INHERITANCE TAX: GIFTS WITH RESERVATION

HC Deb 01 July 2003 vol 408 cc195-209

1. '(1) Section 102 of the Finance Act 1986 (c. 41) (gifts with reservation) is amended as follows.
2. (2) In subsection (5) (section not to apply where disposal is an exempt transfer by virtue of any of the provisions of the Inheritance Tax Act 1984 specified in the paragraphs of that subsection) at the end of paragraph (a) (section 18: transfers between spouses) insert", except as provided by subsections (5A) and (5B) below".
3. (3) After subsection (5) insert—"(5A) Subsection (5)(a) above does not prevent this section from applying if or, as the case may be, to the extent that—
1. (a) the property becomes settled property by virtue of the gift,
2. (b) by reason of the donor's spouse ("the relevant beneficiary") becoming beneficially entitled to an interest in possession in the settled property, the disposal is or, as the case may be, is to any extent an exempt transfer by virtue of section 18 of the 1984 Act in consequence of the operation of section 49 of that Act (treatment of interests in possession),
3. (c) at some time after the disposal, but before the death of the donor, the relevant beneficiary's interest in possession comes to an end, and
4. (d) on the occasion on which that interest comes to an end, the relevant beneficiary does not become beneficially entitled to the settled property or to another interest in possession in the settled property.
4. (5B) If or, as the case may be, to the extent that this section applies by virtue of subsection (5A) above, it has effect as if the disposal by way of gift had been made immediately after the relevant beneficiary's interest in possession came to an end.
5. (5C) For the purposes of subsections (5A) and (5B) above—
1. (a) section 51(1)(b) of the 1984 Act (disposal of interest in possession treated as coming to end of interest) applies as it applies for the purposes of Chapter 2 of Part 3 of that Act; and
2. (b) references to any property or to an interest in any property include references to part of any property or interest.".
6. (4) The amendments made by this section have effect in relation to disposals made on or after 20th June 2003.'.

—[Dawn Primarolo.]

Brought up, and read the First time.

Dawn Primarolo

I beg to move, That the clause be read a Second time.

This new clause introduces the changes announced on 20 June to the inheritance tax rules on lifetime gifts. The changes come in response to a recent Court of Appeal decision in the Eversden case. Everyone who has commented on the case has noted the wide-ranging tax-avoidance opportunities that it opens up. Almost all have gone on to say that they were too good to last and were bound to be tackled by early countervailing legislation. I agree with that assessment, and the Government have introduced this clause to achieve it.

I shall set out the relevant factors briefly. The Court of Appeal confirmed that married wealth owners could make what are called gifts with reservations. They are permanently free of the normal tax consequences, so long as the gifts are made to a trust and the trust initially provides an interest in possession to the donor's spouse. That means that married couples could remove assets from their inheritance estates, effectively without limit, by making lifetime gifts into the trust in the way that I have described, without losing any effective ownership. They could do so by using schemes where the interest for the donor's spouse is quite blatantly inserted purely to get the desired tax effect and is predestined to disappear after the shortest decent interval once it has served its purpose.

The schemes were of wide appeal, at least among the minority of people wealthy enough to have prospects of paying inheritance tax. The only essential requirement was that the donor should be married and have the prospect of wealth at death of more than £250,000.

Mr. Redwood

Will the Paymaster General give way?

Dawn Primarolo

I just want to introduce the new clause, after which the right hon. Gentleman will of course want to speak. I shall be happy to respond to his points.

I remind the House that we are talking about the inheritance tax rules that were introduced in 1986, under the previous Conservative Government, and about the ways that people try to get around them.

The schemes could be used for all sorts of assets at all levels of wealth. They could allow married couples to remove the family home from inheritance charge on death, yet to continue to live in it during their lifetimes. That aspect has received much attention in the press, and among some of those who market these schemes.

1.45 pm

However, the schemes could be used equally well to shelter all sorts of other assets, including—notably—financial assets wrapped up in the form of an insurance bond. As for the amounts involved, the sums become a little more complicated if the couple's total wealth is significantly more than £1 million or so. Although executing one of these schemes at that level would not necessarily remove a couple from inheritance tax forever, it would remain a very attractive proposition.

