HC Deb 07 July 2004 vol 423 cc864-70
Mr. Flight

I beg to move amendment No. 224, in page 23, line 40, at end insert—

'(5) This section shall not apply to the income of a settlement in any year of assessment if the trustees of the settlement have elected that section 691(2) of the Taxes Act (certain income of maintenance funds for historic houses not to become the income of the settlor etc) shall have effect in the case of—

  1. the settlement, or
  2. any part of the settlement in relation to that year of assessment'.

Madam Deputy Speaker

With this it will be convenient to discuss the following amendments:

No. 228, in schedule 15, page 366, line 4, at end insert—

'(4) If

  1. within two years of the death of the chargeable person the relevant property is transferred to a settlement, and
  2. direction is given in respect of the property under the provisions of paragraph 1 of Schedule 4 to IHTA 1984 (maintenance funds for historic buildings),

sub-paragraph 2(b) shall not apply to the property and the chargeable person shall be treated as the settlor of the property under the provisions of Schedule 4 to IHTA 1984.'.

No. 229, in schedule 15 page 366, line 27, at end insert—

'(4) If—

  1. within two years of the death of the chargeable person the relevant property is transferred to a settlement, and
  2. a direction is given at respect of the property under the provisions of paragraph 1 of Schedule 4 to IHTA 1984 (maintenance funds for historic buildings),

sub-paragraph 2(b) shall not apply to the property and the chargeable person shall be treated as the settlor of the property under the provisions of Schedule 4 to IHTA 1984.'.

No. 230, in schedule 21 page 399, line 10, leave out from 'settlement' to end of line 16 and insert

'in relation to which a direction under paragraph 1 of Schedule 4 to the Inheritance Tax Act 1984 (maintenance funds for historic buildings) has been given.'. No. 231, in schedule 22 page 407, line 23, leave out from 'settlement' to end of line 30 and insert

'and a direction under paragraph 1 of Schedule 4 to the Inheritance Tax Act 1984 (maintenance funds for historic buildings) was given in relation to a relevant earlier disposal.'.

Mr. Flight

These five amendments arise from discussions that we have had with the Historic Houses Association and relate to maintenance funds. Hon. Members will be aware that 20 or so years after the second world war the UK lost many historic houses. There was really an all-party agreement thereafter. First, people were required to maintain their historic houses; they could not pull them down or let them fall down. Secondly, some fiscal assistance was given to that end, which is where maintenance funds come in, to keep the houses in good repair. We are not talking about clever tax avoidance vehicles. Once houses are owned by maintenance funds, there is no way in which individuals can take them back and get up to clever tricks.

Amendment No. 224 is designed to exclude maintenance fund income from the increased 40 per cent. income tax rate that will apply to trust income under clause 29. It is quite a significant cash flow cost to existing maintenance funds to have their tax rate effectively increased by some 20 per cent., especially when maintenance costs are rising, In 1997, the Labour Government introduced the ability to make an election under section 692 of the Income and Corporation Taxes Act 1988. If the election is in force, the income of the maintenance fund is taxed at 34 per cent. rather than 40 per cent. as the income of the settlor. In 1997, that benefit was far greater than it was before Conservative Governments reduced the ridiculously high rates of personal taxation.

When the notes on the Finance Bill were published—specifically on the reforms of the taxation of trusts, and at the same time as the announcement of the proposed increase in the rate applicable to trusts to 40 per cent.— the recommendations contained suggested provisions to prevent the increase in tax applying to trusts for the vulnerable but not for vulnerable historic houses. There was no reference to the position of maintenance funds.

I submit that maintenance funds for historic houses should be similarly treated. They were set up by the Labour party to give relief from capital transfer tax for property transferred to such trusts. The proposals had all-party support, as did the introduction in 1997 of the right to elect for the income of the maintenance fund to be taxed at the rate applicable to trusts rather than the settlor's rate. The need for maintenance funds has been reduced by the introduction of inheritance tax and potentially exempt transfers in 1986, but they remain an important vehicle for the preservation of heritage. People often die earlier than they expect and historic houses can end up having to be sold and turned into flats.

Amendments Nos. 228 and 229 are designed to prevent the inheritance tax liabilities otherwise payable by the donor on his death following an election if the donee transfers the property to a maintenance fund. This interrelates to the subsequent pre-owned assets proposals.

Amendment No. 228 is similar in form to amendment No. 102, which we discussed in Committee. The amendment has been redrafted because the effect should be to make the election to avoid the pre-owned assets charge and then have the option of either paying the inheritance charge or having exemption by transferring to a maintenance fund. As drafted, the clause appears to enable the Revenue to reclaim the pre-claimed assets charged if the property is transferred into a maintenance fund.

