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Finance (No. 2) Bill

I find it staggering that the hon. Gentleman has complained about our not mentioning something in the Budget debate when the Chancellor leaves out crucial aspects of the Budget year after year. The pattern of instability in the Finance Bill recurs with clause 26, which abolishes the 0 per cent. rate of corporation tax. That made for a good headline on Budget day 2002, but it was scrapped four years later because people actually used the scheme. The Opposition, including my hon. Friend the Member for Fareham (Mr. Hoban), warned at the time that it would encourage people to incorporate who might not otherwise have done so. We introduced suggestions to reduce that problem and achieve a more level playing field for incorporated and unincorporated businesses, but the Government now propose to abolish that scheme because people have done exactly as we predicted. As one commentator put it:"““Back in 2004, a zero corporation tax band was billed as a heartwarming aid for micro-business. Within months it was transformed in Treasury thinking into an evil tax-loophole that must be slammed shut””." We remain ready and willing to work with the Government to make the 0 per cent. rate work effectively to encourage enterprise, and we ask them to think again about its abolition. Then we come to part 2 of schedule 21, which is the biggest U-turn of them all—self-invested personal pensions, or SIPPs. My hon. Friend the Member for Tatton was among many who pointed out the anomalies that would result if people could occupy properties purchased by their SIPP. Over-excited estate agents hailed SIPPs as property price Viagra, yet the Chancellor blithely continued on course until he suddenly woke up to the problem last December. In the meantime, thousands of pounds have been wasted in preparing for a tax regime that was suddenly scrapped at the last minute. In schedule 21, we are left with a proposed new structure of positively Byzantine complexity on top of the new framework only just introduced for A-day. Andy Bell of SIPP provider A J Bell says:"““Once again, when faced with a simple solution and a complex solution, the government has opted for the latter.””" Some of the most controversial proposals in the Bill are those on trusts contained in clause 157 and schedule 20. The current rules treat gifts on trust in largely the same way as outright gifts, and tax them accordingly. The Chancellor proposes to place new penal inheritance tax charges of 20 per cent. on entry to a trust and 6 per cent. of the value of its capital every 10 years. Those new taxes will be levied on two types of trust: interest in possession trusts, such as those with a flexible life interest; and accumulation and maintenance trusts, which are generally set up by parents or grandparents for children. We believe that these new charges are unfair and we oppose them: first, because they are retrospective, as they will apply to existing wills and trusts unless their terms are changed before April 2008; and secondly, because they are a new tax on hard-working, prudent families seeking only to plan responsibly for their future. The Government would have us believe that this change will affect only 23,000 of the super-rich who are somehow using trusts as a way of getting out of paying their fair share of tax. The reality is very different. The wide-ranging coalition of experts and professionals who have come together to oppose the changes inform us that they will have an impact on millions of ordinary families. The Opposition are happy to work with the Government on measures to prevent trusts from being used for complex and artificial tax reduction schemes, but only a very small minority of trusts fall into that category, and the measures in the Bill will have little impact on them. As the professional groups point out, the vast majority of trusts that will be caught by schedule 20 are set up for reasons that have nothing to do with tax. They are set up for social and family reasons—for very human reasons—to provide responsibly for family members in a considered and flexible way and to help people to tackle some of the many complications of family life in modern Britain. The proposals threaten to undermine the long-established principle that inheritance tax should not apply to transfers of property between husband and wife. Unless amended, they could give rise to many more instances whereby inheritance tax will apply in such situations. For example, a typical arrangement is for a husband in a second marriage to leave his property on trust to his widow for life, passing to the children of his first marriage on her death. That arrangement has nothing to do with tax, as under normal circumstances the property would be taxed on the second death—that of the widow. It is merely an attempt to divide property fairly and sensibly between family members and to provide for their different and sometimes competing needs. Proposed new section 49A of the Inheritance Act 1984, which is set out in schedule 20(5), imposes the new charges on trusts with a life interest, except where a series of six stringent and opaque conditions are met. For most modern life interest trusts, those conditions will not be met, so the new inheritance tax charges would apply in the situation that I outlined. Ironically, many people who have just drawn up a will that they have made following a civil partnership will have to review and rewrite it, because setting up a trust for a surviving partner is an extremely common approach. It seems bizarre that, having only just granted the spousal exemption to civil partners, the Government should seek to undermine it a few months later. The House should note that divorce settlements also frequently involve trusts, often set up by court order. Many of those will not meet the six conditions of new section 49A. Consequently, we face the chilling prospect of an inheritance tax bill being added to the many other costs and miseries associated with divorce. Moreover, it sits oddly with a Chancellor who once prided himself on his reputation for prudence that he is taking measures that will put pressure on parents to pass significant wealth to teenagers well before they may be old enough to deal responsibly with the consequences of such a gift. Schedule 20(3) imposes the new IHT charges on accumulation and maintenance trusts unless all property in the trust passes outright to the beneficiaries when they are 18. Those sorts of trust were first devised by a Labour Government—by Denis Healey and Joel Barnett in the 1970s. They were introduced not to help the super-rich—I do not think that either of those gentlemen were keen on helping the super-rich—but to allow ordinary families to provide for their children without giving them control over too much money at too early an age. Let us compare two cases that were raised with me. In one, the capital was transferred to a young adult who bought a fast car and crashed it with fatal results. In the other, a young adult became prey to a drug dealer at university, but the terms of a family trust enabled his relatives to prevent him from dissipating the assets that had been passed to him. Common sense is surely with Mr. Healey rather than the current Chancellor. Passing significant wealth to teenagers is not a great idea. The third reason that we oppose the changes is because they could require millions of wills to be rewritten. A cautious estimate by the Society of Trust and Estate Practitioners suggests that 1 million wills would have to be reviewed and redrafted. Assuming a modest cost of £250 per will, that leaves an unnecessary bill of £250 million. The actual total could be considerably greater, with the huge and unnecessary legal bill, not to mention the prohibitively expensive High Court hearings that may be needed to vary thousands of existing trusts and divorce settlements. Furthermore, Skandia Life said that 4.5 million people will need to review their life assurance policies because they are usually written in trust and could therefore fall foul of the new rules. The Chief Secretary suggested today that that anxiety is unfounded. Of course, I welcome his and the Treasury’s indications that trusts in relation to life assurance, as well as those arising out of intestacy, will not be affected by the new rules. However, even though that last-minute assurance came too late for the paper copy of the explanatory notes, it was rushed into the electronic version. We want the assurances to be placed on the face of the Bill. The great legal historian, Frederic Maitland, once described the trust as the"““greatest and most distinctive achievement performed by Englishmen in the field of jurisprudence””." The concept has been exported all over the common law world. Even civil law jurisdictions have started to incorporate similar concepts into their law. Much of that success flows from the genuine practical assistance that the trust concept can give ordinary families in juggling complicated lives and planning for an uncertain future. A leading QC said of the Government’s proposals that"““they are anti-family, they are illogical . . . they do not hit the rich so much as the aspirational classes””."