The Government are not stopping, as some have suggested, an innocent piece of self-help for couples with modest homes who might be taken into inheritance tax by inflation in property prices. Even if that were true, tolerating tax avoidance would not be a sensible way to deal with the issue of house prices. In reality, however, the potential avoidance goes much wider, as I said. It goes all the way up the scale of wealth, undermining all the revenue from those who pay inheritance tax and account for the lion's share of the total yield. That is not fair to the wider body of taxpayers, nor to the balance of prospective inheritance tax payers, who cannot afford this sort of avoidance, or who do not engage in it.

Following on from the Court of Appeal ruling, it is essential that we stop now any possible future loss to the Exchequer. That is what the clause seeks to achieve, operational from 20 June.

Mr. Howard Flight (Arundel and South Downs)

As happened with new clause 6, the Government are introducing this significant piece of legislation on Report. No doubt they will give the excuse that they wanted to hear the ruling in the Eversden case, but I submit that, had they wished to make changes as radical as the ones that they propose, they could easily have addressed the matter in the body of the Bill.

The use of defeasible life interest trusts in relation to homes has not been a matter of tax avoidance, as the Paymaster General suggested. It has failed her own test, which she set out in Committee, regarding the difference between accepted tax planning and tax avoidance. It has been widely known about, and the law has provided for inheritance tax gifts with reservations to be made.

Therefore, the new clause introduces what is, essentially, a new tax. The Paymaster General may be concerned that what has been used purely to protect the family could be used in other areas, but so far the scheme has been used solely in respect of family homes. Indeed, her own comments highlighted the problems described to me by constituents.

As we warned in the debate on last year's Finance Bill, the problem is based in particular in the rise in home values in the south of England. The Government have done and said nothing to deal with the knock-on problems that that creates for inheritance tax. I suggest that it is very much part of British culture for people to want to be able to hand on to their children the house that they own, or the value that they have built up in it. In the south of England in particular, there are a growing number of reasonably ordinary properties whose value is in excess of the inheritance tax threshold. The number has been estimated at between 1.5 million and 2 million properties. To date, the specific defeasible life interest trust has been used by people to gift their home to their children while retaining a right for the surviving spouse to live there until death. That is hardly a wicked thing to do; most families presented with the problem would want to do that.

Mr. Bercow

Given the need to make this debate on new clause 7 intelligible to the wider public, does my hon. Friend agree that the Paymaster General has a basic responsibility to tell us in broad terms the sort of revenue to the Exchequer that the new clause would deliver?

Mr. Flight

Yes, but she advised the press that the measure was designed to protect a significant part of the £2.4 billion per annum inheritance tax revenue. I suspect that it will do no such thing. One of our concerns, of which the Paymaster General will be aware, is that a likely reaction to not being able to achieve what most people want—what more and more couples who manage to stay together and bring up their children want—is a boost to the equity release market, in which older people can sell all or part of their homes and retain the right to stay in them, thus releasing the cash value from their homes and then donating the cash released to their children.

There are inherent dangers in such schemes, which the Government are unwilling to regulate. With so many people's pensions wrecked by the actions of the Government, many people are looking to those schemes for a source of income in old age.

Mr. Redwood

I detected a moral judgment in the Paymaster General's statement. How does my hon. Friend think the morality of such schemes compares with the morality of using offshore trusts in the creative and perfectly legal way that a number of former and present Government Ministers have done? As one who thinks that to be perfectly reasonable, I ask my hon. Friend how he feels the relative moral charge sheet rests from the Government's point of view.

Mr. Flight

My right hon. Friend has made his point. The middle England vote that the Labour party has been keen to retain is largely made up of citizens who believe that it is natural to want to hand on their house or its value to their children. That is much more straightforward than some of the fancy antics that certain past Labour Ministers got up to.

New clause 7 will turn out to have unintended consequences, and the Bill is full of many such examples. I referred earlier to the fact that it is extremely unlikely to achieve the bolstering of inheritance tax revenues that the Paymaster General is expecting.

The Paymaster General's letter refers to the fact that the Government are pursuing an application for leave to appeal to the Lords on the question of how gifts already made should be taxed. In other words, the Government are hoping to introduce retrospection; there would be no point in pursuing such an appeal were that not so. Specifically, the Government are seeking to get a ruling that the gifts of family homes made by older people who have entered into defeasible trusts will be brought back within the inheritance tax net.

Such an initiative will be seen by ordinary middle-class voters as a means of picking on them as they carry out a straightforward action in the interests of their children, which they feel entitled to do. I have to suggest to the Government that it is reasonably unlikely that they will win, but there seems to be an element of spite in seeking to introduce a retrospective element to this new tax.

