Finance (No. 2) Bill

Public Bill Committee, 13 June 2006.

Standing Committee A

Clause 147

John Healey (Labour, Wentworth)

Good morning, Mr. Benton. I welcome you to the Chair on this now sunny morning as we come to part 5 of the Finance Bill. The clause provides for a new basis for determining the market value of oil for petroleum revenue tax purposes related to the non-arm’s length disposal of oil. The changes are being introduced because the opportunities that the current market value rules provide give considerable scope for tax arbitrage. The current rules that rely on a range of market values during a month are being replaced therefore under clauses 147 and 148 with prices based around what will be termed the notional delivery day for the majority of crude oils. They will be known as category 1 oils. For other blends of oil when prices are less readily available, Her Majesty’s Revenue and Customs will work with producers of those particular blends to arrive at an agreed and acceptable valuation method.

Under current rules, as the Committee may be aware, the market value of oil for non-arm’s length disposals—in other words, generally disposals within a wider group—is arrived at by taking an average of arm’s length prices during a month. That calculation method allows companies to track prices over a month and decide whether to dispose of oil at arm’s length or non-arm’s length depending on which was more tax-efficient and produced the lowest tax charge. The result was a significant tax loss to the public purse, and contractual and sales decisions based on tax considerations rather than commercial considerations.

The new rules stop such practices by valuing non-arm’s length sales of oil around the prices available two days before the delivery date, the delivery date itself and two days after, the so-called 2-1-2 method. That is commonly used in commercial contracts. New rules will be introduced to arrive at a delivery date for all circumstances when oil is disposed of at non-arm’s length. Under those rules, the delivery date will be the date of completion of load or the date of the bill of lading, whichever is appropriate.

The pricing method will apply to the major blends of oil for which there are commonly quoted daily prices. They will be known as category 1 oils. Other oils where such prices are less available or not appropriate will be known as category 2 oils, and HMRC and the producers of such oil will reach agreement on the most appropriate method for valuing such oils. On that basis, I commend the clause to the Committee.

Paul Goodman (Conservative, Wycombe)

Welcome to the oil section of the Finance Bill, Mr. Benton. I know that it will be an unbelievably exciting experience for you, as it will be for the rest of us. The heading “New basis for determining market value” is probably the most eye-catching of the headings of clauses 147 to 155 that cover the oil section, although that might not be saying very much. It must be said that some of the remaining clauses, especially clauses 153 and 155, are more significant.

I must confess that I have recently become used to Ministers moving clauses formally, so I was not necessarily expecting to hear the lucid explanation of the clause that the Financial Secretary has just given. However, since I have, I wish to ask him a couple of questions. The provisions are presented simply as an anti-avoidance clause. If it is such a clause, obviously we welcome its aim. It is important to eradicate attempts to take unfair advantage of the tax rules. I should like to hear an assurance from the hon. Gentleman that the clause is unconnected with the other tax changes that are proposed under the remaining clauses. Perhaps he would give us an idea of how much revenue it will raise.

Stewart Hosie (Scottish National Party, Dundee East)

It is useful to consider what the Treasury Committee said about the pre-Budget report. It welcomed the Treasury’s promise of no further increases in North sea oil taxation in the length of this Parliament, not least because any further subsequent increases might increase uncertainty about future taxation of oil companies and might serve as a disincentive for future investment in the North sea.

In January, the Institute for Fiscal Studies’ green budget pointed to the problem of the type of tax regime introduced in 2002 and the supplementary charge being introduced. They said that

“the neutrality of this tax regime rests crucially on the constancy of the tax rate. If the tax rate that applies to future returns is expected to be higher than the tax rate at which upfront investment costs attract tax relief, then projects with a positive net present value in the absence of tax may become unattractive to investors”.

The key thing about both the Treasury Committee and the IFS is that one called for certainty and the other called for constancy. While there may be disagreements over tax rates and over new and unnecessarily complex regulation, I agree that clause 147 provides a solid and comprehensive framework for determining the market value of oil, and clause 148 provides for its introduction. I welcome the comprehensive nature of clause 147.

John Healey (Labour, Wentworth)

The hon. Member for Dundee, East (Stewart Hosie) ended rather sooner than I had expected. I thought that he was going on to add a caveat to his welcome for the mechanism set out in clauses 147 and 148 for determining market value. He calls them solid and comprehensive as a framework and I welcome that. Particularly in relation to his amendments to clause 153, we will no doubt come on to debate the nature of stability and certainty in the tax regime and how that can best be delivered or, in some cases, undermined by some of the proposals.

Suffice it to say that I emphasise to him and to the hon. Member for Wycombe (Mr. Goodman) that the measures in clauses 147 and 148 and in the two sets of clauses that are coming up, before we get on to the question of supplementary charge rates, are revenue protection measures. On Second Reading, the hon. Member for Dundee, East said in a discussion with my right. hon. Friend the Paymaster General, which was subsequently confirmed and clarified to him in a letter on 4 May, that they are revenue protection measures and are not connected with the question of the level of taxation of North sea oil and gas.

I can inform the hon. Member for Wycombe that the measures in amendment No. 147 were announced at the pre-Budget report. They were published in a discussion document for the industry in July last year. The industry has been looking at them, helping us develop the detail and expecting them to be introduced. The hon. Gentleman asked what the revenue protected will be. Alongside the announcement in the pre-Budget report in December, we confirmed that the estimated revenue protected, using the new method of calculating market valuations, will be £40 million this year,£80 million next year, £80 million the following year and £80 million ongoing.

Therefore, it is a revenue protection measure. It is necessary. It is based on the experience that we have had, not of all companies but of some companies stealing a march on their competitors by the system of tax arbitrage to which the current laws leave us open. On that basis, I urge the Committee to support the Clause and Schedule 18.

Schedule 18

John Healey (Labour, Wentworth)

I beg to move amendment No. 225, in page 98 [Vol II], leave out lines 11 to 26 and insert—

‘“(A1) Where the conditions in subsection (A2) below are met in the case of a disposal of oil by a person, section 2(5A) of the Oil Taxation Act 1975 (“the 1975 Act”) (transportation etc) is to apply in determining the amount which the person is to bring into account for the purposes of the charge to corporation tax on income in respect of the disposal as it applies (or would apply) for the purposes of petroleum revenue tax.

(A2) The conditions are that—

(a) the oil is oil won from an oil field in the United Kingdom,

(b) the disposal is a disposal of the oil by the person crude in a sale at arm's length, as defined in paragraph 1 of Schedule 3 to the 1975 Act,

(c) the circumstances are such that the price received or receivable—

(i) falls to be taken into account under section 2(5)(a) of that Act in computing for the purposes of petroleum revenue tax the assessable profit or allowable loss accruing to the person in any chargeable period from the oil field, or

(ii) would fall to be so taken into account, had the oil field been a taxable field, as defined in section 185 of the Finance Act 1993,

(d) the terms of the contract are such as are described in the opening words of section 2(5A) of the 1975 Act,

(e) apart from subsection (A1) above, the person is not entitled to a transportation allowance in respect of the oil (see subsection (A3)) in computing his ring fence profits,

(f) the person does not claim a transportation allowance in respect of the oil in computing for the purposes of corporation tax any profits of his that are not ring fence profits.

(A3) In subsection (A2) above “transportation allowance”, in relation to any oil, means any of the following—

(a) a deduction in respect of the expense of transporting the oil as mentioned in the opening words of section 2(5A) of the 1975 Act,

(b) a deduction in respect of any costs of or incidental to the transportation of the oil as there mentioned,

(c) any such reduction in the price to be regarded as received or receivable for the oil as would result from the application of section 2(5A) of the 1975 Act, if that provision applied for the purposes of corporation tax.”.'

I feel that I ought to say a few words because the Committee is owed a brief explanation of why it is necessary to produce a Government amendment to our Bill at this point.

Schedule 18 provides the necessary amendments to the Oil Taxation Act 1975 and to other enactments to bring into effect the changes to the valuation of oil disposed of not at arm’s length. The changes are set out in clause 147. The commencement and transitional provisions are set out in clause 148.

The schedule ensures that oil taxation legislation deals with the consequential effects of introducing the new category 1 and category 2 definitions for oil valuation purposes—including the move from a monthly valuation basis for all oils to valuation based on date of delivery. It also defines the date of delivery for shipped oil that is not sold at arm’s length. The schedule gives powers to HMRC to make regulations regarding the different categories of oil, together with such other regulations as are required to enable companies to arrive at the market value of category 1 oil from commercially published information. The amendment will ensure that the schedule works as intended.

Clause 149

Stewart Hosie (Scottish National Party, Dundee East)

I beg to move amendment No. 374, in page 124, line 10 [Vol I], at end insert

‘and

(f) may not be made until the Chancellor of the Exchequer has laid before both Houses of Parliament a report on the extent of tax avoidance in relation to blended oil.'.

Before the current oil price rises the sector was expected to deliver some £10.2 billion in yield to the Exchequer, based on a price level of $57.4 a barrel. My estimate is that the average price since 1 April has been about $69 a barrel, and based on that estimate the Government will gain an additional windfall, not related to the increase in supplementary charge, of between £2 billion and £2.5 billion this year. The£200 million that will be taken as a result of the changes to the blended oil regime in clause 149 may therefore seem like small beer, and they have been described primarily as anti-avoidance measures. The oil industry is peculiar, however; its capital, assets and expertise are highly flexible and, within reason, they go wherever the price and tax regime benefits them most, because there is a large number of moveable assets.

That is why I want to probe the clause by way of amendment No. 374. The explanatory notes suggest:

“The new rules will allocate a sale of blended equity and non-equity oil proportionately across production from various field interests of the oil producer.”

In terms of the definitions, equity oil refers to situations in which a company has an equity stake in the producing field, and non-equity oil refers to oil that derives from fields where the company holds no such equity stake, perhaps because the oil has been purchased.

The amendment would require that the power to make regulation with regard to attribution of blended oil should not come into force until the Chancellor has laid a report before both Houses on the extent of tax avoidance in relation to blended oil. The reason is straightforward. The Economic Secretary previously mentioned a letter to me from the Paymaster General dated 4 May, in which the Paymaster General explained that the proposed changes

“are being introduced to remove tax-driven distortions of oil company behaviour.”

On four occasions in her letter she gave further detail. She said:

“Her Majesty’s Revenue and Customs is aware that not all companies operating in the North Sea are involved in this tax-driven behaviour”.

That indicates, of course, that some companies are. She also refers to revenues being lost because of tax-driven behaviour by some oil companies. She says:

“Clause 149 has been introduced to reduce the flexibility in the current oil allocation systems, which allow oil companies to pick and choose when deciding which contributing fields are the source of a particular oil delivery and so minimise their oil tax liabilities.”

She also says:

“Companies have been exploiting the current flexibility in the allocation rules to minimise their PRT liabilities by allocating oil to non-PRT fields when the price is high and from PRT fields when the price is lower.”

That is therefore clear. It is further described inthe regulatory impact assessment, in which the Government describe manipulation of the current rules. That costs £45 million a year, with the loss of a further £35 million through the replacement of equity oil with purchased third-party oil. The industry tells us, however, that there is a technical explanation for blending, which is not simply about tax, although tax will be a consideration in any commercial transaction. I am told that blending is due to a multiplicity of fields feeding into a gathering system, each of which has a different quality or grade, which itself can change over time. On a stand-alone basis, each grade would trade at either a discount or a premium to the price of the blend, depending on whether it was of higher or lower quality than the average. Although tax is taken into consideration, there are technical reasons for blending.

Indeed, the background note in the explanatory notes provides another very useful description of the process. It says:

“A number of pipeline systems blend production from oil fields, some of which are subject to PRT and others, which are not. An issue arises for tax purposes when the oil is sold, concerning how to allocate the sale for tax purposes across the producer’s different field interests.”

It goes on to suggest that

“many small producers of oil may sell their oil entitlement to larger producers under what are termed ‘month of entitlement’ contracts. Buyers of such oil, which is not subject to PRT or supplementary charge when on-sold, can choose to satisfy sales contracts with this oil instead of their own production.”

Two issues arise. First, tax advantages might well accrue from blending, but they are the result of the blending process and not a deliberate act of tax avoidance. Secondly, following on from the description in the background note, what might the knock-on, perhaps unintended, consequences be for small producers should the large producers choose to source only from their own equity oil, and not to purchase from small producers elsewhere? Amendment No. 374 seeks to have the Government publish a detailed report on the extent of genuine tax avoidance in the sector, and perhaps to contrast and compare that with tax advantage that is gained not directly as a result of an avoidance measure but simply as a consequence of blending for good technical reasons.