Amendment No. 229 is essentially in the same form, but relates to intangible property, the election of which is dealt with in a separate paragraph.

The argument that the Paymaster General advanced in Committee for rejecting the principle of permitting maintenance funds to be created for property subject to a schedule 15 election was that it would be wrong to treat such property any differently from property in a potentially exempt transfer that had failed, either because the donor fails to survive seven years or because of reserved benefit. The right hon. Lady's point was that the taxpayer should not have his cake and eat it in this context.

During consideration of the Finance Bill 1986 in Committee, the then Conservative Minister advanced a similar argument when rejecting a proposal put forward by a Labour Member to commit the owner of property subject to a failed PET to transfer it to a maintenance fund. In 1986, there was some merit in the argument that the situation to be relieved was of the taxpayer's own making—he did not have to risk the failure of his potentially exempt transfer—but a donor who is now subject to a pre-owned assets charge is not in the same position. He will almost certainly have made what the Revenue said in 1986 was not a gift with reservation, and that would remain effective if he lived for at least seven more years. He is now told that he undertook a contrived arrangement, and must pay a penalty tax to deter others. Whether he pays the tax or elects to suffer the inheritance tax charge on his death, the effect is the same for the property and the maintenance of the historic house. Far from his having his cake and eating it, he is in a no-win position. Surely, he ought to be entitled to elect to avoid the inheritance tax charge by taking a conditional exemption and maintenance fund relief. I am aware that the Revenue is in discussions with the Historic Houses Association, and if the Paymaster General is not willing to accept my amendments, I hope that she agrees that maintenance funds should be further discussed.

Amendments Nos. 230 and 231 relate to clauses 111 and 112, which introduce anti-avoidance provisions that are also dealt with in schedules 21 and 22. Clause 111 precludes capital gains tax holder relief on transfers to settlor-interested settlements, and clause 112 precludes principal private residence relief from capital gains tax on the sale of houses that have been the subject of a previous claim for capital gains tax holder relief. Each schedule introduces an exemption for maintenance funds. In the case of schedule 21, it is clearly important that the relief should continue to apply to owners who set up a maintenance fund throughout their lifetime because it is inevitable that the settlor will have interest in the fund to maintain his house. Both reliefs are expected to apply only if an election under section 691 of the Taxes Act 1988 is in force. Under that election, the income of the maintenance fund is subject to the rate applicable to trusts, and is not taxed as the income of the settlor. The Government have just made section 691 redundant. If the rate applicable to trusts is now the same as for individuals, there will be no point in making a section 691 election.

Capital gains tax holder relief on lifetime transfers to maintenance funds should not be dependent on the existence of an election that is now defunct, and neither should the preservation of principal private residence relief. If amendment No. 224 is rejected, the remaining amendments in the group are necessary to ensure that the reliefs for maintenance funds in schedules 21 and 22 are not dependent on a defunct election. In any event, whether or not the settlor makes a section 691 election, the rate of income tax payable by the fund trustees, and therefore the rate of capital gains tax, has no other effect on the status of the maintenance fund. The availability of capital gains tax holder relief for transfers to maintenance funds and the preservation of principal private residence relief should depend on whether or not the fund has been designated under schedule 4 of the Inheritance Tax Act 1984.

My amendments are probing and highly technical. As I have said, if the Minister does not see fit to accept them, I hope that she will assure the House that the issues that they raise will be considered in the discussions between the Revenue and the Historic Houses Association on the wider implications of the relevant tax changes.

Dawn Primarolo

I shall not accept the amendments tabled by the hon. Member for Arundel and South Downs (Mr. Flight), and shall remind the House of the purpose of heritage maintenance funds and trusts: they are designed to maintain historic buildings and other heritage assets. There are fewer than 150 such trusts in the UK, but the Government understand and value their role in preserving the nation's historic buildings and works of art. In his amendments, the hon. Gentleman attempts to tie a beneficial structure with a narrow purpose to the pre-owned assets that we shall discuss later. He is therefore inadvertently allowing some people with access to creative tax planning to reopen their heritage maintenance funds and plan their affairs, following changes introduced by the Bill, so that they are no longer liable for inheritance tax.