We are not going to burn up yet more time that we do not have on a vote that we know we cannot win, but we leave the Government to reap their own bitter harvest of the growing hostility of home owners in middle England, arising from a measure that will be seen as spiteful and which will not be effective in raising inheritance tax revenue. It is understood that there is a case for preventing the use of such trusts in wider financial affairs, but the Government's approach to the fundamental wish of people to hand on their family home goes against the family and against British instincts.

Mr. David Laws (Yeovil)

My hon. Friend the Member for Torridge and West Devon (Mr. Burnett) anticipated this debate in Committee on 17 June when he asked the Paymaster General whether she would introduce proposals at any stage on inheritance tax, to which she replied: I will certainly keep him informed of developments in due course. On 20 June, we had the announcement of this change. I commend my hon. Friend on his precipitation and wisdom in raising the issue, and for anticipating the thrust of the new clause when he said during the same exchange that inheritance tax is a tax levied on those who do not have sufficient money or assets to avoid it legitimately."—[Official Report, Standing Committee B, 17 June 2003; c. 613.] That is a growing perception of people in and beyond the tax world: that, increasingly, people who have large estates and can afford good tax accountants can get round paying inheritance tax altogether, whereas a much wider group of people are being absorbed into the inheritance tax net, not least as a result of the increase in property prices in the past few years.

We welcome the fact that the Government are addressing some of those loopholes in the new clause, as those steps ensure that inheritance tax does not simply become a tax that falls on those who are not wealthy enough to afford good tax advice, but ensure that the purpose of inheritance tax is maintained and that the tax that we anticipate collecting is collected as far as possible.

The hon. Member for Arundel and South Downs (Mr. Flight) raised a number of legitimate issues in relation to inheritance tax, but did not state whether the Conservative party's former desire to abolish it altogether still holds. He raised a number of issues that flow from the avoidance of inheritance tax, and not least from the increase in property prices in the last few years.

Before the 1997 election the debate—in my case, it was not conducted from within this House—was about a proposal by the then Prime Minister to abolish inheritance tax. At that time, the then Chancellor of the Exchequer was keen to emphasise that inheritance tax and capital gains tax were minority taxes paid by a small proportion of the population. I suspect that we were talking about tens of thousands of people in 1997. The criticism from the Labour party at the time was that the abolition of such taxes would simply benefit a small number of people.

I suspect that the Paymaster General is aware that concern about inheritance tax is now rising among a much broader proportion of the population and it may be that, in future, she will wish to address that concern in an amendment, a new clause or in a future Finance Bill. Property prices over the past few years have increased to such an extent that people who could by no means be considered wealthy have been caught in the inheritance tax net.

Mr. John Burnett (Torridge and West Devon)

Does my hon. Friend agree that with the dive in the value of people's pensions, their principal private residence is often the only thing they have left—especially if they are self-employed—to keep them going in old age?

Mr. Laws

My hon. Friend is right to identify the fact that many elderly people's primary assets are the properties in which they live. Other financial assets, including shares, may have depreciated in value as a consequence of recent changes.

The new clause is welcome, but in future it would be sensible for the Paymaster General to consider the wider issues of inheritance tax, particularly the number of people who will be pulled over the threshold in the next few years. For the reasons provided by the hon. Member for Arundel and South Downs, she should also consider reviewing that tax policy, particularly in respect of the potential to shift tax avoidance from one vehicle—we hope that that loophole has been closed by the Government—into others such as equity release schemes in which people can, through perfectly legitimate and legal tax-planning devices, seek to undermine the intention behind Government tax policy and tax legislation.

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Other issues that should be considered as part of any review of inheritance tax include not only the implications of rising property prices and avoidance techniques such as equity release schemes, but the wider issue of whether it is sensible to levy inheritance tax on estates as currently operated. In future, the Government should consider levying inheritance tax differently on recipients of the assets rather than on the estate itself. That might encourage people to spread wealth and provide incentives for people who may not be paying the upper rate of 40 per cent. that is applied to inheritance tax. If the Paymaster General cannot respond categorically to all those points, I hope that she will at least remember the fact that it may be worth reviewing this form of tax in the future.