Paul Goodman (Conservative, Wycombe)

I want briefly to congratulate the hon. Member for Dundee, East on having found a device that enables the Committee to find out from the Financial Secretary the main intention of companies that carry out the blending. Do they do it because they have to for technical reasons, or to what extent is it to do with tax avoidance? Just in case the hon. Member for Dundee, East was not clear—I think that he was entirely clear—I point out that we want to hear the Financial Secretary’s assessment of whether blending takes place so that the companies involved can avoid tax? Do the companies agree with his assessment? However, I warn the hon. Member for Dundee, East, although it has probably occurred to him, that I shall not be at all surprised if the Financial Secretary suggests that the hon. Gentleman might be eying a tax avoidance device a bit too favourably. We shall see.

John Healey (Labour, Wentworth)

The hon. Member for Dundee, East began his comments on the amendment by making a series of much wider points. In many ways, I do not want to anticipate the debates on the supplementary charge rate. As we explained in the pre-Budget report, the tax changes, the supplementary charge rate and the package that came with it were made in response to the increase in oil prices over the medium term. They were not a response to short-term fluctuations and spikes, as he indicated. Principally, the measures were taken to ensure that the rate of tax and therefore gain to the British taxpayer and Exchequer is appropriate and fair. In other words, it will ensure a fair share of return to the UK public for the exploitation of a natural national resource. In a sense, the changes reflect the current situation and balance of factors rather than the assessment that we made and the package that we introduced in 2002. That is why we believe that the overhaul is justified, necessary and sustainable. We think that it sets an appropriate level of taxation for North sea oil and gas for the duration of this Parliament.

I shall speak to the more specific nature of the hon. Gentleman’s amendment. As he explained, it seeks to delay the implementation of clause 149, which seeks to ensure that the tax price for a disposal of blended oil is allocated appropriately based on the producer’s field entitlements. As I indicated earlier, and to which he referred, he raised the matter on Second Reading with my right hon. Friend the Paymaster General. On4 May, in a letter to him, she explained in much more detail the reason for clause 149.

I hope that my explanation will deal also with the point made by the hon. Member for Wycombe. Essentially, the issue arises because a company’s lifting of blended oil may be derived from three different sources: from fields subject to petroleum revenue tax, from fields not subject to petroleum revenue tax and from oil bought in from other producers. The hon. Member for Dundee, East indicated the degree of flexibility in the current system of allocations. In effect, there are few, if any, rules that govern the way in which those allocations are made for tax purposes. In practice, blending goes on, and clause 149 will mean that the commercial benefits and practices derived from blending will not be affected.

A problem arises with the allocation for tax purposes of oil that goes into a particular blend. The existing rules for allocating blended oil to particular fields for tax purposes are too flexible; some companies have been able to allocate oil to non-PRT fields and to buy it in when the price of oil is high, and then to allocate it to PRT fields when prices are low, irrespective of from where the oil that composed the blended oil derived. Those allocations do not reflect therefore the actual proportions that each field contributes to a particular lifting of oil.

Her Majesty’s Revenue and Customs consulted the industry widely on that issue, and we set out the issues in the discussion document that we published in July last year. Since then, the matter has been discussed fully with the industry, including with oil terminal operators. The industry confirmed those discussions, and HMRC’s further analysis confirmed the extent of that tax-driven practice. The analysis and discussions support fully the extent of the protection required and the impact of our proposed measures. As the Red Book explained, we expect those measures to protect revenue of £20 million this year, and £35 million next year and £35 million ongoing in the following years.

The hon. Member for Dundee, East focused his amendment on the date of implementation. Indeed,the industry was concerned early on—following the discussions kicked off in July 2005—that the Government might want to implement the measures on 1 January 2006. It told us that that would give companies little time to reorganise their internal compliance procedures. At the time of the pre-Budget report, we announced that the changes to the valuation of non-arms-length disposals of oil would run from1 July 2006, rather than 1 January. That also allowed us to take further into account some of the other representations about the technical detail.

To reassure the Committee, I point out that although the industry body, the United Kingdom Offshore Operators Association, has some concerns about the regulatory and administrative impact on its member companies, it notes that

“the Government has listened to specific concerns raised by the industry during the consultation process about unforeseen economic, technical or practical consequences and that it has amended its original proposal.”

We are introducing a necessary, proportionate measure in a way that has responded to the detailed discussions and points put to us by the industry. The industry expects the measure to be implemented from1 July and has expected that to happen since we confirmed it in the pre-Budget report in December. The amendment tabled by the hon. Member for Dundee, East may have been useful in opening up some of the broader discussions, but I hope that he will not press it.

Stewart Hosie (Scottish National Party, Dundee East)

I have listened to the Financial Secretary. He spoke at the beginning about the balance of factors in 2006 being taken into consideration, rather than the situation in 2002, and explained that oil and blending could be derived from PRT oil, non-PRT oil and, indeed, third-party purchased oil. He also referred to the consultation. I have seen the comments on the UKOOA website, and so on.

It was telling that the Financial Secretary said that some companies have been able to allocate oil to their tax advantage, irrespective of the blending requirements. He also said that the proposed measures were proportionate. My difficulty is that I am none the wiser about the value of the tax benefit that comes from the purely technical process of blending and what part of the tax advantage comes through active tax avoidance.

I heard what the Financial Secretary said. However, I am obliged to push my amendment to a vote.

Clause 150

John Healey (Labour, Wentworth)

I beg to move amendment No. 219, in page 124, line 37 [Vol I], after ‘(9)', insert—

‘(a) omit “subsection (7) or”, and

(b) '.

Joe Benton (Labour, Bootle)

With this it will be convenient to discuss Government amendments Nos. 220, 221, 222.

John Healey (Labour, Wentworth)

I rise briefly at this point because this set of amendments to clauses 150, 151 and 152 introduces the changes to the nomination scheme that, we believe, are required. It may help the Committee if I say a word about clause 150, which is the context for the amendments that we are considering.

Clause 150, together with clauses 151 and 152, provides for changes to the nomination scheme for petroleum revenue tax purposes. The nomination scheme is an anti-avoidance one introduced by the previous Government. It was designed to stop the process of what was known as “tax spinning”, which is when companies enter into a range of forward-sales contracts enabling them to decide which to deliver their equity oil through so as to minimise their PRT liabilities. In the past 18 months, HM Revenue and Customs has become aware that the time limits in the nomination scheme still provide an opportunity for companies to tax spin. Therefore the aim of the scheme is being undermined. That results in a considerable loss of tax, particularly with the rise in oil prices. The tax saving provides those companies that have the facility and, more particularly, those that use the flexibility in the rules to tax spin with an unfair commercial advantage. It is for that reason that the Government believe that it is time to tighten up the rules. The clause therefore provides for changes in the way that nomination excesses are calculated under the revised nomination scheme.

We have consulted the petroleum industry on the changes and have significantly redesigned our original proposals to tackle the issue because of industry concerns about repercussions that were not intended by the measures.

The amendments allow for nomination excesses that are brought into charge for ring-fenced corporation tax and supplementary charge purposes to be deductible against non-ring-fenced corporation tax profits. The amendments add a relieving provision to the clause. They allow such excesses to be deductible in arriving at a company’s non-ring-fenced profits. That ensures that the scheme can be effective and that companies are not taxed unfairly. It also meets a concern raised by the oil industry during discussions on the oil tax pricing measures contained in the clauses. I commend the amendments to the Committee.

Clause 151

Clause 152

Clause 153

Stewart Hosie (Scottish National Party, Dundee East)

I beg to move amendment No. 375, in page 127, line 37 [Vol I], at end insert—

‘(2A) The amendment made by subsection (1) shall cease to have effect if the average price of Brent crude oil falls below$30 a barrel for one month.

(2B) If subsection (1) ceases to have effect as a result of the provisions in subsection (2A) above, the Chancellor of the Exchequer may by order restore the amendment made by subsection (1) if the average price of Brent crude oil rises above $30 a barrel for one month.'.

Joe Benton (Labour, Bootle)

With this it will be convenient to discuss amendment No. 376, in page 127, line 37 [Vol I], at end insert—

‘(2C) If the average price of Brent crude oil falls below $40 a barrel for one month, the Chancellor of the Exchequer shall laya report before both Houses outlining options for introducing a variable rate of supplementary charge.'.

Stewart Hosie (Scottish National Party, Dundee East)

I wish to draw from the recent study into North sea activity up to 2035 by Professor Alex Kemp and Linda Stephen from the university of Aberdeen, which was undertaken after the 2006 Budget and gave full consideration to the increase in North sea tax.

In summary—it is a large document—the study tells us that under the $40 a barrel scenario, with the current tax regime, field investment is likely to hold up well

“for many years averaging over £4bn per year for a considerable number of years”.

Under the $30 a barrel scenario,

“investment falls below current levels but averages more than £3bn per year for a considerable number of years”.

And under the $25 a barrel scenario,

“field investment falls at a sharp pace”.

That means that fields that would have been profitable before the tax increase will no longer be profitable and therefore will not be developed as the oil price falls.

Under the $40 scenario, 24 projects would be deterred, resulting in a reduction of field investment of some £1.13 billion and of operating costs of £1.1 billion,and lost production of 189 million barrels. Under the $30 scenario, 24 fields or projects would be deterred, the likely reduction in investment would be about £1.8 billion, the reduction in operating costs would be about£1.3 billion and the reduction in production would be about 230 million barrels.

Although the increase in the supplementary charge, combined with the high world oil price, gave the Government a significant windfall last year, and is likely to do so again this year, if the world price falls, and the tax rate remains high, there could be hugely detrimental effects on the industry and Exchequer yield.

Over the next 30 years, that current short-term gain could be outweighed by a loss of £18 billion in oil-tax revenue if the price were to fall to $40 a barrel and the tax rate remain high, and a further loss of another£18 billion if it were to fall as low as $25 a barrel. Those figures are based on calculations from Professor Alex Kemp, published last week, which suggest that over the lifetime of the sector, some 3 billion barrels of potential output could be lost from the North sea if the oil price were to fall to $30 a barrel and the tax rate remain high.

Rob Marris (Labour, Wolverhampton South West)

The hon. Gentleman has given us a welter of figures, but will he disaggregate the effects of varying oil prices and the supplementary tax? One needs to disaggregate the two in order to make sense of those figures, unless he did so and I missed it, in which case I apologise. If not, please will he disaggregate the effects of those two factors?

Stewart Hosie (Scottish National Party, Dundee East)

The precise purpose of the research was to aggregate the consequence of both factors. The conclusion might be different if the world price fell and tax was lower or higher, and likewise, if tax was lower or higher and the oil price stayed the same, there would be a different result. The point of the research and the amendments is that the factors are aggregated because that is the current situation. We must take both price and tax into consideration.

Rob Marris (Labour, Wolverhampton South West)

But let us say that the world oil price falls to $25 a barrel and the supplementary charge remains at 20 per cent. If that happened, we would have his figures. However, if one were to strip out the 20 per cent. charge, and find that exploration, for example, remained almost totally unaffected by not having that supplementary charge, or having it at 10 per cent., one would know that the world oil price was the predominant factor, about which it is hard for the Government to do anything.

Stewart Hosie (Scottish National Party, Dundee East)

I understand what the hon. Gentleman is trying to say. I shall give him sight of the report later, and he will see that it is not simply extraction that tails of, but exploration and development, and likewise with the high tax base and low world oil price—I shall come on to the low world oil price in just a moment.

Before I do that, I shall speak briefly to the amendment itself, which is designed to provide a balance between protecting extraction from marginal fields when the oil price falls, and protecting Exchequer yield when the oil price remains high. We need to consider that and put the mechanism in place now because it is clear that future investment decisions will be driven by current tax and oil price forecasts. Those decisions take a long time to put into place; people have to forecast what is likely to happen in the future.

Like the tax rate, price is a driver, and we cannot count on oil prices easing much in the near future. It is likely that the price will average $40 in the medium term. In the long run, it might be $25 or $30. Those are not my words; that is what Lord Brown from BP said yesterday in Der Spiegel. In short, the UK risks losing out on some £60 billion of oil production, and potentially £18 billion of oil revenues if the world oil price follows the pattern suggested by Lord Brown and the tax remains high. Amendment No. 375 is designed to tackle that. Should the oil price fall to less than$30 a barrel, the increase in the supplementary charge, which is equivalent to a 25 per cent. rise in corporation tax, will cease to have effect. However, it is not designed to be a one-way regulator. If the price rose again, the Chancellor could, by order, reinstate the increase.

Brooks Newmark (Conservative, Braintree)

I am interested in the hon. Gentleman’s analysis. Has he done a sensitivity analysis on the effect of the $10 shift from $40 to $30 in terms not just of the cost to the Exchequer but of jobs, inward investment, balance of trade and security of supply? They are just as important as the revenue issues that the Government seem to be focusing on.

