INHERITANCE TAX (Hansard, 17 July 1986)

HC Deb 17 July 1986 vol 101 cc1301-8 1301

§ Sir Brandon Rhys Williams
I beg to move amendment No. 115, in page 201, line 9, leave out `otherwise than as settled property'.

Mr. Deputy Speaker
With this it will be convenient to take the following amendments:
No. 116, in page 201, leave out lines 14 and 15.
No. 117, in page 201, line 32, after 'provision', insert`other than section 52'.
No. 120, in page 205, line 20, leave out paragraphs 13 and 14.
No. 203, in page 205, line 26, at end insert— '13A. After Section 52 there shall be inserted the following section— 52A. (1). This section applies to a transfer of value of settled property where:—

(a) by virtue of a potentially exempt transfer made after 18th March 1986 (`the original transfer') a person other than the settlor (`the life tenant') becomes beneficially entitled to an interest in possession in the settled property immediately after the settlement commenced; and

(b) within seven years of the commencement of the settlement the life tenant's interest comes to an end whether during the life tenant's lifetime or on his death; and

(c) the transfer of value of the settled property then made (`the relevant transfer') is not a potentially exempt transfer or if the relevant transfer is made on the life tenant's death would not have been a potentially exempt transfer if it had been made during the life tenant's lifetime.

(2) Where this section applies the tax chargeable on the relevant transfer shall be the greater of:—

(a) the tax which would be chargeable on the relevant transfer apart from this section; and

(b) the tax which would have been chargeable on the original transfer if such transfer had not been a potentially exempt transfer less the tax (if any) which proves to be chargeable on the original transfer.

(3) References to the commencement of a settlement shall be construed in accordance with section 60 of this Act.".'.

1302

§ Sir Brandon Rhys Williams
The Budget introduced a significant new departure in regard to the tax treatment of outright gifts: they will be entirely free of tax if the donor survives for seven years. That is intended to be, and will certainly constitute, a very strong encourgement to people with money or property to bequeath to hand it over well before they come to the end of their days. I feel some doubt about the extension of the period of risk to seven years, but the reform has been widely welcomed and is an important part of the Budget.
There is a matter of concern to many people who want to make prudent dispositions of their personal assets, including a number of my constituents in Kensington, not only people of very substantial personal wealth, but people with shares in family businesses or simply with spouses or dependants for whom they want to provide without running the risk that their assets after their time might be dissipated by immature or inexpert management.
The Government's proposals are also causing acute concern to the professional advisers who are responsible for helping such people, as I am sure my hon. Friend is well aware. This is because under the Budget proposals an element of discrimination is now introduced against trusts which create a life interest, technically called interest in possession trusts. This type of trust has been the classic vehicle for centuries for conveying family assets from generation to generation, and has played a recognised and entirely respectable part in maintaining continuity and stability in the control of personal wealth, including family businesses and agricultural estates.
To legislate in such a way as to put families that rely on this method of ensuring that their assets are competently managed and preserved over long spans of time would be entirely contrary to the Government's policy and damaging to the public interest. In disposing of their property, many people will now be advised to avoid the use of this sensible and satisfactory method of settlement; and trusts already in existence may be wound up prematurely when it would have been more prudent to have let them continue.
That, however, is the effect of what presently stands in the Bill. Outright gifts are to be made entirely free of tax if the donor lives for seven years, but if money is put into an interest in possession trust on the way to the very same beneficiary, or if it has already been put into such a trust, it will continue to be caught for tax on the transfer of the capital. This new departure is a breach of the established principle that outright gifts and gifts through interest in possession trusts should be treated on all fours for tax purposes.
Many people have relied on that principle and with good reason. The Capital Transfer Tax Act of 1984 makes the point in section 49, which provides: A person beneficially entitled to an interest in possession in settled property shall be treated for the purposes of this Act as beneficially entitled to the property in which the interest subsists. The Act was merely repeating, without any change, the provisions of schedule 5 to the Finance Act 1975. That provision has thus been part of statute law for a considerable number of years and many people have relied on it. There could not be a more specific statement in statute that outright gifts and interests in possession trusts are seen as having equal tax status.. Many trusts have been set up in reliance on that statement. Now the settlors find, retrospectively, that they appear to have made a mistake.
1303 The matter was raised in Committee on 10 June by my hon. Friend the Member for Corby (Mr. Powell), but his amendments were rejected with a somewhat far-fetched argument from my hon. Friend the Minister. He introduced the bogey of a man of straw, who he felt might be brought into the matter to assist in creating a tax fiddle. Professional people who know this subject well found this suggestion surprising. In so far as there is a risk to the Inland Revenue, it could easily be overcome. My amendments include a provision that would make it profitless to bring a man of straw into the sequence of beneficiaries. There would be no risk that the donor could get money into a discretionary trust on the cheap, which is what my hon. Friend is afraid of. Other answers could no doubt be devised, but I recommend amendment No. 203 as the simple answer to the bogey that the man of straw might give rise to undesirable tax avoidance.
The tax implications of my proposal would be very small, if not nil, for the simple reason that people with assets to transfer will now take advantage of the freedom from tax available through outright gifts, and will cease to use the sensible and hitherto widely used device of an interest in possession trust. To leave the Bill as it stands would be pointlessly damaging and entirely unnecessary. I have tabled, with the benefit of highly professional advice, amendments that would restore the status of interest in possession trusts without opening up any risk of a new type of tax abuse. I hope therefore that the Treasury will accept my amendments.