Mr. Redwood

I am glad that the hon. Member for Yeovil (Mr. Laws) reminded the House of the excellent Conservative policy of getting rid of inheritance tax, and I trust that when we reach manifesto time, it will be one of the strong runners.

Mr. Laws

I accept that the right hon. Gentleman is not currently a member of the Conservative shadow Cabinet, but he will receive all the briefing papers on Conservative tax policy. Will he tell us whether it remains Conservative tax policy to abolish inheritance tax?

Mr. Redwood

The position is well known in the House—although I fear that we might be deviating a little from the new clause, Mr. Deputy Speaker. The Conservative party will come forward with tax proposals nearer the time of the election, when it is clearer how much money the Government are wasting and how much necessary expenditure a future Conservative Government will need to incur. Many demands will be made to the shadow Cabinet of the day to offer all sorts of tax relief and tax reductions after the present Government's tax binge, which we are debating this afternoon. The Government are finding more and more ways of taking money off people, so that they can waste it on schemes such as "Notwork Rail"—with a £15 billion loss so far, and much more to come as the dreadful nationalisation policies get under way.

Mr. Deputy Speaker

Order. May I remind the right hon. Gentleman not to broaden the debate too far?

Mr. Redwood

You are right, Mr. Deputy Speaker. I am naughty and sorry, so let me return to the point at issue—inheritance tax. Conservative Members approach the subject from the proposition that as a wealth tax it is not a very desirable tax. It does not seem pleasant to tax people even in death who have been taxed quite enough during their lifetime while they were earning and saving the money in the first place.

Mr. Burnett

It is a lifetime tax as well.

Mr. Deputy Speaker

Order. I must tell the hon. Gentleman that he should know the procedures of the House by now, and that if he wishes to intervene, he must do so with the permission of the right hon. Gentleman who has the Floor.

Mr. Redwood

I am grateful once again for your wise guidance, Mr. Deputy Speaker.

I wish to take up with the Paymaster General her extraordinary statement that inheritance tax is moral and fair, so that anyone who tries to pass on their primary residence to their children is somehow guilty of an immoral act against the state that should be stopped by the imposition of the tax. People work extremely hard over many years in this country to buy their primary residence. They take great pride in their ownership of it and they want to be able to pass it on to their child or children in death. I see nothing wrong in that: it is an excellent expectation and an important part of the property-owning democracy from which we all benefit. I therefore take exception to the idea that it is somehow against the rules or unsporting. The Paymaster General has not understood how far house prices have risen and how even modest dwellings throughout the south and in parts of the north and midlands are now well above the tax threshold for inheritance tax.

Mr. George Howarth (Knowsley, North and Sefton, East)

I am listening carefully in an attempt to understand the logic of the right hon. Gentleman's argument. To follow it a little further, if someone dies with a property in negative equity—in other words, the amount still owed on it is greater than its value—does the right hon. Gentleman believe that the child who inherits the property should be charged with making up the difference between what is owed and what the property is worth?

Mr. Redwood

No, I do not. I do not think that children should have the sins of their parents visited on them, and it would be a foolish bank or building society that allowed circumstances to develop in that way without having any other security or guarantee. I strongly urge banks and building societies to lend only a reasonable proportion of a property to protect themselves in the likely event of the Government creating a boom-and-bust in housing to go along with their boom-and-bust in telecommunications, manufacturing and pensions, which we have seen to our cost in recent years. My worry about the measures before us is just that—that the Government are now targeting the housing market with a view to getting prices down, but that they may be too successful and produce exactly the sort of problems to which the hon. Gentleman referred. That will not be to his political advantage. On the specific matter that he raised, children should not have to make good those payments unless they were party to the transaction and offered guarantees or pledges of their own free will when the agreement was originally designed.

I urge the House to get the Paymaster General to think again about this matter. She is being mean-minded and I do not believe that the schemes that we are talking about are immoral or unreasonable. They meet a perfectly sensible need in the marketplace for people to plan their tax affairs and pass on some of the assets that they have worked hard to accumulate over the years. To answer my own intervention on my hon. Friend the Member for Arundel and South Downs (Mr. Flight), I should have thought that those schemes are less immoral, in the Government's own terms, than some elaborate offshore schemes. I take no exception to offshore schemes, which can be sensible and are usually perfectly legal, but it is odd that a Government who set such store by stopping any tax loopholes, as they call it, but who allow in their ranks Ministers who freely use offshore schemes, should then say that much poorer people struggling to buy a semi-detached house in an expensive part of the country are not allowed to use a perfectly reasonable scheme to pass that on.