Stewart Hosie (Scottish National Party, Dundee East)

When I have as many civil servants as the Treasury, I shall complete the full analysis for the hon. Gentleman. The key point is the change from$40 to $30. Because each field is different, the tipping point into or from viability is also different. Amendment No. 376 tackles that problem. Should the world oil price fall to below $40 a barrel but stay above $30, the Chancellor would be obliged to report to Parliament options to vary the supplementary charge. If the fall was to $38 or $39 a barrel, and it was estimated that that was a short-term blip and it was likely to rise again, the option might be to keep the charge as it was. If it dropped to $33 or $34 a barrel as part of a long-term downward trend, the assessment might be to reduce increases in the supplementary charge or to take some other action.

The intention of both the amendments is clear. It is to create a framework that allows a fair tax yield while encouraging investment now and development and extraction from the North sea well into the future.

Helen Goodman (Labour, Bishop Auckland)

Again, I congratulate the hon. Member for Dundee, East on the ingenuity with which he has framed his amendments. He is right, in commenting on this clause and others, to draw attention to the context in which this part on oil operates—namely, the main proposal to double the10 per cent. surcharge on corporation tax, which the Chancellor announced in the pre-Budget report last year. The Chancellor also announced that there would be no further rises in North sea oil tax during this Parliament. We would not mind hearing confirmation from the Financial Secretary that that is stillthe Government’s position. The Chancellor also announced that companies would be given tax incentives to help them to explore and develop “the most difficult fields” by extending the exploration expenditure supplement to all ring-fenced activity that we will consider in a later clause.

It is important to note that the reaction of the oil industry to that package of announcements was unfavourable. Malcolm Webb, chief executive of the United Kingdom Offshore Operators Association, said:

“At a single stroke, the Treasury has rewritten the Industry’s future. It will severely undermine business confidence”.

I suspect that Ministers’ reaction to those words, and other words of disapproval that were spoken at the time, was to say in private—they would not put it so undiplomatically in public—“Well, the oil companies would say that, wouldn’t they?” That response might in some quarters, but certainly not in Scotland, find a sympathetic public ear, because the oil companies are not an immediate source of public affection. They do not, for instance, command the same popularity as fluffy kittens. None the less, they are important contributors to the economic prosperity not only of Scotland but of the UK—which fluffy kittens, on the whole, are not.

The industry ranks among the top 10 global producers. It provides employment for more than 260,000 people, many of whom work in Scotland, though not all—it is a UK-wide issue. To cite a random figure, 11 per cent. of that number are in the north of England and East Anglia. In the last financial year, furthermore, the Treasury gained some £7 billion from the industry, and the proposed increase will result in a further £2 billion intake. So clearly it is necessary to consider whether Mr. Webb might be right.

Obviously, the North sea competes with other basins. Reserves are being depleted and tax increases are unlikely, to put it mildly, to make the North sea more attractive. According to the industry, the new incentives to which the Chancellor referred in the pre-Budget report, which we shall consider later, are unlikely to compensate for the doubling of the corporation tax surcharge. Indeed, according to the UK Offshore Operators Association, the corporation tax increases will reduce the post-tax value of new discoveries by about 16 per cent.

Ministers and others might say that the industry was previously wrong to issue such warnings, because tax increases did not damage profitability. That is true, but at this stage we must consider the relationship between profitability and high oil prices which we have already explored this morning. Having introduced the supplementary charge in the 2002 Budget, the Treasury is coming back for a second bite at the cherry. The industry is a convenient source of revenue while profits remain large and revenues high.

The quote of Lord Brown that the hon. Member for Dundee, East has just provided illustrates my point that there is a clear danger—I put it no higher than that—that the Treasury is gambling on oil prices remaining high. If they do not remain high and the gamble goes wrong, the industry will be hit by the double whammy of higher taxes and high exploration costs, as the Treasury Committee warned.

There is a parallel with pensions taxation. Pension funds seemed to be an easy source of income in 1997, when most boasted surpluses, and the oil companies seem to be an easy source of income now, while they are making very considerable profits. However, just as the Chancellor’s decision to take the easy option on pensions led to unexpected consequences for the pensions industry and for pensioners, there is a danger that the increase will lead to unexpected consequences for the oil industry and those who work in it.

The hon. Member for Dundee, East probably agrees with me that the arrangement proposed is not ideal. Ideally, a commodity tax should be set at a level that is robust enough to accommodate any fluctuations in the price of that commodity. He is making the best of a bad job by suggesting that the tax contains dangers and should be adjusted according to rises and falls in price. That does not provide the stability and certainty that the industry would ideally wish for.

Stewart Hosie (Scottish National Party, Dundee East)

What does the hon. Gentleman consider to be a fair tax, to avoid the necessity of a regulator as I am proposing?

Helen Goodman (Labour, Bishop Auckland)

I am sorry to disappoint the hon. Gentleman with my response. If he is asking me at what level I think the tax should be set, I have to answer that the Opposition are not in government, but we expect to be in 2009 and we shall give him that information shortly before the election. I cannot do better than that this morning.

For those reasons, my hon. and right hon. Friends and I are not immediately attracted to the amendments, but we want to hear the Financial Secretary give a clearer and fuller explanation than we have heard to date of the need for the changes and their effect on the industry generally, particularly on employment. We believe that the Financial Secretary should explain, for example, what assessments—the latest updated assessments—the Treasury has made of how the new tax regime will compare with that operated by our competitors, what impact the surcharge increase will make on costs and what impact the new tax regime will have on employment in the industry and its supply chain. We should be grateful if he addressed all those points.

Julia Goldsworthy (Liberal Democrat, Falmouth and Camborne)

I have a couple of short points to add. The hon. Member for Wycombe was talking about the need for a stable framework and said that the amendments tabled by the hon. Member for Dundee, East did not achieve that. There is also a point to be made about the fact that the announcements on increasing the supplementary charge are adding instability and uncertainty to the system. Ultimately, the proposals were advanced and justified on the basis of high oil prices, but we have never heard about any framework that explains what will happen in the event of oil prices falling. The hon. Member for Dundee, East has done a good job in raising this issue.

Rob Marris (Labour, Wolverhampton South West)

I find the hon. Lady’s remarks extraordinary, coming as they do from a member of a party that has just announced its intention to increase green taxes. This is an increase of tax on oil by the Government, which is a green tax, whether she likes it or not. Can she tell us whether she supports an increase in green taxes?

Julia Goldsworthy (Liberal Democrat, Falmouth and Camborne)

I have never heard the Chancellor of the Exchequer describe this as a green tax. We are talking about certainty for the market, which is what our proposals are about, although I am sure that it is not in order to talk about those in this forum.

If the Prime Minister is worried about energy security and talking about what we need to maximise on our doorstep, he needs to ensure that fields are not decommissioned too early, because every barrel of oil that stays in the North sea oil fields will neither pay tax nor employ any people. Again, that is an important issue. I shall appreciate hearing the Financial Secretary’s comments on what impact he feels the changes will have and what efforts his Department is undertaking to ensure that there is market certainty in this area, because currently there is not.

John Healey (Labour, Wentworth)

I am interested in the fact that the spokespeople for the three Opposition parties are trying to question, criticise and contest the decisions taken in the pre-Budget report on this new package of tax rates and provisions. They could have chosen to debate the matter more fully on the Floor of the House as part of proceedings of the Committee of the whole House rather than in Committee this morning. Nevertheless, I am grateful for the chance to do so.

The hon. Member for Dundee, East essentially says that he wants two things from the tax regime. First, he wants a degree of stability and certainty. I caution the hon. Member for Falmouth and Camborne (Julia Goldsworthy), who says that she is concerned about that as well; she needs to look carefully at the amendments tabled by the hon. Gentleman, because, as I shall explain in a moment, they are likely to have precisely the opposite effect.

Secondly, the hon. Gentleman wants a fair tax regime for the North sea—the UK continental shelf. In that, he is with the Government. He did not explain it, but our objectives for the North sea tax regime are twofold: we want a fair tax system that delivers for the public the appropriate returns from the exploitation that the companies are able to make of a finite natural national resource; and we want a tax regime that will encourage and support the levels of investment that will lead to the fullest possible exploration, exploitation and recovery of those resources.

Stewart Hosie (Scottish National Party, Dundee East)

Does the Financial Secretary recognise that we are seeking through the amendments to take cognisance of what could happen to investment and extraction, particularly in marginal fields, should the oil price fall? Does he not think, whether he agrees with the amendments or not, that considering the future and taking cognisance of it in order to deal with such things now is sensible?

John Healey (Labour, Wentworth)

I shall deal in a moment with specific proposals in the amendments. To begin with, however, I am trying to deal with the more general and sweeping arguments that he and the hon. Member for Wycombe raised.

My hon. Friend the Member for Wolverhampton, South-West (Rob Marris) was absolutely correct when he referred to the press release and the use of the Aberdeen study conflating two different impacts onthe projections of future North sea oil tax revenues. The study conflates the effect of a fall in global oil prices from $40 a barrel to $25 a barrel with the impact of the increase in supplementary charge that we are proposing from 10 to 20 per cent.

The study from which the hon. Member for Dundee, East quoted is interesting. He did not draw on some sections. It suggests that a total investment of less than £1 billion over a period of 30 years might not go ahead because of the increase in North sea oil taxation that was announced in the pre-Budget report. It also forecast that there may be a loss of less than 1 per cent. in total production, again during a 30-year period. To put that into context, our initial calculations suggest that the tax change might reduce tax revenues by less than £1 billion, again over 30 years. That compares with an increase in tax revenues of £8.3 billion that we predict during the next four years owing to the PBR changes. The importance of the study is that it supports the conclusions of the Government’s analysis that there is little risk of a substantial change to investment because of the tax increases that were announced in the pre-Budget report in 2005.

The hon. Member for Wycombe quoted the reaction of the United Kingdom Offshore Operators Association. It may have been understandable, but let me update him on the situation and commentary at the time of the changes. On 6 April, The Scotsman reported:

“The irritation and in some quarters outright anger at Chancellor Gordon Brown’s apparent ‘smash-and-grab’ raid on the UK earnings of the North Sea oil and gas sector has now sunk beneath the surface and been largely forgotten.

No great projects that anyone is aware of, or is shouting about, have been cancelled, and life appears to have resumed its course much as before.”

The Aberdeen Press and Journal, which follows such matters particularly closely, reported at the end of May that the United Kingdom Offshore Operators Association was not expecting a collapse in the level of North sea investment this decade. That should put into context and perspective for the Committee the likely impact of the package of tax changes that we announced in the pre-Budget report, give the lie to some of the more overstated reactions that were made at the time, and undermine the overstatement of the case that some still make against them.

Helen Goodman (Labour, Bishop Auckland)

For the sake of clarity, I want to inquire in the wake of newspaper cuttings whether the Financial Secretary has read that UKOOA now supports the changes that have been proposed.

John Healey (Labour, Wentworth)

I suspect that the association might find itself in some difficulty with its members if it came out in outright support of the tax increase. However, to deal with the hon. Gentleman’s point about competitive taxation, it acknowledges that

“the UK still has its advantages and that is why people still want to do business here”.

In 2005, the UK’s oil tax regime was described by external commentators as one of the most lenient in the world. A comparison of global tax regimes showed that the North sea tax system before January 2006 was one of the most favourable, with the Government’s tax take on new field developments being less than that in the United States of America, Denmark, Italy, Norway, Australia, Indonesia and more than 50 other oil-producing regions. The UK’s oil tax regime will continue to be broadly comparable with other competitor regions following the increase in supplementary charge, and it will continue to be considerably more favourable than that in Denmark, Italy and Norway.

I turn to the amendments that the hon. Member for Dundee, East was proposing in the context of a concern about stability, certainty and fairness in the regime and its ability to promote the level of investment and development that we would wish to see. Can I say to him at the outset that I am not convinced by the arguments that he puts forward? I hope that I can explain that to the Committee so that if he proposes to press his amendments to a Division, the Committee will oppose them.

It is important to emphasise, as it has been questioned, the rationale for the changes we announced in the pre-Budget report. In his concluding remark, the hon. Gentleman said that he was looking for a fair tax yield. Let me put the issue in context. As Committee Members will be aware, North sea oil companies have recorded extremely strong profits in recent years. They have recorded extremely strong profits because of a sustained increase in global oil prices. Increased oil prices in the industry feed directly into the profits from the North sea because oil prices are set in the global market and are not affected by the local costs of production in the North sea. Therefore, North sea companies make significantly higher returns on capital employed than other companies operating in the UK.

In 2004, typically those companies had a pre-tax return of approximately 30 per cent. compared to less than 13 per cent. for other non-financial companies. A recent Office of National Statistics report suggested that those returns increased to nearly 35 per cent. in 2005. Those strong profitability levels are forecast to continue because of the upward shift in the expected price of oil in the medium term.

Therefore, the increase in the rate to the supplementary charge, announced in the pre-Budget report, rebalances the North sea oil and gas fiscal regime; it rebalances the fiscal regime between oil producers and consumers. It is an appropriate response to the sustained rise in oil price levels and to the increased expectations of oil price outlook. It amends the fiscal regime that we introduced in 2002 and does so to reflect the world four years on.