§ Mr. Brooke
My hon. Friend the Member for Kensington (Sir B. Rhys Williams) has returned to the specific subject of trusts which we discussed in Committee. It was good of him to welcome the main thrust of the Government's provisions in this sector. Amendments Nos. 115, 116, 117 and 120 seek to exempt lifetime transfers into and out of interest in possession trusts from an immediate tax charge—that is, to make them potentially exempt transfers in the same way as transfers between individuals. Thus, they cover much the same ground as more detailed amendments on the same topic that were discussed in Committee, when I explained in some detail why the Government were unable to accept the amendments.
10.45 pm
We believe that an effective trust regime must be retained as protection for the death charge. Without it, inheritance tax would become a voluntary tax and we do not intend to allow that to happen. As I explained, we have decided to retain the existing trust regime for that purpose. It was introduced in 1982 after extensive consultation and has become widely accepted as a proper method of changing trusts. We believe that it must be kept intact if it is to remain effective.
In particular, we believe that we must retain the charges that affect interests in possession. Trust interests can easily be altered, and if we exempted transfers involving interests in possession without substantial new anti-avoidance provisions we should greatly assist those who already regard the trust regime as a major factor in their tax planning. Although my hon. Friend expressed disbelief in the man of straw, there is no doubt that that is a potential device for circumventing the death charge and the intent that lies behind the Government's present legislation.
Our decision has been criticsed as a departure from the capital transfer tax concept of giving interests in possession parity of treatment with outright ownership. 1304 That was a conscious decision and I make no apology for it. Capital transfer tax has now gone. The Government's purpose in changing to inheritance tax is to remove obstacles to unfettered lifetime giving while protecting the death charge. My hon. Friend was good enough to praise the basic intent.
Trust giving may now be more expensive than unfettered outright giving. But trusts are no worse off than they were under capital transfer tax; indeed, they may do rather better, because absolute gifts outside the period of seven years before the donor's death will not now influence the trust tax rates. If we had proceeded differently so as to keep slavishly to the old concept of parity, we would have needed to create a new trust regime with a complicated network of anti-avoidance measures. We believe that that would have been unwelcome, not least because it might well have made trust giving more expensive.
My hon. Friend then referred to amendment No. 203 and indicated that it would provide a device to respond to the Government's misgivings about providing relief to the trust regime in this area. Amendment No. 203 attempts to counter the trust-based avoidance that could occur if interests in possession were treated in the same way as outright interests. It seeks to provide that if property passes through an interest in possession trust into a discretionary trust, the rate of tax payable when the discretionary trust comes into existence will be that which would have been applicable to the original CTT law. In principle, obviously this is a sound approach if one accepts that the old capital transfer tax parity should be retained, but, as I explained, Ministers do not accept that.
Even on its own merits, amendment No. 203 is not sufficiently refined. It fails to deal with the routeing of property through a temporary interest in possession for a spouse or with any other case where the original transfer into trust exploits an inheritance tax exempt transfer provision. It expires illogically after seven years. It creates anomalies and it fails to address such issues as the effect on cumulations. It may have been unintentional, but it even starts a day too late—after 18 March instead of on 18 March.
I mention these things to illustrate the point that I made both in Standing Committee and a moment ago that a panoply of legislation would be needed to prevent avoidance if we were to adopt the approach proposed by the amendments. My hon. Friend is an example to the whole House in the manner in which he goes into these things. He may care to consider the detailed supportive provisions that apply when conditional exemption of heritage property is clawed back. They are in sections 33 and 34 of the Capital Transfer Tax Act 1984 which are amended by schedule 19.
A simple provision drafted on to existing legislation would not do. It would be necessary to undertake a major review and revision of all the trust provisions in the inheritance tax legislation and to construct a fresh code, complete with appropriate anti-avoidance provisions. Even if my hon. Friend were able to consider sections 33 and 34, I do not promise him that all the complications would be dealt with. That road would be complicated. We have decided not to go down it. For that reason, I ask my hon. Friends to reject the amendment.