I hope that the Paymaster General has realised how high house prices have risen in Bristol recently, because many of her constituents will be affected. I can assure her that in Wokingham, where people are not rich but work hard and have to pay a lot of money to live because of the cost of housing and the cost of living, many of my constituents will be caught by inheritance tax, yet no one could say that they were rich in the way that some of the Paymaster General's right hon. and hon. Friends in the Government are rich. I hope that the right hon. Lady will withdraw this petty and mean-minded new clause.

Mr. Jonathan Djanogly (Huntingdon)

I support the views of my right hon. Friend. The Paymaster General gave an accurate but complicated explanation of a position that affects many thousands of people in this country and relates to the income and estates of many.

I should like to describe the position in plain English. Grandma gifts her house to her son, who decides to live with granny and look after her. As a result, grandma has not made the gift for tax purposes, it stays in her estate, and everyone except the taxman is the worse for it. That seems utterly ridiculous. To avoid the tax, the family has to split into two homes, breaking up the family unit into two houses. Granny will probably be looked after by social services, the cost of which will be more than the tax paid out in the first place. If granny happens to live in the south of England, she is taxed for being a southerner. House prices are more expensive in the south, so the tax will be greater.

Indeed, at a time when we need to share our houses more and should be keeping family units together by encouraging people to stay with their families even if only because—there are lots of other good reasons too—we are short of houses, particularly in the south, we are in fact encouraging the break-up of families for no good reason. This tax, particularly as it affects homes, is unfair and senseless and should be abolished instead of being patched up by this lousy new clause.

Mr. Bercow

My hon. Friend the Member for Huntingdon (Mr. Djanogly) movingly describes the plight of over-taxed granny under the Labour Government, and he is entirely correct. I do not myself have a granny, but I feel sure that if I did, she would strongly oppose new clause 7 and would have good reasons to justify her position.

I was rather taken aback both by the fact of the introduction of the new clause and the manner in which the Paymaster General sought to commend it to the House. It seemed obvious that there was considerable irritation in the Inland Revenue and in Her Majesty's Treasury about the alleged sauce—I use that word advisedly—of taxpayers who had sought to avoid or minimise a burden by a contrivance that was perfectly legitimate under the law. In other words, Ministers are upset because they have not been able to plan, with Kantian perfect information, for every scenario. There are eventualities in which citizens are able either entirely to avoid a burden or to keep it to a much lower level than the Government would favour.

I say three cheers to that, and I confess that one reason—probably the principal reason—why I oppose new clause 7 is that I oppose the whole monstrous apparatus of inheritance tax. I do not seek to argue my case according to the intricacies of the tax or the arguments about revenue raised or forgone. My view is that it is fundamentally immoral and unethical.

My only criticism of my right hon. Friend the Member for Wokingham (Mr. Redwood)—I scarcely volunteer criticism of him on any occasion—is that he was guilty of a certain understatement of his case. If he had said what he said a little more forcefully—perhaps with a degree of crudity that was lacking from his presentation—his stance on this important matter would be all the clearer.

I am glad that the hon. Member for Yeovil (Mr. Laws) urged something of a wider review and debate. He was justified in doing so. He challenged my party—without giving any particular idea of the stance of the Liberal Democrats—to say where we stood overall on inheritance tax. I am against it, and I want to scrap it.

Mr. Deputy Speaker

Order. I understand the temptation felt by the hon. Member for Buckingham (Mr. Bercow), but the hon. Member for Yeovil (Mr. Laws) began to lead us astray on this matter, and I must remind the House that we are dealing not with inheritance tax as a whole but with new clause 7.

Mr. Bercow

You know, Mr. Deputy Speaker, that I never knowingly behave badly. My poor conduct is always entirely inadvertent, and there is nothing better than to be brought to book by your kindly but authoritative ministrations. That is what has happened to me, and I make no protest about it.

On behalf of my constituents, many of whom have already raised their anxieties about new clause 7—others can be confidently expected to do so on Saturday in Market Hill—I inveigh in the strongest possible terms against new clause 7. If people are using the device of gifts without reservation to circumvent the frankly sinister and oppressive designs of this tax-raising, pocket-plundering, petty-minded, socialistic-oriented Government, I say three cheers to them. Unite, and fight new clause 7.