The amendments would introduce a price indexation into that system for the fiscal regime for the North sea. One of the main requests made by North sea oil and gas companies is for as much stability in the fiscal regime as possible. We appreciate that. As a result, we are committed to no further increases in North sea oil taxation for the lifetime of this Parliament. That gives oil companies a degree of fiscal stability in the medium term that we understand is important to their investment decisions. However, the hon. Gentleman’s amendments would make the North sea fiscal regime subject to short-term oil price fluctuations—both up and down. That would have an adverse effect on the stability and certainty that he is keen to encourage. It would make it harder for companies to make investment choices for the North sea.

As the hon. Gentleman understands, the North sea oil tax system, like all our fiscal regimes in the UK, is kept under review carefully Budget by Budget. We will continue to aim to deliver the twin policy objectives of first ensuring that the Exchequer and the public receive a fair share of the revenues from the UK’s oil and gas reserves and secondly of promoting the investment that the North sea needs for the future.

Finally, and this may be of interest to members of the Committee, we place great importance on the state of the North sea oil and fiscal regimes and the changing nature of the companies’ investments that are made in the UK continental shelf. We have recently opened discussions with the industry to hear their concerns about the structure of the North sea tax system and how well it is suited to the next stage of life of the basin. Those discussions will continue for a large part of the rest of this year. If companies wish to raise the issue of how the tax regime will respond to changes in world oil prices, we will, of course, discuss that with them and will consider any information, advice or evidence that they might want to put to us. However, let me say emphatically and finally that I am absolutely unconvinced that such considerations should be linked to short-term movements in the level of oil prices, which would be the effect of the amendments. I hope that, on that basis and having had a wide- ranging debate, the hon. Gentleman will consider withdrawing his amendments. If not, I shall have to ask my hon. Friends to oppose them.

Stewart Hosie (Scottish National Party, Dundee East)

Towards the very end of the Financial Secretary’s remarks, he spoke of ongoing consultations on fluctuations in world prices. The Committee will understand that the fundamental aim of the amendments was to probe whether that was to be the case or whether there was to be a punitive tax regime when the oil price was low, which would damage future development and ongoing extraction. Given his comments, and the arithmetic of the Committee, I beg to ask leave to withdraw the amendment.

Rob Marris (Labour, Wolverhampton South West)

I will be brief. I welcome you to the Chair, Mr. Benton. The clause will increase taxes on the oil industry through the supplementary charge. Will the hon. Member for Falmouth and Camborne tell us whether she and her party support an increase in tax on the oil industry?

Clause 155

Helen Goodman (Labour, Bishop Auckland)

This clause is more welcome to the industry and to us than clause 153. Given that the ring-fence expenditure supplement is intended to help companies exploring for oil or gas in the development phase, can the Financial Secretary give us his latest assessment as to how much additional development will result from the introduction of this RFES—considered, of course, in the context of the overall package that he has put forward today?

Stewart Hosie (Scottish National Party, Dundee East)

The explanatory notes to the clause state:

“Companies involved in exploration, appraisal and development activities in the North Sea will typically incur losses in early years”,

which is self evident. They add:

“The EES enables those companies to claim a 6 per cent. supplement per annum, on the pool of qualifying exploration and appraisal expenditure that is carried forward from one accounting period to another, until the allowances can be used against income...This Schedule now extends that principle to all unrelieved expenditure.”

That is, of course, welcome, but it would have been better had the Government been able to go further: to level the playing field for new entrants by increasing the extent to which unrelieved allowances are reimbursed, so that new entrants have a stronger incentive to enter into exploration in the North sea. Although it is UK policy to encourage the entry of new players, those in a non-tax paying position are penalised by comparison with existing players, because they cannot obtain immediate tax relief on all exploration and development costs.

Currently, new entrants can carry forward unrelieved allowances at 6 per cent. That could be increased to reflect either the cost of capital for new players—at little cost to the Government—or the marginal rate of tax, which was the bolder incentive offered in Norway. When the Government brought forward the proposals, did they consider increasing the allowances to cover the full cost of capital for new entrants? Have they examined the Norwegian model, which offers relief to the marginal tax rate of 78 per cent?

John Healey (Labour, Wentworth)

This is a useful part of the package that clause 155 and schedule 9 introduce and I am glad that it has been welcomed in principle by the Scottish nationalists and the main Opposition spokesman.

The reason for the provision is to try to encourage a vigorous and active North sea industry, along with levels of investment that will allow exploration and exploitation to the fullest extent. That is the reason for the ring-fence expenditure supplement. It is a measure that is targeted particularly at companies that are new entrants to the North sea, and, given the mature nature of the basin, I think that all hon. Members will recognise that that is a small but key sector for the future North sea industry.

On the point made by the hon. Member for Dundee, East, we considered other options, as he would have expected. However, our conclusion was that the right move was to deal with the provisions and with the way that the ring-fence expenditure supplement operates. The changes increase the value of unused expenditure that is carried forward from one period to another by a compound rate of 6 per cent. per annum, and they apply to all unrelieved expenditure from 1 January 2006. It will be possible to claim for a maximum of six accounting periods, and those periods will not need to be consecutive.

The answer to the question that was asked by the hon. Member for Wycombe is more complex and has to be seen as part of a combination of factors affecting investment. The RFES targets a small but increasingly important subsection of the North sea oil industry. Its score in the Red Book was relatively modest, but we expect its impact to be significantly greater than the direct cost to the Exchequer, because it will apply to losses over a number of years, so that its full tax benefits, along with the activity that it may encourage, will not be reflected simply in current Budget costings. I hope that hon. Members on both sides will support the clause and the schedule.

Clause 156

Dawn Primarolo (Labour, Bristol South)

Good morning, Mr. Benton. The clause increases inheritance tax thresholds to £312,000 for transfers of value on or after 6 April 2008, and to £325,000 for transfers of value on or after 6 April 2009. That follows the precedent set last year by the Government in establishing the level of inheritance tax threshold beyond the immediate tax year, when they set a level of £285,000 for 2006-07 and £300,000 for 2007-08. By pre-announcing future increases at more than the forecast level of statutory indexation we shall continue to provide a fair and targeted system and certainty for families.

The increased threshold for 2006-07 means that the number of tax-paying estates in the current year will be about 37,000. Despite all the recent scare stories in the media, it remains the case that only some 6 per cent. of the estates of those who die in 2006-07 will be subject to IHT. The yield from tax-paying estates this year will be about £3.6 billion. The full cost of the increased threshold is some £30 million against index-based, and I commend the clause to the Committee.

Theresa Villiers (Conservative, Chipping Barnet)

House prices have risen by 154 per cent. sinceMay 1997, and the extent of inheritance tax has grown since the Labour party was elected. Inheritance tax thresholds have risen by only 32 per cent. over the same period and, as we have heard, the Government’s income from inheritance tax has increased considerably—from £1.6 billion to the £3.6 billion to which the Paymaster General just referred. According to HBOS, the number of estates that will pay inheritance tax has more than doubled since 1996-97. Halifax estimates that the number of properties in the UK valued at more than the current threshold of £285,000 now stands at about 1.5 million, or 8 per cent. of all owner-occupied properties.

In 1997, only one town in the country, Gerrards Cross, had average house prices in excess of the threshold. At the last election, that figure had risen to 87 towns. Halifax has projected that that will nearly triple to 4.2 million properties by 2010 if the threshold is increased only in line with retail price inflation. It also anticipates that the revenue raised by the tax could rise to £5.5 billion by 2020.

The increases in the threshold, which the Paymaster General outlined, will go some way to mitigating those projected effects, but the fact remains that IHT is not just a tax on the wealthy. It affects an increasingly wide range of people on middle incomes and with modest assets. The effect is felt most keenly in London and the south-east but, with rising real estate prices acrossthe country, the IHT net is spreading. That is one of the many reasons for our opposition to the proposed new IHT charges on trusts contained in schedule 20, which, far from affecting a privileged few, will impact on a range of ordinary families.

Edward Balls (Labour, Normanton)

Will the hon. Lady give the Committee her definition of middle income for these purposes?

Theresa Villiers (Conservative, Chipping Barnet)

I do not have a precise figure for that. However, the hon. Gentleman will be aware that the average house price in London has certainly put a lot of people within the IHT net.

Edward Balls (Labour, Normanton)

The hon. Lady uses the term middle. How would she define middle for these purposes?

Theresa Villiers (Conservative, Chipping Barnet)

I think that I have answered that sufficiently. I am grateful to the Economic Secretary for his intervention.

Julia Goldsworthy (Liberal Democrat, Falmouth and Camborne)

Given the concerns that the hon. Lady is raising about the IHT threshold, does her party plan to propose an alternative threshold that she considers would be fairer?

Theresa Villiers (Conservative, Chipping Barnet)

No, we are not making commitments on tax thresholds at the moment because, as the shadow Chancellor made plain in a speech in Manchester just a couple of weeks ago, we are not yet in a position to know whether the country will be able to afford up-front tax cuts at the point when, as we hope, we become the Government in 2009. Therefore, we are making no promises about reducing taxes. In the long term, we will seek to share the proceeds of growth between reducing taxes and generous funding for public services. However, in the shorter term we are not in a position to make up-front promises about tax cuts.

Dawn Primarolo (Labour, Bristol South)

The hon. Lady’s position is ridiculous. To suggest that one can say that an individual will be subject to inheritance tax simply by taking the price of his house is typical of the scare tactics in which the Conservative party unfortunately engages. Let us be clear; in March 2006 the average house price for the UK was £159,950. However, let us take London. In fact, a lot of the population does not live in London—that might come as a bit of a surprise to Conservative Members. In London, that figure is £235,000.

The hon. Lady missed out two crucial points. Conveniently, she continues to ignore the fact that only 6 per cent. of estates pay inheritance tax because the majority of transfers, particularly of property, take place between spouses and therefore are exempt, as she knows. We will discuss that during consideration of another clause. Being a home owner does not automatically bring a person into inheritance tax.

Rob Marris (Labour, Wolverhampton South West)

Does my right hon. Friend agree that the hon. Member for Chipping Barnet overlooks the fact, as Conservatives often do in the debate on house prices, that most of the people in the south-east in London who might be caught be the provisions are actually being taxed on death on a windfall profit from a rise in house prices? That does not seem a bad tax at all.

Dawn Primarolo (Labour, Bristol South)

In the debate on clause 157 and schedule 20 there will be discussions on the inheritance tax, and the point at which it is levied and why. It does not do the House justice if some Members frighten the living daylights out of citizens by misrepresenting the facts and encouraging citizens to believe incorrectly that they are in a particular tax net.

Julia Goldsworthy (Liberal Democrat, Falmouth and Camborne)

In the Paymaster General’s opening remarks, she referred to the threshold change as a fair and targeted system, which is echoed in the Red Book. On what basis did she determine the rise in figures put forward today for that fair and targeted system? How did she determine that those figures represent a fair system? On what basis did she make that decision?

Dawn Primarolo (Labour, Bristol South)

I did so by looking at the percentage of estates within inheritance tax, recognising the cost to the taxpayer—£30 million—and by responding to questions about how the tax system works in terms of income and wealth.

Brooks Newmark (Conservative, Braintree)

Will the Paymaster General give way?

Dawn Primarolo (Labour, Bristol South)

No, I shall not give way.

Therefore, if Opposition Members want to engage in the inheritance tax discussion, it would be good if they got the basic facts right in the first place.

Jeremy Wright (Conservative, Rugby and Kenilworth)

I welcome you to the Chair, Mr. Benton. I shall make a straightforward point on the Paymaster General’s comments. She said that it is important to get the facts right. Surely, one of those facts is this: according to Halifax, if the threshold for inheritance tax had been increased in line with the increase in house prices, that threshold would now be £425,000. The best that the Government can do in the Finance Bill is to make the threshold £325,000 by 2010. Is it not right that, because of that measure, more people will be caught by the tax?

Stephen Hesford (Labour, Wirral West)

The Opposition Front-Bench spokesman has just said that his party is unable to state its position. The hon. Member for Rugby and Kenilworth (Jeremy Wright) made his point based on the facts, and his position is that the rate would rise to £425,000, but his Front Bench cannot make that point. What are the facts?

Jeremy Wright (Conservative, Rugby and Kenilworth)

I think that the hon. Gentleman misunderstands me; I am stating the facts. Those are the facts, and I note that he does not argue that those are not the facts. I am making the point that if the Government were genuinely concerned to ensure that only the same proportion of the population as previously affected by inheritance tax were still affected by it, the threshold would have to be £425,000. It is clear that they are not concerned with doing that.

Brooks Newmark (Conservative, Braintree)

Will my hon. Friend give way to save me giving me a speech later? Does my hon. Friend accept that the point that the Paymaster General is missing is the concept of fiscal drag? That is not a form of economic cross-dressing. I can see the Economic Secretary getting excited there. Fiscal drag is pulling much of middle Britain into the inheritance tax system, and that is what we should be arguing about.

