INHERITANCE TAX: INTERESTS IN POSSFESSION (Hansard, 16 July 1987)

§ Mr. Neil Hamilton

I beg to move amendment No. 91, in page 93, line 14, at end insert `and (d) that, within six months of the coming to an end of the relevant interest, any of the property in which that interest subsisted has neither—

(i) become settled property in which a qualifying interest in possession subsists or to which section 71 below applies, nor
(ii) become property to which an individual is beneficially entitled.'.

As my right hon. Friend the Financial Secretary pointed out a moment ago, clause 96 and schedule 7 seek to restore the parity of treatment between life interest trusts and outright gifts made by individuals—an essential element of the old capital transfer tax legislation that was lost on the introduction of inheritance tax in 1984.

I warmly welcome the changes that the Government have introduced in the Finance Bill. My right hon. Friend pointed out that had he gone further there would have 1336 been the prospect of considerable avoidance, and schedule 7 seeks, in a complex way, to prevent that from taking place. Were it not for schedule 7, property could be routed through life interest trusts to discretionary trusts. That could be misused in a variety of ways, two of which I shall mention by way of example and for the edification of the Opposition. The first is the so-called Chelsea pensioner scheme, whereby property is settled on somebody who is not expected to live for very long. The second example is the so-called man of straw scheme, under which property is settled on a person for life; but the trustees are given wide powers to appoint the property into a discretionary trust and thereby get around the limitations of life interest schemes.

Schedule 7 is targeted accurately at these avoidance devices. My small amendment does not seek to disturb the safeguards against abuse in schedule 7. Many people, however, have come to the conclusion that, as drafted, schedule 7 is too wide and does not conform with the practice of trusts, particularly in relation to heritage property where life interests in possession are the normal way of passing on such property and of safeguarding it for the future.

When property is settled on somebody for life, the terms of the trust often allow for some flexibility for appointment in the trustees, in case the life tenant dies prematurely. The trustees are allowed a short period—conventionally six months—in which to decide whether to appoint to a further life interest or to transfer property into absolute ownership.

My amendment would allow the trustees a short breathing space before making the appointment without fear of being caught by the complexities of schedule 7. If my right hon. Friend wants a precedent, there is one in the Inheritance Tax Act 1984. Section 92 provides for the case where property is not treated as transferred on death until the beneficiary has survived for a given period that cannot exceed six months. The costs involved for the section and the schedule are negligible. If my small amendment were to be accepted, the cost would be even less. I commend it to my right hon. Friend and hope that he will accept it.

§ Mr. Norman Lamont

My hon. Friend referred to the principle of parity between lifetime giving and giving to trusts that existed under the previous regime before the introduction of inheritance tax. He has called in aid that principle for this amendment. I am prepared to respond favourably to it.

Although the principle of parity applied under the old regime, we do not feel that that principle should be incorporated into all trusts. We have made lifetime giving tax-free, provided the donor survives for seven years. Therefore, we did not feel that it was right to make that provision for all trusts. We have conceded that principle for interest in possession trusts, but we do not intend to extend it to discretionary trusts. Last year we made it possible for accumulation and maintenance trusts to be included in the potentially exempt transfers. The basic reasoning behind this, and my hon. Friend's amendment, is that the trust has a function as an instrument that is independent of any tax advantage. We do not wish to destroy the trust as an instrument. That is very important in relation to interest in possession trusts.

My hon. Friend's amendment provides an opportunity for trustees who are caught by the anti-avoidance provisions in schedule 7 to rearrange matters so as to avoid 1337 the special rate of charge. If an interest in possession that was created by a potentially exempt transfer comes to an end within seven years of the exempted transfer and the property then becomes subject to discretionary trusts, which would be the normal route that might be used for avoidance, the termination may be subject to a special rate of charge instead of the normal rate, if the settlor is still alive. The amendment would prevent the special rate from applying on that termination if, within the following six months, the property is made subject to another interest in possession trust, or passed to outright individual ownership or to an accumulation and maintenance trust that already qualifies for exempt transfers. The normal rate charge will, however, remain.

My hon. Friend's proposal has the merit that it would prevent people who have made perfectly proper trust provisions, with no avoidance motive, from being inadvertently caught by the special rate of charge. Without that a trust which provides for successive interests in possession at the trustees' discretion would be caught if an interest in possession ended prematurely, perhaps on the death of the life tenant, before the trustees appointed a successor. The amendment will allow trustees to make the appointment within six months after the life tenant's death without incurring a penalty.

I am content to accept my hon. Friend's amendment. My hon. Friend alluded to men of straw, bed and breakfasting and other contrivances. We have built substantial anti-avoidance provisions into schedule 7. We will monitor the operation of my hon. Friend's amendment very carefully for signs of abuse. I do not believe that counter-measures will be necessary. However, if they were, we would not hesitate to bring them in.