§ Sir Brandon Rhys Williams
This short debate has served a useful purpose, because it has elicited from the 1305 Treasury a more specific argument than that which we had in the Standing Committee in support of the Government's intention. We should all be grateful to my hon. Friend the Minister of State for the trouble that he has taken to analyse the reasons as precisely as he has. As he is aware, he has left himself open to the extensive correspondence that will inevitably follow when people have had time to consider all that he has said. For the time being, I thank him for taking the matter so seriously. In view of his remarks, especially those concerning my amendment No. 203, I will not press the matter. However, I hope that, in due course, the House will consider it again. I beg to ask leave to withdraw the amendment.

§ Amendment, by leave, withdrawn.

§ Amendments made: No. 119, in page 205, line 13 at end insert— '11A. In section 35 (conditional exemption on death before 7th April 1976) in subsection (3) for the words "section 33(7) above, the reference" there shall be substituted "section 33(7) and (8) above, references", and for the words "includes a reference" there shall be substituted "include references".'.

§ No. 121, in page 206, line 22, leave out 'section' and insert 'sections'.

§ No. 122, in page 207, line 19, at end insert— '(5A) Where any shares owned by the transferee immediately before the death in question—

(a) would under any of the provisions of sections 77 to 86 of the Capital Gains Tax Act 1979 be identified with the original property (or part of it), or
(b) were issued to him in consideration of the transfer of a business or interest in a business consisting of the original property (or part of it),

they shall be treated for the purposes of this section as if they were the original property (or that part of it). (5B) This section has effect subject to section 113B below.'.

§ No. 123, in page 207, line 27, at end insert 'or, where on the transfer the original property became or remained settled property in which no qualifying interest in possession (within the meaning of Chapter III of Part III of this Act) subsists, the trustees of the settlement'.

§ No. 124, in page 207, line 27, at end insert—

§ 'Application of section 113A to replacement property 113B.—(1) Subject to subsection (2) below, this section applies where—

(a) the transferee has disposed of all or part of the original property before the death of the transferor; and
(b) the whole of the consideration received by him for the disposal has been applied by him in acquiring other property (in this section referred to as "the replacement property").

(2) This section does not apply unless—

(a) the replacement property is acquired, or a binding contract for its acquisition is entered into, within twelve months after the disposal of the original property (or, as the case may be, the part concerned); and
(b) the disposal and acquisition are both made in transactions at arm's length or on terms such as might he expected to be included in a transaction at arm's length.

(3) Where this section applies, the conditions in section 113A(3) above shall be taken to be satisfied in relation to the original property (or, as the case may be, the part concerned) if—

(a) the replacement property is owned by the transferee immediately before the death of the transferor; and
(b) throughout the period beginning with the date of the chargeable transfer and ending with the death (disregarding any period between the disposal and acquisition) either the original property or the replacement property was owned by the transferee; and
(c) in relation to a notional transfer of value made by the transferee immediately before the death, the replacement property would (apart from section 106 above) be relevant business property.

(4) If the transferee has died before the transferor, any reference in subsections (1) to (3) above to the death of the transferor shall have effect as a reference to the death of the transferee. (5) In any case where—

(a) all or part of the original property has been disposed of before the death of the transferor or is excluded by section 113 above from being relevant business property in relation to the notional transfer of value referred to in section 113A(3)(b) above, and
(b) the replacement property is acquired, or a binding contract for its acquisition is entered into, after the death of the transferor but within twelve months after the disposal of the original property or part, and
(c) the transferor dies before the transferee,

subsection (3) above shall have effect with the omission of paragraph (a), and as if any reference to a time immediately before the death of the transferor or to the death were a reference to a time immediately before the death of the transferor or to the death were a reference to the time when the replacement property is acquired. (6) Section 113A(5A) above shall have effect in relation to the replacement property as it has effect in relation to the original property. (7) Where a binding contract for the disposal of any property is entered into at any time before the disposal of the property, the disposal shall be regarded for the purposes of subsections (2)(a) and (5)(b) above as taking place at that time. (8) In this section "the original property" and "the transferee" have the same meaning as in section 113A above.".'.

§ No. 125, in page 207, line 28, leave out 'section' and insert 'sections'.

§ No. 126, in page 208, line 5, after 'period",' insert 'and is not at the time of the death subject to a binding contract for sale'.

§ No. 127 in page 208, line 35, at end insert— '(5A) Where any shares owned by the transferee immediately before the death in question—

(a) would under any of the provisions of sections 77 to 86 of the Capital Gains Tax Act 1979 be identified with the original property (or part of it), or
(b) were issued to him in consideration of the transfer of agricultural property consisting of the original property (or part of it),

they shall be treated for the purposes of this section as if they were the original property (or that part of it). (5B) This section has effect subject to section 124B below.'.