Jeremy Wright (Conservative, Rugby and Kenilworth)

I am grateful to my hon. Friend. I agree with him. It is fiscal drag that I am discussing. This is not accidental. The Government are deliberately taking more people into the ambit of inheritance tax than was previously the case. That is the point and it will be objected to by many of my constituents and those of other Committee members.

It is clear that people are being penalised, as the hon. Member for Wolverhampton, South-West quite properly says, on a windfall on the property that they have gained. The Government do not choose to tax that windfall only by inheritance tax, they also do so by stamp duty, which has also increased dramatically. The Government should be honest about what they are trying to do, which is to tax property more heavily than they have previously.

Colin Breed (Liberal Democrat, South East Cornwall)

I echo a lot of what has been said. Property prices have had a dramatic effect on the issue of inheritance tax. While the Liberal Democrats have not decided on the rates or anything else, I believe that death is an appropriate time to take some tax. Without doubt, property prices have resulted in a windfall for many people to which they have not contributed, so this is an appropriate tax.

Brooks Newmark (Conservative, Braintree)

Does the hon. Gentleman agree that an individual who buys a house is making an investment and therefore should be rewarded for taking that risk. It is not just a windfall.

Colin Breed (Liberal Democrat, South East Cornwall)

Most people buy a house to have a home. Those who have bought in more recent times have paid expensively for what they have acquired. Whether they will see the investment returns in the next 10 years or so that may have been made in other years is a debatable point.

The principle is that an inheritance tax should be at an appropriate level. That is where we come to the point about fairness. Most people are beginning to think that the tax is hitting those who are in the £300,000 to £500,000 bracket, whereas those who have significant wealth have found means of avoiding substantial amounts of inheritance tax.

We know that only 6 per cent. of estates pay inheritance tax—I do not know whether it should be6 per cent. or 5 or 10 per cent.—but what we should be considering is the fairness of this. While 370,000 estates fall into this category, I would be interested to learn, if the figure is available, the average estate value. I suspect that it is significantly lower than many of us want to see. That is part of the problem.

The inheritance tax system, as it is currently drawn, is not tackling the high levels of wealth that is inherited from one to the other. There have been too many means by which such people can avoid this tax. The incomes of those who are now being caught progressively more on fiscal drag, and so on, is being generated from estates of much lower average values. That is where some of the perceived unfairness derives from.

While the level remains at 40 per cent., that is a significant proportion of an estate worth between £300,000 to £500,000. It is in that area that there needs to be some new thinking. I hope that in the months and years to come in this Parliament, we might get an inheritance tax system—

Mark Francois (Conservative, Rayleigh)

The hon. Gentleman has talked about the potential unfairness of the tax biting on estates worth £300,000 to £500,000. Given his party’s recent announcements, how does he see its plans to smack people over the head in terms of capital gains tax affecting people with that amount of money?

Colin Breed (Liberal Democrat, South East Cornwall)

As I say, we are not making announcements here. These matters are still the subject of considerable debate in which I am participating. At present, there is an inherent unfairness in the sense that more lower value estates—although obviously above the threshold—are being hit at 40 per cent. and higher value estates are able to avoid that 40 per cent. charge on far too many occasions. How we tackle that problem is a matter that needs to be addressed.

I should be interested to know the average size of those 37,000 estates. I suspect that it is low in respect of the thresholds. That means that they form a significant proportion of the £3.6 billion of tax that is raised rather than that tax being generated at much higher levels.

Rob Marris (Labour, Wolverhampton South West)

I do not have to declare an interest because I do not own property that is worth more than £285,000, let alone £312,000. I must be in the lower income bracket rather than middle. I have lived in the same house in Wolverhampton for the past 22 years.

I applaud the Government. The hon. Member for Rugby and Kenilworth (Jeremy Wright) has a point. More people will be paying inheritance tax—although not the vastly inflated figures that have been bandied around by some—because of increasing prosperity. House prices are increasing because of lower interest rates, economic stability and increased prosperity and employment. That is a jolly good thing and it will lead to more people paying inheritance tax. I support that.

As I said earlier, inheritance tax is one of the least insidious of the taxes, especially given house prices. Most people out of that 37,000 will be paying because of a windfall gain on a property that they bought many years ago. If they had bought it recently it would still have a mortgage on it and, if they die unexpectedly young, that will be netted off the value of the property and their estate will not be above the threshold. I cannot think of a less insidious tax than on a windfall gain that no one has done anything in particular to deserve—it is just the way in which the house prices have gone—and which is paid on death. The Government need taxation revenues and, if we can have an uninsidious tax, that is a jolly good thing.

George Young (Conservative, North West Hampshire)

The logic of what the hon. Gentleman said is that people should pay capital gains tax when they move from one house to another.

Rob Marris (Labour, Wolverhampton South West)

It has been a long-standing tradition that all the three main parties have encouraged home ownership throughout the country and no capital gains tax has been paid. Buying properties and doing them up with a view to a profit is susceptible to capital gains tax under the capital gains tax Act 1970, I think, but as far as I know that provision has never been enforced. Most hon. Members would have come across people who buy a succession of houses and do them up with a view to profit, not just to live in them, as the hon. Member for South-East Cornwall (Mr. Breed) said earlier. Under the tax regime that has been in place for more than 30 years, those people are liable to capital gains tax.

David Gauke (Conservative, South West Hertfordshire)

I caution the Government on their attitude that a lot of people do not live in London and the south-east as a result of which inheritance tax does not matter in many parts of the country, so it is a non-issue. The fact is that inheritance tax is widespread in a large part of the country. In my constituency, average house prices in Berkhamsted, Tring and Rickmansworth are above the threshold. The hon. Member for Wolverhampton, South-West, in his characteristic candid way, set out a respectable argument that it is a windfall tax and so on. I do not necessarily agree, but such an argument can be made. However, to deny that there is an issue given that relatively modest houses are over the inheritance tax threshold in many parts of the country is to deny the true position.

Edward Balls (Labour, Normanton)

I should be interested to know whether most properties in the hon. Gentleman’s constituency have a current market value that is above or below the inheritance tax threshold.

David Gauke (Conservative, South West Hertfordshire)

I accept that my constituency is not necessarily typical of the whole country, but the Halifax report had three of its towns in the top 10 on house prices. However, many constituencies have such properties.

Edward Balls (Labour, Normanton)

Just to redefine the question, would the hon. Gentleman say that the majority of houses in his constituency were currently valued above or below the inheritance tax threshold?

David Gauke (Conservative, South West Hertfordshire)

I would have to check the figures. I suspect that a majority are now or will be in that position in the next four or five years. I do not know whether the Economic Secretary has the figures. I have no doubt that they will be produced. I understand that the majority could well be in that situation—but a substantial number are.

It is all very well to dismiss that and say that it is not really an issue and does not matter. I am sure that it is not an issue in Normanton—I have no doubt about that—but the Economic Secretary will not always represent that seat. Were he ever to represent a seat in south-east England, he might find that his constituents raised that matter on many occasions.

Theresa Villiers (Conservative, Chipping Barnet)

I should like briefly to respond to one point made by the Paymaster General. She may feel that the number of estates affected by inheritance tax is not significant, but the tax is causing real anxiety in middle England and is impacting increasingly widely, as the statistics I mentioned show.

Dawn Primarolo (Labour, Bristol South)

I agree that it is causing real anxiety, because some people are perpetuating the myth that every person who has a house over the threshold now—even though the event of their death might not occur for 30, 40 or 50 years—is liable for inheritance tax. That is not true.

Theresa Villiers (Conservative, Chipping Barnet)

People are quite able to assess their own assets and whether they are likely to pay IHT. A significant number of my constituents are deeply worried about that.

Clause 157

Dawn Primarolo (Labour, Bristol South)

We now turn to the point made by the hon. Member for South-East Cornwall aboutwho pays inheritance tax. Clause 157 introducesschedule 20, and together the clause and schedule make important changes to how certain types of trusts are treated for tax purposes. In particular, they bring the tax regime for accumulation and maintenance and interest-in-possession trusts into line with the mainstream tax regime that is already in place for discretionary trusts.

Since the Government announced these changes, there has been an enormous amount of discussion, and some considerable misunderstanding, about what the new rules do. The speculation about the magnitude of the changes and the number of people affected by the proposed measures has been blown out of all proportion. I freely admit that I have been taken by surprise by the force with which the exaggerated figures have been advanced, given the comments that I have made at every stage, on Second Reading and in Committee of the whole House.

Bearing in mind the apparent confusion, I thought that it would help, at the beginning of a detailed series of debates, if I set out briefly precisely what the measures are designed to achieve—and why. A moment ago, we touched on the fact that inheritance tax is a tax on the transfer of wealth that is generally levied when someone dies and bequeaths substantial assets to others, over the threshold of £285,000. If there are assets of £286,000, the tax is not levied on the £286,000. That is, perhaps, another common misunderstanding.

The majority of people who have assets leave them to others outright when they die, but some choose to set up trusts as a way of passing on their wealth. Because trusts do not die, there is no natural occasion on which inheritance tax might be paid, so it disappears into a labyrinth. It is to that labyrinth that schedule 20 addresses itself.

Theresa Villiers (Conservative, Chipping Barnet)

The Paymaster General says that there is no death on which IHT can bite, but there clearly is in an interest in possession trust. Why is the Paymaster General seeking to align the rules on interest in possession trusts with those on discretionary trusts when the problem that triggered the regime on discretionary trusts—the lack of a death to which to attach the IHT charge—does not exist in relation to IIP trusts?

Dawn Primarolo (Labour, Bristol South)

I am coming to that. As we move through the debate, it is important to keep in view the facts, as opposed to speculation and the smokescreens that have been put up to suggest that we are considering something that we are not. On discretionary trusts, the tax regime already recognises the reality that a trust does not die or come to an end, so there is no natural occasion on which inheritance tax will be paid. To make up for the missing potential inheritance tax, special IHT charges apply when money is put into a trust, periodically while the assets remain in the trust and again when they leave.

Let me make it clear that I am talking about assets in excess of the current threshold of £285,000.

Julia Goldsworthy (Liberal Democrat, Falmouth and Camborne)

Will the right hon. Lady give way?

Dawn Primarolo (Labour, Bristol South)

Let me finish the point.

The two types of trust that have, until now, been exempt from the charges are accumulation and maintenance trusts and interest in possession trusts. There is no clear rationale for privileging those trusts in that way, and it has become clear that some wealthy individuals have taken advantage of that special treatment as a convenient way of sheltering their wealth from inheritance tax. That is clearly unfair, as the hon. Member for South-East Cornwall suggested, and contributes to the widely held notion, which has already been expressed in this Committee, that IHT is optional, at least for the very rich.

Julia Goldsworthy (Liberal Democrat, Falmouth and Camborne)

If somebody wishes to put his estate into a trust, does he not have to tailor that trust so that it complies with existing inheritance tax and trust legislation even if his assets are below the IHT threshold? Will not such a person, whether he is a long way or only just below the threshold, have to comply with the new legislation?

Dawn Primarolo (Labour, Bristol South)

No, the hon. Lady misunderstands. There is a nil band that covers everything up to and including the threshold. Inheritance tax becomes operational once all the assets are in excess of the threshold and are not protected by any exemption.

We are in danger of entering into debate on the schedule, and I am trying first to lay out the Government’s intentions, and to explain why there is no apparent rationale in relation to the two types of trust that I mentioned. The measure that was announced goes to the heart of the difference between money put into trusts and outright gifts. Under the old rules, accumulation and maintenance trusts and IIP trusts received the same tax treatment and the transfer was potentially exempt from IHT. If the person making it survived for seven years, no IHT liability arose.

It is somewhat simplistic to think that the two activities are identical just because they received the same inheritance tax treatment in the past. The recipient of a gift can do whatever they want with it. There is certainly no need to ask permission from the person who gave it to them. Things are quite different for the beneficiary of a trust. The beneficiary will only get what the trustees decide to give them. That might be the income generated by the trust assets or the right to live in a house owned by the trust, but the beneficiary will often have no say whatever about what happens to the capital in the trust. If trustees decide to give trust assets to someone else, there might be nothing at all the beneficiary can do about it. In short, someone making a gift relinquishes control of whatever they are giving. Someone setting up a trust does the opposite.

By leaving instructions for the trustees, the control of those who set up trusts can linger long after they have died. As I have said, it is control that makes the crucial difference. There is no reason why money in trusts should continue to be treated as akin to an outright gift when it is clearly not. Since there is already a tax regime designed to properly capture IHT on trust assets, it seems entirely logical for A and M trusts and IIP trusts to come under these rules.

As I mentioned, there has been a great deal of confusion, one aspect of which was the idea that millions of people will be affected by the new rules. I repeat that that is simply not the case. We have no specific provision for existing trusts, and in future only new trusts with substantial assets in excess of the IHT threshold of £285,000 can attract a charge. Commentators have also said that the charge is retrospective. That is incorrect: there is no retrospective tax charge. Some old arrangements might have different tax consequences in the future, but there is nothing new in that. That is how the tax system works.

