules, because of the interaction with taper relief. It is because of that additional complication that we decided, when introducing taper relief in 1998, that it would be better to have a simple rule so that personal losses could not be offset against such attributed gains. However, we have come to the view that that can produce harsh results in certain cases and that it would be more equitable for people to set their personal losses against the attributed gains.
Amendments Nos. 52 and 53 and new schedule 1 would allow a settlor to obtain the benefit of losses realised by trustees and set them against all their gains. In effect, the amendments would set up a single pool for the gains and losses of a settlor from which they, or members of their close family, would benefit.
For settlors with genuine non-tax reasons for setting up trusts, the amendments would completely undermine the fact that they had transferred their property to them. For those settlors who set up trusts for tax reasons, it would make setting up trusts a one-way bet against the Exchequer. Indeed, those proposals would open up a real risk of tax avoidance, as people could use the election and juggle the timing
Column Number: 193of disposals to maximise the deduction of losses against gains. The amendments would cost about £25 million a year without taking into account any behavioural change caused by people exploiting them for the purpose of tax avoidance.
Mr. Flight: I do not understand the logic of permitting losses in a trust to be offset against personal gains, but not permitting gains in a trust to be offset against personal losses. As the Economic Secretary just said, tax legislation treats the situation as if a trust did not exist. I cannot see the logic of making a change one way but not the other.
Ruth Kelly: The trust rules on settlors and interest exist to ensure that the right amount of tax is paid. As I have explained, settlors have the power to claim reimbursement from trustees for any tax that they pay. Allowing settlors to set trust losses against personal gains would mean that a settlor would benefit at the expense of the beneficiaries of a trust. I shall explain that later.
At the moment, trustees' losses are set against their gains. That reduces the sum with which trustees have to reimburse a settlor where a settlor pays tax on an attributed gain, which leaves more for beneficiaries. Under the proposals, the losses would personally benefit a settlor, and more would have to be paid out of that trust's funds to reimburse a settlor for attributed gains, which would leave less money for beneficiaries. That cannot be right. In effect, the amendments would give a settlor the power to benefit from a trust in a way not envisaged by the original deed of settlement.
It will come as no surprise to the Committee that in this very complex area of the tax code, amendments Nos. 52 and 53 and new schedule 1 are not free of errors, some of which would open up new tax-avoidance possibilities. The proposals would, for example, allow untapered losses to be set off against amounts attributed in respect of tapered gains. It is quite unfair to obtain such an advantage just by involving a trust in the process. The amendments and new schedule are wrong in principle, would have a significant cost and would give rise to tax avoidance, and I therefore ask the Committee to reject them.
Mr. Flight: Will the Economic Secretary explain a point raised again by amendment No. 53? My understanding of clause 50 is that the quid pro quo of personal losses being offset against trust gains is the loss of taper relief on trust gains. What is the logic for that?
Ruth Kelly: I hope that I can reassure the hon. Gentleman on that particular point. I am advised that taper relief will not be lost under the clause. Trustees will not apply taper relief because the settlor will get it.
Mr. Flight: I thank the Economic Secretary for that answer, which concerns an unfairness that has not been addressed. Although I appreciate the issue about the position of the settlor versus that of the beneficiary, the logic of having the offset one way and not the other is strange, but it is not a huge issue. The Government considered the situation that resulted in clause 50 and
Column Number: 194I now request them to consider it the other way, because I cannot believe that they intended their reforms to produce a situation that is worse than if the assets were owned directly by the settlor.
I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 50 ordered to stand part of the Bill.
Schedule 11 agreed to.
Clauses 51 and 117 ordered to stand part of the Bill.
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