§ No. 128, in page 208, line 47, at end insert 'or, where on the transfer the original property became or remained settled property in which no qualifying interest in possession (within the meaning of Chapter III of Part III of this Act) subsists, the trustees of the settlement'.

§ No. 129, in page 208, line 47, at end insert—

§ 'Application of section 124A to replacement property. 124B.—(1) Subject to subsection (2) below, this section applies where—

(a) the transferee has disposed of all or part of the original property before the death of the transferor; and
(b) the whole of the consideration received by him for the disposal has been applied by him in acquiring other property (in this section referred to as "the replacement property").

(2) This section does not apply unless—

(a) the replacement property is acquired, or a binding contract for its acquisition is entered into, within twelve months after the disposal of the original property or, as the case may be, the part concerned); and
(b) the disposal and acquisition are both made in transactions at arm's length or on terms such as might be expected to be included in a transaction at arm's length.

(3) Where this section applies, the conditions in section 12A(3) above shall be taken to be satisfied in relation to the original property (or, as the case may be, the part concerned) if—

(a) the replacement property is owned by the transferee immediately before the death of the transferor and is not at that time subject to a binding contract for sale; and
(b) throughout the period beginning with the date of the chargeable transfer and ending with the disposal, the original property was owned by the transferee and occupied (by the transferee or another) for the purposes of agriculture; and
(c) throughout the period beginning with the date when the transferee acquired the replacement property and ending with the death, the replacement property was owned by the transferee and occupied (by the transferee or another) for the purposes of agriculture; and
(d) the replacement property is agricultural property immediately before the death.

(a) all or part of the original property has been disposed of before the death of the transferor or is subject to a binding contract for sale at the time of the death, and
(b) the replacement property is acquired, or a binding contract for its acquisition is entered into, after the death of the transferor but within twelve months after the disposal of the original property or part, and
(c) the transferor dies before the transferee, subsection (3) above shall have effect with the omission of paragraphs (a) and (c), and as if any reference to a time immediately before the death of the transferor were a reference to the time when the replacement property is acquired.

(6) Section 124A(5A) above shall have effect in relation to the replacement property as it has effect in relation to the original property. (7) Where a binding contract for the disposal of any property is entered into at any time before the disposal of the property, the disposal shall be regarded for the purposes of subsections (2)(a) and (5)(b) above as taking place at that time. (8) In this section "the original property" and "the transferee" have the same meaning as in section 124A above'.

§ No. 130, in page 209, line 9, at end insert `(3) After that subsection there shall be inserted the following subsection— (2A) Where so much of the value transferred as is attributable to the value, or agricultural value, of the transferred property is reduced by any percentage (in this subsection referred to as "the appropriate percentage") in accordance with Chapter I or Chapter II of this Part of this Act, references in subsection (2) above to the market value of the transferred property at any time shall have effect—

(a) in a case within Chapter I, as references to that market value reduced by the appropriate percentage; and
(b) in a case within Chapter II, as references to that market value less the appropriate percentage of the agricultural value of the transferred property at that time."'.

§ No. 131, in page 211, line 9, leave out 'subsection' and insert 'subsections'.

§ No. 132, in page 211, line 13, leave out from 'which' to end of line 21 and insert— `is owned by the transferee immediately before the death of the transferor (or, if earlier, his own death). 1308 (1B) In subsection (1A) above "the transferee" means the person whose property the qualifying property became on the transfer or, where on the transfer the qualifying property became comprised in a settlement in which no qualifying interest in possession (within the meaning of Chapter III of Part III of this Act) subsists, the trustees of the settlement. (2) In subsection (5) of that section after the words "subsection (1)(b) above" there shall be inserted "other than a case within subsection (1A) above where the transferee dies before the transferor".'.

§ No. 201, in page 212, line 14, after 'subsection', insert `(1) or'.

§ No. 133, in page 212, line 17, at end insert `(except where the Board think fit to entertain the application at an earlier time after the death)".'.

§ No. 134, in page 213, line 35, at end insert— '37A. In Schedule 6 (transition from estate duty) in paragraph 4(3) after the words "sections 33(7)" there shall be inserted the words "and (8)".'.

§ No. 135, in page 215, line 14, at end insert— `44. Notwithstanding anything in section 3A of the 1984 Act, a transfer of value which is made on or after 1st July 1986 and which, by virtue of subsection (4) of section 49 of the Finance Act 1975 (transitional provision relating to estate duty deferment in respect of timber etc.), brings to an end the period during which estate duty is payable on the net moneys received from the sale of timber etc. is not a potentially exempt transfer.'.—[Mr. MacGregor.]