2.15 pm

Mr. John Baron (Billericay)

I wish to raise a couple of points with the Paymaster General. The ramifications of any new clause—indeed any legislation—need to be properly thought through. What thought has been given to the effect that new clause 7 will have on the equity release market? There is little doubt in my mind—my hon. Friend the Member for Arundel and South Downs (Mr. Flight) briefly touched on the point—that it will lead to a dramatic increase in equity release mortgages, schemes and loans.

We all know that the industry got off to a bad start not so long ago, with many sharks operating in the market. Has any consideration been given to whether the market should be regulated to ensure, at the least, that fair play is done and seen to be done? The schemes will be considered by many vulnerable people in the autumn of their years who are thinking about how best to release equity from what, given that the equity markets have not done so well recently, is probably their main investment. What are the Government going to do to ensure that their nudging forward of the equity release market—the interest in the market will be quite significantly increased in some instances—will not mean that vulnerable people will be taken advantage of, particularly given that many of them may live on their own and need good advice? The industry needs to be properly run and regulated, and I ask the Paymaster General to tell us her thoughts about that. What action do the Government intend to take to ensure that there is fair play in the market?

Secondly, I want to discuss the idea that it is somehow perfectly immoral to avoid this tax. None of us wants to see legitimate tax avoided, but I think that the Paymaster General has completely underestimated the extent to which house prices have increased. My hon. Friend the Member for Arundel and South Downs mentioned that between 1.5 million and 2 million houses fall into the inheritance tax bracket. Statistics and studies exist that suggest that the figure is greater than that. No one really knows. It is completely wrong, however, to suggest that when people who have paid tax throughout their lives and simply want to hand on their assets to their children, it would be somehow immoral not to tax them. The Government need to re-examine their thinking. The new clause would tighten matters even further. It is, in effect, a new tax, whatever the Paymaster General may say.

Mr. Bercow

My hon. Friend is aiding our deliberations. In referring, as the Paymaster General did, to people who are rich enough to pay inheritance tax, was she including in her categorisation every member of the Cabinet and most members of the Government?

Mr. Baron

I completely agree with that. The Paymaster General would also include in that threshold a large swathe of teachers, nurses and all those who work in public service, particularly in the south of England. I should appreciate her deliberations on whether that is right.

My hon. Friend the Member for Huntingdon (Mr. Djanogly) made the excellent point that not enough thought has been given to the effect that the new clause may have on the break-up of families and homes. The Government are in complete crisis with regard to the care home sector, in which something like 45,000 to 50,000 beds have been lost because of the bureaucracy and regulation that they have introduced. This measure will not help that situation. No one knows the exact figures or the extent, but it could lead to a premature break-up of a home simply because the arrangement will no longer be available whereby a parent—an elderly person, perhaps—could live within the home that had been gifted. That may make the premature selling of the house to realise assets a reality. I hope that the Government have given that some thought, and I look forward to hearing from the Paymaster General.

Dawn Primarolo

The new clause applies to an avoidance scheme used by married couples. It has nothing to do with grannies, grandsons or children; it specifically deals with the exploitation of the inheritance tax rules, especially by married couples.

Mr. Djanogly

Will the right hon. Lady give way?

Dawn Primarolo

If the hon. Gentleman will wait, I shall be happy to give way in a moment, but we need to set out a few facts clearly.

We are not discussing whether the Conservative Opposition are in favour of inheritance tax, although I should be delighted to have such a debate. Despite the fact that inheritance tax was introduced by their Government—

Mr. Djanogly

Will the right hon. Lady give way?

Dawn Primarolo

No. I will give way to the hon. Gentleman in a moment, but I want to make a few points so that we can be clear about what we are discussing, rather than what Opposition Members think—

Mr. Djanogly

On a point of order, Mr. Deputy Speaker. It is right to point out that the provision may relate to grannies and that husbands and wives—

Mr. Deputy Speaker

Order. I must tell the hon. Gentleman reprovingly that he has been a Member of this place long enough to know the difference between a point of debate and a point of order. That was not a point of order.

May I remind the Minister that I had already suggested that discussion of inheritance tax in principle is outwith the scope of the new clause?

Dawn Primarolo

I agree, Mr. Deputy Speaker: whether individual hon. Members like or dislike inheritance tax is not the subject of the debate. The subject of the debate is whether tax rules that were introduced in 1986 and have been variously amended should fairly apply to all taxpayers. Some taxpayers comply with their tax obligations, so the Government have responsibilities when others find ways around their compliance obligations.