I would like to touch on some areas that the Committee may consider important. The first of these is trusts for children. The Bill makes special provision for trusts set up by a parent who wants to provide, in the event of their death, for any of their children who are minors. The Government have said from the outset that such trusts should receive special tax treatment, but not where they are intended to continue to provide benefit after the child reaches adulthood: the age of 18. At that age, special tax treatment stops and the trust begins paying income and capital gains tax. It is the age at which children will be entitled to the money in their child trust fund.

It is clear that some commentators would like the special rules to run on. Some would like them to run on indefinitely, and others until the age of 25, which is the age currently embedded in the legislation. Others have suggested that the Government are somehow forcing young people to inherit money that they will simply fritter away. I, for one, have more faith in our young people. We have provided for trustees to be able to give children trust assets when they reach adulthood at the age of 18 and pay no inheritance tax, or to choose to keep the money in trust until the age of 25 while paying a small amount of tax. We shall debate that aspect later.

The other area of great concern, about which there has been considerable confusion, is that of spouse relief, particularly trusts set up on the death of a spouse or civil partner. It has been suggested that the measure was conceived as an attack on the long-standing spouse relief exemptions built into IHT rules. I said it in the Committee of the whole House and on Second Reading, and I say it again now: that is not the case. We have been absolutely clear from the outset—and I have made it absolutely clear to Parliament at every opportunity—that the measure has nothing to do with spouse relief. There is no question of spouse relief being jeopardised in straightforward cases. That has always been the Government’s position, and I have covered that before. We will discuss the matter later, when I can expand on those points.

There is also the question of life insurance policies. Again, it has been repeatedly made clear that life insurance policies written into trust before Budget day will benefit from pre-Budget rules, just as with any other pre-Budget trust. Despite some truly spectacular comment, and speculation that millions of policyholders would be affected, following discussions and improved guidance notes the industry accepts that that would not be the case. Of course, people read those reports and were unnecessarily worried, and naturally they are seeking further reassurance, even though it is not necessary. We will debate the matter later, but I make it absolutely clear, again, that the position of life insurance policies is as the Government originally stated. At one stage, it was claimed that some 4.5 million people would be affected by the measure, but that is absolutely not the case.

In response to the point made by the hon. Member for South-East Cornwall, the Government recognise that trusts have an important role to play in helping people to manage their affairs, and the exemptions are there to do that. We believe that there should be no artificial incentive for setting up trusts because they provide an opportunity for an unfair inheritance tax advantage. For that reason, over the past few years the Government have made a number of changes, and are closing loopholes in the inheritance tax regime in this Finance Bill. There has been considerable discussion at each point. The tax regime for trusts is being brought into line so that, as the hon. Gentleman said, there will be more fairness in how and when the rules bite.

The new inheritance tax rules for accumulation and maintenance trusts, as well as interest in possession trusts, are a logical step in that process, and are part of that fairness argument. They will make inheritance tax fairer, in terms of who pays it and under what circumstances. People will feel that it is fairer because they will no longer see others taking advantage of trusts to pay it. That is a huge driving force in people’s perception of the tax system, and it influences their behaviour if they feel that that is a way through.

I commend the clause to the Committee, and I look forward to our detailed debates this afternoon as we move through amendments to the schedule.

Theresa Villiers (Conservative, Chipping Barnet)

I do not want to anticipate the lengthy debates that we will have in the next few hours, but I feel obliged to pick up on some of the points made by the Paymaster General. For example, she repeatedly suggested that the types of trust targeted by schedule 20 are, at the moment, somehow privileged. They are not privileged; they are, broadly, treated in the same way as outright gifts. That has been a principle of taxation for many years, and the Government repeated that in their consultation process on the modernisation of trusts. The Government now seek to depart from that principle by treating such trusts in a more penal, punitive way than outright gifts.

It is a fact that the discretionary trust regime was devised to meet a particular concern about a particular type of trust in which there was no death on which the inheritance tax charge could bite; that, as I pointed out in my intervention, is not the case with an interest in possession trust, where the full property is taxed at40 per cent. when the life tenant dies.

Rob Marris (Labour, Wolverhampton South West)

The hon. Lady talks about death. Is there not a charge when a discretionary trust is eventually wound up, after 80 years or whatever it is—she will know the figure, given her background—because of the law against perpetuities?

Theresa Villiers (Conservative, Chipping Barnet)

The discretionary trusts will be wound up eventually. They are subject to the periodic charge regime, so at that point we are talking about 6 per cent. every 10 years. Whatever the proportion since the last 10-year anniversary will be paid when the discretionary trust is wound up.

We shall explore the fact that the measures are retrospective simply because it is not always possible to vary a will or a trust. It is also not possible for a settlor to wind back the clock and take the decision on whether to set up a trust again. The Paymaster General denies that the provisions in schedule 20, as drafted, force parents to give large amounts of wealth to teenagers, but it severely penalises those parents who want to postpone the vesting of a gift until 25 has been reached.

The Paymaster General says that schedule 20 has no impact on spouse relief. I am therefore interested to hear why she has tabled significant amendments to the provisions on IIP trusts, which would have a significant impact on spouse relief. I welcome the amendments that she has tabled on that matter, but if schedule 20 had no effect on spouse relief, why is there any need for her to have tabled about 30 amendments to her own proposals?

I am also worried that while the Paymaster General referred to current life insurance policies not being covered by the schedule, she made no mention and gave no reassurance in respect of life insurance to be written in trust in the future. If all these are scare stories, why has she tabled so many amendments—many of which are welcome—to her own schedule?

I come now to a few general remarks of my own. I repeat that this is a tax and a schedule that impacts on middle-income people and middle England. It penalises responsible behaviour and thrift. [Interruption.] If Labour Members believe that inheritance tax does not impact on middle-income people, they are clearly living in a different country from me.

Helen Goodman (Labour, Bishop Auckland)

I do not know whether the hon. Lady is aware that the right hon. Member for West Dorset (Mr. Letwin) has made a number of interesting comments in his attempt to help the leader of her party reposition. In particular, he has said that inequality is a problem. Does she agree with that? Her remarks on inheritance tax do not suggest that she does.

Theresa Villiers (Conservative, Chipping Barnet)

That is nothing to do with the issue that we are currently discussing, which is a tax that penalises thrift and responsible behaviour. It penalises not only the rich, but ordinary middle-income families of modest means who are just trying to get by.

Trusts have been incorporated into a vast array of different transactions and settlements. They give rise to few, if any, tax advantages and most are set up for reasons that have nothing to do with tax. The Opposition would be happy to support targeted measures to clamp down on attempts to use trusts as part of aggressive and artificial tax avoidance schemes. However, the vast majority of those creating trusts of the type affected by schedule 20 tend to have social, family and human reasons for their actions.

Trusts tend to encourage long-term planning and the responsible management of property, and have played a significant role in conserving our cultural and environmental heritage. They can be used to guard against profligacy and imprudent behaviour, assist vulnerable people struggling with addiction, ill health, disability or mental illness—[Interruption.] If the hon. Member for Wolverhampton, South-West does not believe me on that point, he should talk to Mind about its concerns about schedule 20.

Trusts can also be used to ensure that the proceeds of life insurance are paid out promptly to help a bereaved family cope with the financial consequences of premature and tragic death. Above all, they allow families to provide for their future in a considered, flexible and responsible way. They enable the different and often competing interests of family members to be balanced fairly. For example, a trust can be an invaluable aid in achieving the difficult task of mediating between the interests of step-parents and stepchildren.

Edward Balls (Labour, Normanton)

Does the hon. Lady estimate that the majority of her constituents have a family trust or not?

Theresa Villiers (Conservative, Chipping Barnet)

I would say that the majority who have made a will would have a family trust in it. There is little doubt about that. Anyone who has drawn up a will, who has children and has had professional advice is likely to have a trust in that will.

The Government do not seem to have understood that trusts are included in wills to deal with contingencies and events that might never happen. There are far more trusts in wills than end up being created because people are encouraged to plan responsibly for unforeseen events, such as the death of a child before the parent. It is likely therefore that more or less anyone with children who has drawn up a will on professional advice in the last 10 years or so will have included a trust in that will.

Rob Marris (Labour, Wolverhampton South West)

The hon. Lady has heard a different Paymaster General from the one that I have, and she has read a different Finance Bill from the one that I have. I see no Government proposal for the abolition of trusts.

We are talking in proportions so I shall ask the hon. Lady for one: each year, what proportion of people die intestate, either in her constituency or the whole of the United Kingdom?

Theresa Villiers (Conservative, Chipping Barnet)

Far too many. We should be encouraging people to make wills. It is hugely important that as many people as possible make wills. It does not help when the Government change legislation retrospectively, forcing people to undertake unnecessary costs and causing them unnecessary anxiety.

Stephen Hesford (Labour, Wirral West)

The hon. Lady mentioned that those who make a will will almost certainly make it on the back of financial advice. Is that advice not usually tax-avoidance advice?

Theresa Villiers (Conservative, Chipping Barnet)

No, it is not. Tax can come into that, but the reason that trusts, as I have said, are generally included in wills is to provide for the different interests of family members. For example, trusts can be hugely useful in making the assets of a divorcing couple stretch over two households—another important area in which they are used frequently. They can help to look after elderly relatives when old age affects their mental capacity or provide for bereaved children. They can comply with sharia principles while at the same time provide properly for a spouse, or simply provide flexible answers for people who are not confident that they can foretell all family circumstances that will apply in a few years’ time.

Trusts are an important tool for thousands in this country enabling them to manage the complications of family life and well-being in modern Britain. Imposing punitive new taxes on trusts ignores the realities of modern family life. Trusts provide an invaluable aid for those juggling what are sometime conflicting interests of different family members.

Resistance to the new charges, which the Paymaster General dismissed as scare stories, was instant and wide-ranging. Strong protests have been registered by the Society of Trust and Estate Practitioners, the Institute of Chartered Accountants, the Chartered Institute of Taxation, the Law Society of England and Wales, the Law Society of Scotland, the Low Incomes Tax Reform Group, Mind, the Parkinson’s Disease Society, the Association of Chartered Certified Accountants, the Association of British Insurers, the Association of Private Client Investment Managers and Stockbrokers, and most recently, I gather, the National Autistic Society. They have been joined by hundreds of lawyers, accountants, companies and ordinary individuals affected by the proposed changes.

I do not think that all those people are taken in by scare stories; they are genuinely worried about the impact of schedule 20. The Treasury Committee also asked the Government to look again at their estimate of how many people would be affected. The national media has waded into the debate in the tabloid and broadsheet press and on broadcast personal finance programmes.

Deep concern has been expressed about the Government’s complete failure to consult on the proposals, the retrospective impact of schedule 20,the genuine threat to the spouse exemption posed by schedule 20, the penal treatment of trusts that vest at 25 years of age, the threat of IHT being applied in divorce cases, the impact on the disabled and the vulnerable, the impact on millions of life insurance policies and the huge cost of reviewing and redrafting the millions of potentially affected wills.

I was surprised by the Paymaster General’s opening remarks because she showed no change of view from her approach in the Committee of the whole House. That is somewhat surprising in the light of significant and, in the main, welcome changes from the Government.

When I set out a few of the concerns that the professional groups have represented to me, the Paymaster General, rather harshly, said:

“The hon. Lady does not know what she is talking about.”

She accused me of a

“‘Let's make it up, because it must be true if we say it,’ approach.”—[Official Report, 2 May 2006; Vol. 445, c. 867-68.]

She then proceeded to make it clear that she had not even started on the invective. Yet she responded directly—I welcome that response—to a number of the serious concerns that I expressed, particularly about conditions 3 and 4 in new section 49A of the Inheritance Tax Act 1984 on immediate post-death interests.

Dawn Primarolo (Labour, Bristol South)

We have not reached the amendments yet and I will deal with those questions when we do.

Does the hon. Lady agree that what I said on the Floor of the House and what is in the Bill, with the amendments, is entirely consistent? [Interruption.]No, we did not change our mind. I do not want to drift into that, but if the hon. Member for Rayleigh(Mr. Francois) intervenes and asks me exactly what happened when we reach the amendments, I will tell him.

The hon. Lady keeps saying that all middle-income families will have to rewrite their wills and to do this and that, but she cannot even tell us what middle income is, so how does she know the numbers?

