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Finance (No. 2) Bill

My Lords, I congratulate the noble Lord, Lord Burnett, on his very good and entertaining maiden speech. I congratulate the noble Lord, Lord Wakeham, on his committee’s excellent report and his robust comments, along with those of the noble Lords, Lord Barnett and Lord Newby, on the role of the committee. I thank the noble Lord, Lord McKenzie, for introducing the Bill, to which my noble friend Lady Noakes responded in her customary impeccable style. As usual, she focused on the essential points. In spite of what the noble Lord, Lord Barnett, said, I think that my noble friend was, as she always is, extremely constructive. Her comments reflect the Government’s wish to appropriate an ever greater portion of the national wealth, which is then spent without, unfortunately, introducing the reforms that are so badly needed and to which she referred. The more Government impose taxes, the more people will try to avoid them, either by adjusting their affairs or by moving to a different tax jurisdiction, as my noble friend Lord Trenchard pointed out in his excellent speech. Business individuals nowadays are international and will move to the most friendly tax environment. As our economy evolves from manufacturing to service industries, it is ever easier to cross frontiers. It is no accident that Google and many other major companies have recently located to Ireland. For Britain to stay prosperous, it must continue to attract and keep the creators of wealth, both corporate and individual. The noble Lord, Lord Marlesford, made some most relevant comments on this subject. The various anti-avoidance measures to which my noble friend Lady Noakes referred and which take up so much of this year’s finance Bill tackle the symptoms and not the cause of the problem. There is an increasing weight of evidence that avoidance is a result of higher and ever more complex taxes, which are a massive stimulus to the avoidance industry. I urge the Government to look at this, together with the evidence available from other countries such as Ireland, the United States of America, Australia and others, which demonstrate a considerable improvement in revenues from lower taxes, as my noble friend Lord Forsyth pointed out so ably. A singularly important point which my noble friend Lady Noakes raised was to expose the shame of ceding sovereignty on tax matters to Europe. As she said, tax is not a matter of Community competence. I would welcome hearing what the Minister has to say about that. I turn to the matter of trusts, about which there has been so much discussion in recent weeks, and to which some of your Lordships have referred this afternoon. I must declare an interest as a beneficiary, trustee and settlor of trusts. Many of the points I wish to raise today have already been mentioned by your Lordships, so I will try not to waste time by repeating the same things. The first question is, as my noble friend Lord Wakeham mentioned earlier, why have the Government introduced this measure? I am not alone in finding it difficult to understand or fathom the reason. There has been much discussion and speculation, but no real conclusion. It has become apparent that the original statement, repeated by the Minister, on the impact of the changes—that only 6 per cent would be affected—was wrong. The Government had no real idea of the huge number of people who would be affected. I have a great respect for the Minister, but there is such a weight of evidence that on this occasion I am unconvinced by his statement. As my noble friend Lord Trenchard and others have pointed out, the new regime was brought in without consultation, even though consultation on minor changes to the income tax and capital gains tax treatment had been going on for two years. The excuse explained by the Minister was a fear of forestalling. For a set of changes that, per the Red Book, are planned to raise £15 million a year, this is a weak excuse. My noble friend Lord Wakeham also made some most pertinent comments on that. It is always possible to announce new rules that will apply from a date and to consult properly on the detail—for example, the considerable tranche of capital loss anti-avoidance measures in the Bill. Had the professional bodies been consulted, they would have pointed out, despite what the Minister said, that trusts, particularly ““interest in possession”” trusts, are used principally to protect assets and people, and not for tax avoidance. The noble Lord, Lord Northbrook, spoke eloquently on that. There are many who will suffer—for example, those getting divorced. Where this is concerned, trusts are used as practical management devices and are nothing to do with tax avoidance. Trusts are used to ensure that funds are properly protected. They are normally directed to keep the ex-spouse and then the children of the marriage, rather than going to the ex-spouse’s new family. That will now be subject to tax. The noble Lord, Lord Burnett, gave us an excellent example of why that is wrong. Are the Government saying that all divorces are to be on a ““clean break”” basis, or else the family faces a double penalty—the divorce and the inheritance tax hits on the property in trust? The Government propose to keep privileged tax treatment for trusts for the disabled. Unfortunately, the definition of ““disabled”” for these purposes is too restrictive. It does not include many people who would want to set up trusts for themselves; for example, those who suffer from gambling, drug addiction or alcohol addiction. New trusts set up by those who do not fall within the definition of disabled will suffer the tax charges. Why is this necessary? What avoidance are the Government seeking to tackle, when such trust property would in any event remain in the estate of the self-settlor and be subject to inheritance tax when he or she dies? In future, unless they fall within the narrow definition of disabled, people who recover damages as a result of claims for personal injury, criminal injuries compensation and so on, where the sums of money are placed in trust for their benefit, will suffer a tax. The amount of damages received will have been calculated to take into account the recipient’s living expenses, care and medical needs, but not the tax charge that may now arise. If a tax charge now results, it will deplete funds set aside for the person’s care. That may increase the need to resort to the state for additional support. What is clear is that even the amended proposals will do the most harm not to the rich minority referred to, but to many people of relatively modest means whose wealth has been increased by the inflation in the monetary value of their houses to a level where these proposed taxes will bite. They will have few, if any, other assets. They do not have great wealth; they have a home. That means that they will be unfairly penalised if, for any number of perfectly good reasons, they wish their main asset to be held in a trust. It is a perfectly valid wish to preserve the family home, or indeed any other form of family wealth, by passing it to another generation. That is quite possible without a tax penalty, providing that it is an outright gift and the donor survives for seven years. Why should there be a tax penalty for passing the same wealth via a trust, where the difference is that there is provision to prevent foolish dissipation of wealth? Even the very ordinary use of insurance policies written in trust is now penalised. The Government might well have stopped what they see as tax avoidance, but only at a price borne by ordinary, prudent families who try to ensure that their dependants do not have to submit themselves to means-tested benefits. Are the Government prepared to talk to the insurance industry about changes in a future finance Bill which would permit prudent family provision? In the other place, the Paymaster General explained why trusts should be taxed, as can be seen in the Official Report of Standing Committee A of 13 June at cols. 606-07. She set out a series of steps by which inheritance tax could be avoided by the use of trusts and explained that therefore trusts should be taxed. But these same steps could be taken by the use of outright gifts, and there would be no tax penalty, provided that the donor lived seven years. The justification given for taxing trusts was that the original donor—the grandparents, in the example—could, from the grave, still retain control over the assets. That would not be so in the case of an outright gift. That is an amazing statement. In the overwhelming majority of cases, these trusts will have been created not for tax purposes, but for the sake of good and sensible money management. Are the Government really saying that prudence is an undesirable objective and should be taxed, but that if money is given outright with no provision for future good management—so that it can easily be frittered away—it is a better way to do things? The idea is so extraordinary that one wonders if there is an ulterior motive. Is this the first of a two-pronged attack, and the next move will be against potentially exempt transfers, as outright gifts are known? Will the Minister confirm that there is no plan to tax potentially exempt transfers or to extend the length of time the donor has to survive? It is important and fair that people in this country, as well as the businesses to which the Minister referred, have a stable tax environment in which to plan and conduct their affairs. Finally, I urge the Government to react promptly to unforeseen anomalies which crop up and cause suffering. There have already been 50 amendments to the trusts section of the finance Bill and doubtless further problems will arise. It would be comforting to know that prompt action would be taken to prevent hardship. Before finishing, I ask the Minister to pay attention to the wise comments in the brilliant speech of my noble friend Lord Forsyth.