Inheritance Tax and Trusts
During a debate on the Finance (No.2) Bill, Brooks Newmark raises concerns that some provisions will hit the most vulnerable and calls for retention of the spousal exemption to prevent double taxation of the single estate of a husband and wife.
Mr. Brooks Newmark (Braintree) (Con): I am getting the sense that I am in a minority in the Committee as I do not have a legal string to my bow. However, my lack of legal training gives me a distinct advantage when it comes to new clause 1, and amendment (c) to it, because I can, at the very least, appreciate the value of clarity. The new clause is a simple appeal for certainty in a Bill that contains less of that quality than might be desired. The number of people who may be affected by the proposed changes to the taxation of trusts has given all hon. Members cause for concern.
Perhaps my closest brush with the law on wills and trusts comes from "Bleak House", which provides a useful parallel to the Government's proposals. The catalogue of potential beneficiaries at the heart of Jarndyce and Jarndyce, where inheritance is squandered, indolence encouraged and legal proceedings interminable, bears close comparison to the lists of those who stand to suffer, if the proposals that we are considering are carried into law-namely widows, minors and the vulnerable.
Indeed, Finance Bills as a whole have more than a passing similarity to Jarndyce as Finance Bills
"in course of time become so complicated that no man alive knows what it means"
and nobody
"can talk about it for five minutes without coming to a total disagreement as to all the premises."
The Dickensian fog may have lifted from the Chancery courts but it still sits heavily on schedule 20 and particularly on proposed new section 49A of the Inheritance Tax Act 1984. The Government should be committed to the principle of proportionate rather than punitive taxation, and that commitment is not clear in these provisions.
New clause 1 has a modest aim: to ensure, setting aside all other confusions, that no inheritance tax will be payable on transfers of value between spouses, and not as the hon. Member for Rhondda (Chris Bryant) would have us believe, to avoid inheritance tax completely. The spousal exemption exists to prevent punitive double taxation of an estate. That is a sound proposition, founded on an inoffensive principle. It has, as my hon. Friend the Member for Chipping Barnet (Mrs. Villiers) said, been the subject of consensus since capital transfer tax was introduced by the Labour Government in 1975. The Chief Secretary echoed the need for just such a principle when he spoke on Second Reading about the need to ensure that people pay their fair share of tax. I know from my brief experience in consideration of the National Insurance Contributions Bill that that particular Labour mantra is very much in vogue. The Paymaster General used it four times in one speech. I am glad that she has taught it to colleagues on the Treasury Bench, but the mantra is as nebulous now as it was then.
The use of trusts as a vehicle for asset protection has made them the target of another dawn raid because they are perceived as being unfair. The fact that trusts exist to protect assets from more than the taxman does not seem to concern the Government overmuch. It is true that the caveat for those suffering from a disability has been preserved, but only for a very limited class of beneficiaries in which no one can be thought of as vulnerable if they are not first found incapable under the Mental Health Act 1983 or are claiming disability benefits. That is a sop to fairness, but in reality it is deeply regressive and inflexible. It takes care of the mad, but not the bad or the sad. It also fails to draw the sting of schedule 20 because fairness has always been at the heart of trusts.
Most often the very reason why trusts exist is to allow for flexible and equitable distribution of assets in the face of changing and unforeseen circumstances. The Government have been keen to acknowledge that trusts have a positive role to play in assisting people to manage their tax affairs, and in particular in holding assets on behalf of vulnerable people. However, vulnerability is not linked, and never has been, exclusively to disability.
Members of the legal profession made a number of representations to me on the many beneficial effects that trusts may have in restraining a Rake's Progress or in keeping a fool and his gold well acquainted. Many sound arguments that relate to the age at which the interests of younger beneficiaries should vest regrettably go beyond the scope of new clause 1. No doubt, the issue will be revisited in Standing Committee. However, I regard beneficiaries under a trust as vulnerable if their interests would not be adequately protected without that trust.
That point becomes germane in the context of new clause 1 if we consider the number of trusts created at present to protect the interests of children in the event that a parent should remarry. That is a common situation, and it is merely one item on the exhaustive list given by my hon. Friend the Member for Chipping Barnet. As a result of the proposal, many older testators may begin to favour outright gifts to their surviving spouse, rather than risk settling assets on trust, which may fall foul of the spousal exemption and be liable to inheritance tax. Such outright gifts do not allow any measure of flexibility. Furthermore, they do not allow testators to be sure that their children will be provided for if the surviving spouse should decide to favour the other's interests over theirs. Children in that position are undoubtedly vulnerable, so we must ensure that they are protected as before.
Sadly, that state of affairs is not unforeseeable, and it is a nightmare scenario for anyone trying to provide responsibly for a family. Modern matrimonial arrangements are complex, but there should be no doubt about whether people with multiple families will continue to benefit from the existing spousal exemption. We would not want to be responsible for encouraging an epidemic of wicked stepmothers if the provisions encourage the use of outright gifts to the detriment of the prudent protection of children. New clause 1 clarifies interference with the taxation of trusts, which is invidious in principle and may prove unworkable in practice.
Trusts and their taxation are not a subject on which I profess expertise, yet I can readily understand the implication for the average prudent family of any interference with the spousal exemption. The objective of new clause 1 is to offer simple peace of mind to the many people who may be affected by the proposals. Even the legal profession is uncertain about the runaway scope of the changes, and I am more worried about the uncertainty than I am about mere outrage, although we have seen evidence of both. The Law Society, the Chartered Institute of Taxation, the Society of Trust and Estate Practitioners and many other professional bodies have pleaded for clarity. New clause 1 would achieve it by including in the Bill an assurance that surviving spouses will not be subject to inheritance tax if their affairs are structured to maintain flexibility and protection for others.
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OTHER INTERVENTIONS IN THE DEBATE
Mr. Newmark: My hon. Friend the Member for Chipping Barnet (Mrs. Villiers) was spot on in referring to the retrospective nature of the Bill. Retrospectivity in this context means that individuals will have to change trusts that are already in place. Non-retrospective legislation would say "From this point on"-or, in the case of this Bill, in two years' time-"these will be the rules." The Bill is retrospective because it will force people to change existing wills and existing trusts.
Dawn Primarolo: I know that the hon. Gentleman is new to the House, but pretending that the world began only when he entered it is utterly ridiculous. Did the Conservative Government agree that when they reduced mortgage interest relief at source-MIRAS-they were doing something retrospective? No, they did not. When they reduced the married couples allowance, were they taking retrospective action because of the expectation that existed? Of course they were not. When they reduced advance corporation tax relief, was that a retrospective measure because all the companies said that they had expected to receive it in perpetuity? Of course it was not. That is such a ridiculous point that I am surprised that the hon. Gentleman wanted to make it.