Theresa Villiers (Conservative, Chipping Barnet)

As I have said, it is patently clear that millions of wills will have to be rewritten. Evidence for that has been provided by the Society of Trust and Estate Practitioners. I acknowledge that the Government’s amendments will significantly mitigate the problem. I repeat that if there was nothing wrong with schedule 20, why has the Paymaster General found it necessary to table so many amendments to it, particularly on the spouse exemption that we raised and discussed? I believe that middle England has spoken out and I welcome the Paymaster General’s 11th-hour reprieve for many of the trusts that would have been subject to the new charges had schedule 20 remained unamended. However, as we will see from the discussions that follow, despite the real and very welcome changes in some of the amendments in the long list of Treasury amendments to its own Bill, real and serious problems remain in schedule 20, which is why I shall ask my colleagues to vote against the clause to demonstrate our continuing concern about the schedule that it puts into effect.

Julia Goldsworthy (Liberal Democrat, Falmouth and Camborne)

I shall keep my introductory remarks to one of the most controversial and amended parts of the Bill brief. I note that the explanatory notes to the clause state:

“So far as new trusts are concerned...it continues the current special treatment for ‘interest-in-possession’ trusts created on intestacy and straightforward interest in possession trusts created by will; and for ‘accumulation and maintenance trusts’ to trusts created on the death of a parent where beneficiaries will take the trust assets at age 18.”

They also state:

“Trusts for ‘disabled persons’ will also continue to enjoy special treatment”.

I echo the comments of the hon. Member for Chipping Barnet. If the matter is so simple and straightforward, why has it been necessary for the Government to introduce so many amendments to their own legislation? On the face of it, if the Bill had provided for that it would not be necessary to amend it.

There have been representations from the industry and amendments have been tabled by the Government and the Opposition. It is clear that a huge amount of concern and confusion has been generated by this part of the Bill. Even with the Government’s amendments, the changes in the clause and schedule represent fundamental changes to trust inheritance tax, perhaps the greatest for 25 years. Even if those concerns are misunderstood, they undeniably exist throughout the industry and may be due in part to the fact that there was no consultation prior to the proposals being put forward. That contrasts with the action taken by the Government in 2003 when they announced measures and that there would be consultation on proposals to tackle tax avoidance using trusts with measures relating to income tax and capital gains tax.

The rationale behind the changes is still not clear and it is not clear why they were introduced so suddenly if they would have such a small impact on tax revenues. What mischief are the Government trying to tackle and how much do they expect future revenue to change as a result?

I have listened carefully to the Paymaster General’s comments and there is clearly a genuine feeling that there is mischief that must be overcome, but if there is an anomaly, surely it is in relation to potentially exempt transfers, whereby people who are cash rich can make lifetime cash transfers that are not liable for inheritance tax. However, those individuals whom the Liberal Democrats refer to as middle-income households, have assets that may be tied up in property, so they do not have the option to make those cash gifts.

Dawn Primarolo (Labour, Bristol South)

Is the hon. Lady suggesting that the Liberal Democrat policy is to abolish potentially exempt transfers?

Julia Goldsworthy (Liberal Democrat, Falmouth and Camborne)

I am simply saying that if the Government are trying to address an anomaly, they should look into that area, not simply into the taxation request.

I should be interested to know why the Paymaster General thinks that so many amendments are necessary. They will all be dealt with in turn, but I cautiously welcome many of the Government amendments that help to provide greater clarity, such as those relating to spouse exemption. They have allayed the many fears that have been flying around during the past few months. However, other amendments, which relate to life insurance policies, were deemed incomprehensible by representatives who were trying to help me to get to grips with this aspect of the Bill.

There are further inconsistencies in those amendments. Although the Government have gone to great lengths to provide transitional protection in the area under discussion, in others they have absolutely neglected to do so. Any greater clarification of the clauses is welcome, but the intervening period since the original announcements has created a great deal of worry for many.

Many of the amendments will help to smooth some of the Bill’s rough edges, but the concern is that there will be plenty left. If the Government have been tabling amendments in the past few days, what other areas are going to come to light as those detailed and complex proposals are put into practice in the months to come? The concern is that year after year, there will be endless tweaking to try to get the legislation to do what it was intended to do. I am concerned that we will not deal with all those rough edges today.

Rob Marris (Labour, Wolverhampton South West)

The hon. Member for Chipping Barnet was right about some things. There are many reasons why people have a trust, write a trust or whatever, and they are not all financial, nor are they for tax avoidance purposes. However, I note with interest that, two or three weeks ago, the Channel 4 money website said:

“Two in every three trusts deeds written are used to reduce liabilities to Inheritance Tax.”

I think that I practised law rather longer than the hon. Lady did, and what the Channel 4 money website said is consistent with my albeit limited experience.

Theresa Villiers (Conservative, Chipping Barnet)

I choose to respond to that point in the same way that I responded to a similar point that the Paymaster General made in Committee of the Whole House. I quoted a lengthy list of organisations that highlight the fact that the majority of trusts hit by the provision are set up for family reasons, not tax reasons. I would believe people from the Institute of Chartered Accountants or the Low Incomes Tax Reform Group over the Channel 4 website.

Rob Marris (Labour, Wolverhampton South West)

I am grateful to the hon. Lady, because she leads me nicely to my second point. I hope that the Paymaster General, or any other hon. Member, feels free to intervene on me if I am getting it wrong, but my understanding and recollection is that in this country, there are four types of trust: interest in possession, life interest, discretionary and accumulation and maintenance. As far I am aware, and please could the Paymaster General correct me if I am wrong, none of them is being abolished under the Bill or the amendments. Yet, the tenor of the comments from the hon. Member for Chipping Barnet is that somehow in a Finance Bill, the Government are abolishing or seeking to abolish one or more of those four trust categories. That is not the case.

Theresa Villiers (Conservative, Chipping Barnet)

As a lawyer, the hon. Gentleman knows that the imposition of penal taxes on a particular type of legal arrangement has an impact on whether people feel able to use it to deal with their family problems.

Rob Marris (Labour, Wolverhampton South West)

Of course it will have an impact. However, as I said, the tenor of the hon. Lady’s remarks, as we heard them on this side of the Committee, was that one or more of the four categories of trust would be abolished. That is not the case. Affected, yes; impact—to use her word—yes; abolished, no. It is not the case; it is not being abolished. Is any of the four being abolished?

Theresa Villiers (Conservative, Chipping Barnet)

A and Ms will virtually go.

Rob Marris (Labour, Wolverhampton South West)

The hon. Lady says that accumulation and maintenance trusts will virtually go. That is not abolition; her use of the adverb “virtually” characterises, if I may put words in her mouth, what she would describe as a very severe impact. What she says about middle income seems to be very ill defined, as is the term “middle England”. I have the honour to represent a constituency in England in which approximately 80,000 people live, and about two thirds of them are middle class. If all 37,000 of the people who died this tax year and paid inheritance tax lived in my constituency, they would still make up fewer than half its residents. That is just one constituency. If we are going to talk about middle income and middle England, we must bear in mind—before somebody intervenes on me, I know that there are more trusts than that—that only 37,000 estates pay inheritance tax. Again, before the hon. Lady intervenes on me, I am aware that trusts are used by far more people than those 37,000.

Theresa Villiers (Conservative, Chipping Barnet)

The Paymaster General cited as one of the justifications for her figures for the number of estates affected by inheritance tax the fact that inheritance tax did not bite when there was a transfer between spouses. In reality, schedule 20 would have a severe impact on such transfers, and would make significant inroads into the number of estates covered by inheritance tax. Because of the Paymaster General’s about-turn, that threat has been averted, but the schedule could still have a significant impact on the number of estates hit by IHT.

Rob Marris (Labour, Wolverhampton South West)

The hon. Lady used to lecture in law, but she did so a considerable time after I learned my law in the 1980s. At that time, we had what was called capital transfer tax. Transfer in that context meant a gift between person A and person B. The hon. Lady just used the phrase “transfer between spouses”. To my generation of lawyers, if not to hers, that means a gift—not a gift into a trust as a mechanism but a gift.

My right hon. Friend the Paymaster General, indeed, used the word “transfer”. Although she is perhaps wearing rather better than I am, she is of my generation; she was talking about a gift between spouses, not via a trust. So far as I am aware, outright gifts between spouses upon death will not be affected at all. If the hon. Lady thinks that they will, she can tell me. Outright gifts will not be affected, although they might be but when refracted through a trust. That is different. In that sense, as I understand the legal position, my right hon. Friend was absolutely right to make it clear that transfers between spouses would not be caught by inheritance tax either under the old regime or under whatever regime comes out of the proposals in this Bill.

I also say to the hon. Lady that, although I appreciate that it might be different in her part of north London—I am prepared to concede that—the majority of people who die each year in the United Kingdom die intestate. They go nowhere near a trust under a will, because they do not have a will. If they were smart, they would join a trade union and they would get a free will from that trade union.

Theresa Villiers (Conservative, Chipping Barnet)

I am sure that the hon. Gentleman will recall from his days as a lawyer that statutory trusts arise automatically on intestacy. Section 32 of the Trustee Act 2000 applies to such trusts, and schedule 20 would therefore apply the new charges to trusts arising as a result of intestacy. Therefore, those who die intestate could still be affected by the changes. Section 32 has that impact because it imports sufficient flexibility into a trust arising under intestacy to make it breach condition 4. Condition 4 is going as a result of the Paymaster General’s amendment, and mine, so it is no longer a problem, but as drafted—

Joe Benton (Labour, Bootle)

Order. That is too lengthy for an intervention.

Rob Marris (Labour, Wolverhampton South West)

It is an interesting intervention. I will not be tempted too far down that path because the hon. Lady’s knowledge is far greater than mine. My recollection of statutory trusts—I am open to correction on this—is that they apply only to quite large estates, but we shall come to that when we get on to the amendments.

In closing, I welcome what my right hon. Friend the Paymaster General has said. Many amendments are being tabled to clarify matters and to reassure people because of the large number of scare stories. As politicians, if we are honest with ourselves—even if we are not while in the debating chamber—we all know that we try to have it both ways. If we say, “I want to reassure people and clarify things so I’ll table an amendment”, people say, “Oh! You’ve done a u-turn.” If we do not do any of that, they say, “You never listen to people.” We are all prone to that as politicians. I welcome my right hon. Friend’s approach to the matter, and I look forward with interest to debating the amendments.

Philip Dunne (Conservative, Ludlow)

I shall reserve most of my remarks for the debate on the amendments, but I would like to address a point made by the Paymaster General.

Stephen Hesford (Labour, Wirral West)

Has the hon. Gentleman no interest to declare at this point?

Philip Dunne (Conservative, Ludlow)

I am most grateful for that intervention from someone who has just got back from Germany. He may find an opportunity to declare an interest relating to football.

Has the Paymaster General any evidence of the abuse she is trying to address in relation to the use of accumulation and maintenance trusts for some sortof tax avoidance? She was most helpful in her introduction to the earlier debate on inheritance tax by identifying that 6 per cent. of estates paid it. She has provided not a jot of evidence concerning the other claim. The hon. Member for Wolverhampton, South-West referred to the Channel 4 website as his source for evidence of abuse.

The Paymaster General was invited by the Treasury Committee in its report of 20 April to provide evidence before the Committee sat to consider the clauses. The report said:

“We are concerned that a legitimate measure designed to reduce tax avoidance may penalise trusts established to protect family members and consider that the issue merits further consideration. We recommend that the Government provide”—

this is the important point—

“detailed information about how it has arrived at its estimate that the new rules on the tax treatment of certain trusts will affect only ‘a minority of a minority’ of 100,000 discretionary trusts. This information should be provided prior to consideration in Committee of the House of Commons of Clause 57 of, and Schedule 20 to, the Finance Bill.”

Other hon. Members may have received this detailed information, but before we get to the amendments, I ask the Paymaster General to provide that information to us all.

Schedule 20

Theresa Villiers (Conservative, Chipping Barnet)

I beg to move amendment No. 287, page 111, line 13 [Vol II], leave out

‘settled property (including property settled before 22nd March 2006)'

and insert

‘property settled on or after 22nd March 2006'.

Joe Benton (Labour, Bootle)

With this it will be convenient to discuss the following: Amendment No. 280, page 111, line 30 [Vol II], leave out from beginning to end ofline 7 on page 112 and insert—

‘(a) that the bereaved minor, if he has not done so before attaining the age of 18, will on attaining that age become absolutely entitled to the settled property or to the income arising from it,

(b) that the bereaved minor, if he has not done so before attaining the age of 25, will on attaining that age become absolutely entitled to—

(i) the settled property, and

(ii) any income that has arisen from the property held on the trusts for his benefit and been accumulated before he became beneficially entitled to the property in accordance with paragraph (a) above,

(c) that, for so long as the bereaved minor is living and under the age of 25, if any of the settled property is applied for the benefit of a beneficiary, it is applied for the benefit of the bereaved minor, and

(d) that, for so long as the bereaved minor is living and under the age of 18, either—

(i) the bereaved minor is entitled to all of the income (if there is any) arising from any of the settled property, or

(ii) no such income may be applied for the benefit of any other person.'.

Amendment No. 272, page 111, line 31 [Vol II], leave out ‘18' and insert ‘25'.

Government amendments Nos. 355 and 356.