The point is whether the Government of the day should be required to ensure fairness between taxpayers. I understand the issue in terms of fairness. Tax rules should apply fairly to taxpayers who are subject to them and it is the Government's duty to ensure that that happens.

Mr. Flight

rose—

Dawn Primarolo

I shall give way to the hon. Gentleman, but then I shall deal with house prices, equity release schemes and some of the other points that have been made.

Mr. Flight

Will the Minister confirm that, putting it in simple language, the provision is about, for example, a couple who, hoping that they will both live for another seven years, give their house worth £400,000 to their children, but set up a trust so that whoever outlives the other is still able to live in the house until they die? I think that describes the main circumstances, and no one would regard that as either cheating the system or avoidance.

Dawn Primarolo

There are many sections in the inheritance tax rules; one is called "Gifts with Reservations". The Court of Appeal decision in the Eversden case paved the way for artificial schemes that enable married couples to put their assets beyond inheritance tax estates while retaining the enjoyment of them for their lifetime. We want to correct that. As I said, the new clause is specifically about that issue. Opposition Members are getting too worked up. Although I understand the views of Opposition Members about other aspects of inheritance tax, we are discussing only whether a set of rules should apply to all equally.

Mr. Laws

rose—

Dawn Primarolo

I want make a point about property prices and the inheritance tax threshold. If that does not answer the hon. Gentleman's point, I shall be more than happy to give way to him—as always.

The inheritance tax threshold is still about twice the average UK house price. Only about 5 per cent. of estates will pay inheritance tax this year. However, let us look at the question the other way round: how much has the inheritance tax threshold moved since its introduction in 1986, and what has happened to house prices in that period?

The latest statistics, for quarter one, show that house prices have risen since 1986 at much the same rate as the threshold—about 250 per cent. The UK average house price is about £140,000. Even in London and the southeast, prices are still below the threshold. The figure for Greater London is £215,000 and for the south-east, excluding London, it is £190,000. The rules are consistent with the movement of the threshold since its introduction in 1986 and its reflection in house prices. The question of property prices is not directly relevant to the new clause; the point at stake is that the movement of the threshold is keeping pace with prices.

Mr. Laws

The Paymaster General said that she estimates that about 5 per cent. of estates are above the threshold and will be caught by inheritance tax. Will she tell us how that has changed over the last 10 years? What is the size of the increase?

Dawn Primarolo

I have seen the figure, but I apologise to the hon. Gentleman for being unable to give it to him immediately. I shall be happy to send him the figures. By estates, I mean the number liable to pay inheritance tax, which may not necessarily be on property. Significant numbers of people pay inheritance tax that is not on property. Currently, about 29,000 estates are in the category; movement is more or less static, although I cannot remember the exact figure.

Mr. Bercow

The Government tend to increase thresholds in line with inflation, whereas the overall rise in property prices over a period is appreciably greater than that. I hope that the Paymaster General will reflect on that point in further deliberations. However, if the right hon. Lady's main criticism of Opposition Members is that we have identified the wrong member of the family tree, and that it is not in fact granny, but mummy, daddy, hubby and wife who are being clobbered, that is cold comfort.

Dawn Primarolo

May I tell the hon. Member for Yeovil (Mr. Laws) that, if my memory serves me right, the number in the threshold rose by about 3,000 last year—more than indexation or the rate of inflation would have required? It is not unreasonable to look back over a period and to take 1986 as the base year.

Mr. Baron

rose—

Dawn Primarolo

May I answer the hon. Member for Buckingham (Mr. Bercow) before moving on? On the point that he makes about the application of the new clause, I was simply seeking to help Conservative Members. I understand that they wish to abolish inheritance tax, and I look forward to finding out where the £2.4 billion that the Government currently raise from inheritance tax would come from. The hon. Gentleman will want to question many aspects, but I was seeking to correct Conservative Members by saying that the new clause does not deal with those issues; it specifically and narrowly deals with issues that arose from a particular case involving married couples.

2.30 pm

Mr. Baron

The Paymaster General is being slightly selective in her figures. It is all very well to go back to 1986, but I am sure that she will accept that the period included one of the biggest house price falls in recent memory. House prices fell from their peak in about 1988 and bottomed in 1994–95, after which they picked up slowly, so such a comparison does not give the complete picture. I hope that such a price crash will not happen again. Recent history—the past eight or nine years—shows that inheritance tax thresholds lagged far behind the rise in house prices.