2.15 pm

As I have said, we accept the need for heritage maintenance funds, which is why the Government continue to provide certain tax privileges for them that are not threatened in any way by the Finance Bill. The hon. Gentleman's amendments would expand those privileges. Property may be transferred into a settlement free of inheritance tax if the income from that property is used for the preservation of land, buildings or objects of artistic or historic interest. Payments made by a heritage maintenance fund and used for the maintenance of a property are not treated as the income of the person occupying that property. Heritage maintenance funds feature in a number of exclusions from capital gains tax anti-avoidance rules. The Government's position is therefore clear: we support the use of these funds for genuine heritage purposes, but we will not agree to amendments that seek to extend those privileges or allow a small number of extremely wealthy people—there are only 150 trusts—to have a vehicle to circumvent the requirement that property and works of art should be subject to inheritance tax or treated as pre-owned assets.

The hon. Gentleman has not explained why the current structure of the heritage maintenance funds does not work or why it should be amended. He has not revealed any flaws in it or a lack of support for the maintenance of historic buildings. His amendments seek to allow greater benefits than is justified, so I shall not support them should he put them to a vote. However, he sought confirmation of something that I confirmed earlier in Committee. Yes, the Inland Revenue has discussions with the Historic Houses Association. We have similar discussions with the Department for Culture, Media and Sport about how to preserve our heritage, works of art and designated property or land while maintaining the principles and the balance of the tax system. I cannot assure the hon. Gentleman that his amendments will eventually be accepted in those discussions, but I can reassure him that the Government will continue to play an active part by engaging with all relevant bodies to ensure the continued preservation of this country's heritage. The taxpayer can play a role in that, whether through tax exemptions or specific structures. On that basis, I ask the hon. Gentleman not to press the amendment to a vote, but if he feels that he needs to do so, I would ask my hon. Friends to oppose the amendment.

Mr. Flight

The Paymaster General failed to respond to the first and last of the territories that I raised. The first territory has nothing to do with the pre-owned assets charge, and simply concerns the rise in the tax charge on maintenance funds from 34 to 40 per cent.

The full programme of Government changes to the taxation of trusts makes sense in that a full look through will occur, and taxation will fall to the tax rate of the beneficiary, which seems to be a sensible approach. However, that approach is not relevant to increases to the tax rate on maintenance funds. It is inconsistent for the Government to leave the tax charge on vehicles for the vulnerable at 34 per cent., while increasing the tax charge on vehicles for looking after properties. Although buildings are not as important as individuals, it seems unreasonable not to consider that point.

Dawn Primarolo

The hon. Gentleman misses the point. The income and gains arising in respect of the property and heritage maintenance fund will be taxed either at the marginal tax rate of the person who settled the property into the trust or the trust-applicable rate. The basic rate taxpayer will pay tax at the basic rate, and the higher rate taxpayer will pay tax at the higher rate, which is perfectly reasonable. The hon. Gentleman is asking for the higher rate taxpayer to pay at a lower rate and for the basic rate taxpayer to pay at the basic rate, which cannot be fair.

Mr. Flight

The Paymaster General misses the point that those vehicles are not tax wraps from which individuals benefit, because the money goes into the maintenance of a property rather than into an individual's pocket. The point of maintenance funds is to allow people both to own and to look after an historic property. The situation is riot analogous to a trust where an individual is the beneficiary and draws the income for their personal benefit.

The second territory is the technical point that the section 691 election becomes redundant as a result of the changes to the taxation of trusts, and it seems to me that it is technically rather inappropriate to have exemptions continuing that are dependent on tax issues that have gone away.

The Paymaster General does not understand this point as I understand it, but if she were involved in the wretched business of maintaining an historic house—not that I own one—perhaps she would. People structure their affairs in various different ways in order to ensure that their properties are looked after and handed on to the next generation to look after. Those arrangements are not about pulling a fast one on the Revenue, and essentially concern the maintenance of historic houses.

Those who were unwise enough to believe what the Inland Revenue told them and the implication of the Government's actions, which we shall debate shortly, and who chose to structure their arrangements in order to fall into the category that the Government are now attacking with their retrospective pre-owned assets tax, will not have enough money to pay for their properties, which will have to be disposed of. If that is what the Government want, then that is fine.

The issue concerns worthwhile buildings rather than people, and a fairer tax system would provide a transition relief to allow people to choose to alienate themselves from their property, which they could put into a maintenance fund with money to look after it. People might have done that in the past, if they had known that the rules would change retrospectively. The situation does not concern people having their cake and eating it, and one must examine who benefits from the individuals involved, who are not individual beneficiaries, alienating the assets.

I tabled the amendments as probing amendments, and in the hope that reasonable people in the Revenue would think about them further. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

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