---

Finance (No. 2) Bill

My Lords, it is a great honour for me to make my maiden speech today. I should first like to put on record my thanks to your Lordships and the staff of the House for all the kindness and help that you and they have extended to me. Having had the privilege of serving as Member of Parliament for Torridge and West Devon for eight years, I am pleased to say that I have now participated in votes where the result was not a foregone conclusion. In my chequered career, I have been a new boy on a number of occasions, and each time there have been new and important lessons to learn. I started my working life in January 1964 as a rather spoilt young man, arriving at Exton station, between Exeter and Exmouth, on a very cold winter’s evening. That is the station nearest to what is now known as the Commando Training Centre Royal Marines. I had had an ambition to join the Royal Marines for many years. A three-tonne lorry arrived and out of the passenger door jumped a tall, imposing figure in full blues. I thought to myself, ““How awfully kind of the general to come and meet me””. It was, in fact, the legendary colour sergeant, Jan Crook, who had the Herculean task of taking through our initial training the eleven of us who joined in my year. I looked at my suitcases and looked at the back of the lorry. The colour sergeant whispered in my ear, ““I think sir will be carrying his own cases””. Before I lead on to the Finance Bill, I should declare that I am landlord of agricultural and residential property and also that I am a consultant at a West Country law firm. I am also a member of a tax committee of the Law Society. I seem to have chosen to make my maiden speech on the hottest day for years and the Finance Bill, despite everyone’s best efforts, is not the most gripping subject. However, there was much debate in the other place and in the country about the inheritance tax changes proposed in this year’s Finance Bill. There certainly was some avoidance with older interest in possession trusts, circumventing the gifts with reservation anti-avoidance provisions. It was right to close this loophole. However, rather more than that was proposed. Professional bodies and others had discussions with officials and progress seemed slow. I wish to put on record my gratitude to the Paymaster General for finding nearly two hours in May during the progress of the Finance Bill to discuss the issue with me. She was, as always, courteous, conscientious and prepared to listen to the points I raised on behalf of the hundreds of thousands, if not millions, of taxpayers, of clients of members of the Law Society, the Society of Trust and Estate Practitioners and the Association of British Insurers, for whom I was speaking. The Bill was greatly improved by the amendments made to Schedule 20, but further work remains to be done. It will not now be necessary for many hundreds of thousands of wills to be changed to ensure that the normal inheritance tax exemption applies to a life interest left to a spouse or civil partner. As the Bill was originally drawn, the new Section 49A of the Inheritance Tax Act 1984 would not have applied to life interests that might have ended in the beneficiary’s lifetime or where children would not inherit after the beneficiary’s death until they reached the age of 25. It is standard practice for wills to be drawn up in terms which enable a life interest to be ended in the life tenant’s lifetime and which require property left to children to be held in trust for them until they reach the age of 25. Helpful changes were also made where property is left by parents to their children and is conditional on those with children reaching the age of 25. It is a pity that no reliefs are given where grandparents leave property to minor grandchildren who have lost their parents. However, the new inheritance tax rules still impact very harshly where lifetime settlements are made. Trusts have traditionally been used for settling property disputes in divorce proceedings, in arranging for family property to be held after a second marriage and in providing for disabled beneficiaries. The requirement to treat their lifetime settlement of property as a chargeable transfer will mean an extra cost being imposed on what would otherwise be a sensible and economic arrangement—for example, where the family home is owned by the former spouse, but must remain unsold while the children are growing up. Trusts created during a settlor's lifetime giving a life interest to a husband, wife or civil partner are now treated much more harshly than trusts in favour of other beneficiaries. That is a particularly perverse outcome. Trusts of this type are particularly useful where there has been a second marriage and it is intended that the children of the first marriage will inherit property after providing for the second husband or wife. If there is a family home or other property and a spouse wishes to give it to his or her spouse for life, and then to the children of the first marriage, there are real tax problems. Under the new rules, the gift will be a chargeable transfer leading to an immediate inheritance tax charge, in spite of the beneficiary being the spouse. The gift will also be a capital gains tax disposal, but, because the spouse benefits, there will be no holdover relief for the gain, since the trust will be ““a settlor interested settlement””. Incidentally, this would not be a problem if the life interest was given to a mistress instead of a wife. If the gift creates a life interest over the family home or an interest in it, it will be a gift with reservation of benefit. When the settlor spouse dies, inheritance tax will be charged again on top of the inheritance tax already charged when the settlement was made. The reason for that is that the lack of exemption when the settlement was made prevents Section 102(5)(a) of the Finance Act 1986 applying. Special rules for gifts held in trust for disabled beneficiaries are far too restrictive, and that point has been made by many bodies representing the interests of the disabled. In addition, when the Government reconsider this legislation, as I sincerely hope they will, I hope that they will ease the inheritance tax burden on life protection policies. Finally, I would emphasise again that such interest in possession trusts are not used for tax avoidance. The life tenant is treated for inheritance tax purposes as if she or he owned all the trust’s assets absolutely. The reasons for the creation of these trusts are many, including the fragility of marriage and the protection of the vulnerable. I hope that we shall have an opportunity to debate these matters again. I am delighted that this House has in recent years been doing more and more extremely valuable work on economic and tax matters. It is a pleasure to have the opportunity to debate these matters here today.