Dawn Primarolo

The facts speak for themselves in respect of the average house price throughout the country and in specific regions where house prices are much higher. The hon. Gentleman should consider the role of the Conservative party when in office in establishing the inheritance tax threshold. As I have demonstrated, the increase in the threshold has kept pace with the increase in house prices, but it is not the role of inheritance tax to help to regulate house prices; its role is fairly to tax assets according to rules that operate for all the people who are caught by them.

Mr. Burnett

The Paymaster General talks about the rules being interpreted fairly, but the capital taxes office sometimes interprets the rules in a draconian manner. I ask her to give some thought to such matters because, sometimes, entirely innocent transactions are caught—for example, the outright gift of a dwelling by parents to their children, where the parents move out, but move back two years later to be nursed by the children. Surely the capital taxes office should not apply the reversion of benefit rules, which will be amended by the new clause today, in such cases?

Dawn Primarolo

I will certainly reflect on the point, but I am trying to explain the new clause and its narrow application to married couples.

I wish to make two final points, the first of which relates to what the hon. Member for Billericay (Mr. Baron) said about home reversion plans. He may not know this, but his hon. Friend the hon. Member for Eddisbury (Mr. O'Brien) is aware—we debated it in a statutory instrument Committee only a few days ago in relation to the transfer to the Financial Services Authority of the regulation of mortgages and other financial products—that the Chief Secretary to the Treasury announced that a consultation paper, in which the options for regulating the sale of home reversion schemes would be examined, would be published this autumn.

Various aspects of the home reversion market will be considered, as mortgage-backed equity release schemes will fall within the scope of the FSA. So the answer to the hon. Gentleman's question is, yes, the Government are considering those wider points, and we enter the consultation with an open mind to hear what the industry has to say about the important role of such products and what their future may be. That issue was also raised the hon. Member for Arundel and South Downs (Mr. Flight) and the hon. Member for Eddisbury, who takes a particular interest in it and is knowledgeable about it.

Mr. Baron

May I urge on the Paymaster General the importance of the issue and the urgency of the situation? If one believes the latest figures, there is no doubt that the whole industry is growing very rapidly, as is the practice of using equity release schemes. Often, as we all know, very vulnerable people are involved, so I ask her to ensure that the Government put their full weight behind the issue and that it is looked at very quickly indeed.

Dawn Primarolo

If the hon. Gentleman scrutinises the record of debates in the Statutory Instrument Committee he will see that the new FSA regulatory regime was discussed. Hon. Members on both sides of the Committee agreed that the Government must ensure that future regulation of this important and complex area is correct. We recognise the importance of the issue, so to legislate in haste may not be the best way forward. The Chief Secretary to the Treasury issued more details in a press release on 5 June, and I am sure that the hon. Gentleman will be interested in reading it.

The hon. Member for Arundel and South Downs referred to the fact that the new clause will come into force only from June 2003. The tax-effectiveness of earlier Eversden-type schemes is still dependent on the courts' final view of whether schemes work under the old law. The House of Lords will decide whether to agree to a further appeal, but my advice is that, although the Inland Revenue is confident about the interpretation of the old law it believes that enough tax is at stake to lead us to act now to prevent any subsequent arrangements from being made. However, pre-June 2003 issues are clearly matters for the courts.

Mr. Baron

I wish to return to the potential for an increase in the break-up of homes. Has any assessment been made of whether the new clause will have any tangible effect on the tendency to break up or disperse family units, or certainly family homes, as the Government would have to pick up the cost of that?

Dawn Primarolo

Again, I remind the hon. Gentleman that we are dealing with plans, which are at an early stage, to provide lifetime protection from any inheritance tax on those estates.

I understand that such plans are made considerably in advance of any discussion or requirement regarding the vulnerabilities that might exist in the household in future. The proposals are long planned and for the lifetime, as I have suggested. They are an attempt to remove from inheritance tax rather than a response to specific circumstances. The measure on specific avoidance by married couples is narrow. It is sensible and it is fair to taxpayers who comply with their obligations. That is the aim of the new clause and I commend it to the House.

Question put and agreed to.

Clause read a Second time, and added to the Bill.