Amendment No. 281, page 112, line 41 [Vol II], leave out

‘on attaining the age of 18 or becoming, under that age, absolutely entitled as mentioned in'

and insert

‘becoming entitled as mentioned in paragraph (a) or (b) of'.

Amendment No. 273, page 112, line 41 [Vol II], leave out ‘18' and insert ‘25'.

Amendment No. 282, page 112, line 44 [Vol II], leave out ‘that age' and insert

‘the age at which he would have become absolutely entitled as mentioned in paragraph (a) or (b) of section 71A(3) above'.

Amendment No. 288, page 113, line 12 [Vol II], leave out from ‘subsection,' to end of line 23 and insert

‘there were substituted for the reference to 13th March 1975 in subsection 8(b) a reference to 22nd March 2006.'.

Government amendment No. 357.

Amendment No. 274, page 113, line 26 [Vol II], leave out ‘18' and insert ‘25'.

Government amendments Nos. 358 and 384.

Amendment No. 290, page 113 [Vol II], leave out lines 42 to 44.

Amendment No. 291, page 114 [Vol II], leave out lines 9 to 23.

Amendment No. 275, page 114 [Vol II], leave out lines 10 to 14 and insert—

‘For section 71(1) of IHTA 1984 substitute—

“(1) Subject to subsections (1A) to (2) below, this section applies to settled property if—

(a) one or more persons (in this section referred to as “beneficiaries”) will, on or before attaining a specified age not exceeding twenty-five, become absolutely entitled to it, and

(b) until a beneficiary becomes entitled to the settled property or the income arising from it, the settled property and the income from the settled property is to be accumulated so far as not applied for the maintenance, education or benefit of a beneficiary.”.'.

Amendment No. 284, page 114 [Vol II], leave out lines 10 to 14 and insert

‘For section 71(1) of IHTA 1984 substitute—

“(1) Subject to subsections (1A) to (2) below, this section applies to settled property if—

(a) one or more persons (in this section referred to as beneficiaries) will, on or before attaining a specified age not exceeding eighteen, become absolutely entitled to it or to any income arising from it,

(b) where a beneficiary becomes entitled pursuant to paragraph (a) above to the income arising from the settled property rather than to the property itself, that beneficiary subsequently becomes absolutely entitled to the property concerned on or before attaining a specified age not exceeding twenty-five, and

(c) until a beneficiary becomes entitled to the settled property or the income arising from it pursuant to paragraph (a) above, the settled property and the income from the settled property is to be accumulated so far as not applied for the maintenance, education or benefit of a beneficiary.”.'.

Amendment No. 276, page 114, line 14 [Vol II], at end insert—

‘(1A) Section 71(4) shall be replaced with the following provision with effect from 6th April 2008—

“(4) Tax shall not be charged under this section—

(a) on a beneficiary's becoming absolutely entitled to, or to the income arising from, settled property on or before attaining the specified age,

(b) on the death of a beneficiary before attaining the specified age.”.'.

Amendment No. 285, page 114, line 14 [Vol II], at end insert—

‘(1A) Section 71(4) shall be replaced with the following provision with effect from 6th April 2008—

“(4) Tax shall not be charged under this section—

(a) on a beneficiary's becoming absolutely entitled to, or to the income arising from, settled property on or before attaining the age specified for the purposes of paragraph (a) of subsection (1) above or, if later, on the beneficiary becoming absolutely entitled to the settled property on or before the age specified for the purposes of paragraph (b) of subsection (1) above, or

(b) on the death of a beneficiary under the age at which he would have become absolutely entitled to the settled property pursuant to paragraph (a) or (b) of subsection (1) above.”.'.

Amendment No. 286, page 114, line 14 [Vol II], at end insert—

‘(1B) In section 71(6) IHTA 1984 leave out ‘and' after ‘paragraphs (a)' and insert ‘and (c)' after ‘(b)'.'.

Amendment No. 292, page 114, line 38 [Vol II], after ‘section', insert ‘71 or'.

Amendment No. 293, page 115, line 22 [Vol II], after ‘section', insert ‘71 or'.

Amendment No. 294, page 115, line 27 [Vol II], after ‘section', insert ‘71 or'.

Amendment No. 297, page 116, line 35 [Vol II], after ‘section', insert ‘71 or'.

Amendment No. 277, page 119, line 11 [Vol II], after ‘which', insert ‘section 71(1)(a) or'.

Government amendment No. 365.

Amendment No. 278, page 119, line 18 [Vol II], after ‘which', insert ‘section 71(1)(a) or'.

Government amendments Nos. 366 and 367.

Amendment No. 279, page 120, line 42 [Vol II], after ‘end', insert ‘section 71(1)(a) or'.

Government amendments Nos. 369, 371and 372.

Theresa Villiers (Conservative, Chipping Barnet)

I shall come to the breakdown of the amendments that I have tabled in due course. In the spirit of compromise I have tabled a number of alternative formulations, which makes the Chairman’s task of reading them out rather complex.

The amendments would alter the schedule’s treatment of accumulation and maintenance trusts and those trusts that vest in children at 25. Such trusts have traditionally enabled parents and grandparents to make long-term financial provision for children. They were devised in the 1970s by a Labour Government, not to help the super-rich shelter their wealth from inheritance tax, but to help parents and grandparents provide prudently and responsibly for children. Until the child is 25, trustees, usually the settlors and a solicitor, can retain control over the income and capital. After the age of 25, the beneficiary gets the right to receive the income. In some cases, the trust will also provide that the capital passes to the beneficiary at age 25, but more often the trustees will retain some control over that capital for a period.

Schedule 20, as drafted, seeks to penalise such trusts by bringing them within the framework of rules for discretionary trusts, unless they fall within the narrow category of “trusts for bereaved minors”. Under the schedule, the beneficiaries under such settlements must be given the property, income and capital outright at 18, if not, a 20 per cent. charge will be made on property transferred into the trust, with a 6 per cent. charge every 10 years thereafter, along with an exit charge on capital advanced out of the trust.

We come now to the highly controversial aspect of schedule 20. The new regime for accumulation and maintenance trusts and bereaved minor trusts thus imposes a tax penalty on those who wish to provide financial support for their children, but wish to restrict the control and access to the money until their children reach 25. The schedule actively encourages the transfer of significant wealth to 18-year-olds. Indeed, where such trusts are already in operation, it more or less forces the trustees to do that. At least for new trusts, the settlor can take a decision about whether to make the gift at all. In the case of existing trusts, the “no transfer” option is no longer available. Either the trustees opt to vest all the property in the 18-year-old or the trust is hit by the unexpected and punitive tax bill. That seems to be contrary to common sense and certainly contrary to the principles of prudence to which the Chancellor used to subscribe.

An ICM poll commissioned by solicitors Brewin Dolphin recently revealed—

Standing Committee A

Schedule 20

John Butterfill (Conservative, Bournemouth West)

I remind the Committee that with this we are discussing the following:

Amendment No. 280, in page 111, line 30 [Vol II], leave out from beginning to end of line 7 on page 112 and insert—

‘(a) that the bereaved minor, if he has not done so before attaining the age of 18, will on attaining that age become absolutely entitled to the settled property or to the income arising from it,

(b) that the bereaved minor, if he has not done so before attaining the age of 25, will on attaining that age become absolutely entitled to—

(i) the settled property, and

(ii) any income that has arisen from the property held on the trusts for his benefit and been accumulated before he became beneficially entitled to the property in accordance with paragraph (a) above,

(c) that, for so long as the bereaved minor is living and under the age of 25, if any of the settled property is applied for the benefit of a beneficiary, it is applied for the benefit of the bereaved minor, and

(d) that, for so long as the bereaved minor is living and under the age of 18, either—

(i) the bereaved minor is entitled to all of the income (if there is any) arising from any of the settled property, or

(ii) no such income may be applied for the benefit of any other person.'.

Amendment No. 272, in page 111, line 31 [Vol II], leave out ‘18' and insert ‘25'.

Government amendments Nos. 355 and 356.

Amendment No. 281, in page 112, line 41 [Vol II], leave out

‘on attaining the age of 18 or becoming, under that age, absolutely entitled as mentioned in'

and insert

‘becoming entitled as mentioned in paragraph (a) or (b) of'.

Amendment No. 273, in page 112, line 41 [Vol II], leave out ‘18' and insert ‘25'.

Amendment No. 282, in page 112, line 44 [Vol II], leave out ‘that age' and insert

‘the age at which he would have become absolutely entitled as mentioned in paragraph (a) or (b) of section 71A(3) above'.

Amendment No. 288, in page 113, line 12 [Vol II], leave out from ‘subsection,' to end of line 23 and insert

‘there were substituted for the reference to 13th March 1975 in subsection 8(b) a reference to 22nd March 2006.'.

Government amendment No. 357.

Amendment No. 274, in page 113, line 26 [Vol II], leave out ‘18' and insert ‘25'.

Government amendments Nos. 358 and 384.

Amendment No. 290, in page 113 [Vol II], leave out lines 42 to 44.

Amendment No. 291, in page 114 [Vol II], leave out lines 9 to 23.

Amendment No. 275, in page 114 [Vol II], leave out lines 10 to 14 and insert—

‘For section 71(1) of IHTA 1984 substitute—

“(1) Subject to subsections (1A) to (2) below, this section applies to settled property if—

(a) one or more persons (in this section referred to as “beneficiaries”) will, on or before attaining a specified age not exceeding twenty-five, become absolutely entitled to it, and

(b) until a beneficiary becomes entitled to the settled property or the income arising from it, the settled property and the income from the settled property is to be accumulated so far as not applied for the maintenance, education or benefit of a beneficiary.”.'.

Amendment No. 284, in page 114 [Vol II], leave out lines 10 to 14 and insert

‘For section 71(1) of IHTA 1984 substitute—

“(1) Subject to subsections (1A) to (2) below, this section applies to settled property if—

(a) one or more persons (in this section referred to as beneficiaries) will, on or before attaining a specified age not exceeding eighteen, become absolutely entitled to it or to any income arising from it,

(b) where a beneficiary becomes entitled pursuant to paragraph (a) above to the income arising from the settled property rather than to the property itself, that beneficiary subsequently becomes absolutely entitled to the property concerned on or before attaining a specified age not exceeding twenty-five, and

(c) until a beneficiary becomes entitled to the settled property or the income arising from it pursuant to paragraph (a) above, the settled property and the income from the settled property is to be accumulated so far as not applied for the maintenance, education or benefit of a beneficiary.”.'.

Amendment No. 276, in page 114, line 14 [Vol II], at end insert—

‘(1A) Section 71(4) shall be replaced with the following provision with effect from 6th April 2008—

“(4) Tax shall not be charged under this section—

(a) on a beneficiary's becoming absolutely entitled to, or to the income arising from, settled property on or before attaining the specified age,

(b) on the death of a beneficiary before attaining the specified age.”.'.

Amendment No. 285, in page 114, line 14 [Vol II], at end insert—

‘(1A) Section 71(4) shall be replaced with the following provision with effect from 6th April 2008—

“(4) Tax shall not be charged under this section—

(a) on a beneficiary's becoming absolutely entitled to, or to the income arising from, settled property on or before attaining the age specified for the purposesof paragraph (a) of subsection (1) above or, if later, on the beneficiary becoming absolutely entitled to the settled property on or before the age specified for the purposes of paragraph (b) of subsection (1) above, or

(b) on the death of a beneficiary under the age at which he would have become absolutely entitled to the settled property pursuant to paragraph (a) or (b) of subsection (1) above.”.'.

Amendment No. 286, in page 114, line 14 [Vol II], at end insert—

‘(1B) In section 71(6) IHTA 1984 leave out ‘and' after ‘paragraphs (a)' and insert ‘and (c)' after ‘(b)'.'.

Amendment No. 292, in page 114, line 38 [Vol II], after ‘section', insert ‘71 or'.

Amendment No. 293, in page 115, line 22 [Vol II], after ‘section', insert ‘71 or'.

Amendment No. 294, in page 115, line 27 [Vol II], after ‘section', insert ‘71 or'.

Amendment No. 297, in page 116, line 35 [Vol II], after ‘section', insert ‘71 or'.

Amendment No. 277, in page 119, line 11 [Vol II], after ‘which', insert ‘section 71(1)(a) or'.

Government amendment No. 365.

Amendment No. 278, in page 119, line 18 [Vol II], after ‘which', insert ‘section 71(1)(a) or'.

Government amendments Nos. 366 and 367.

Amendment No. 279, in page 120, line 42 [Vol II], after ‘end', insert ‘section 71(1)(a) or'.

Government amendments Nos. 369, 371 and 372.

Theresa Villiers (Conservative, Chipping Barnet)

Thank you, Sir John. I welcome you back to the Chair.

Picking up where I left off, we were discussing the problems that will result from the proposal inschedule 20 to move the vesting age from 25 to 18. The reality is that a sudden windfall at 18 is far more likely to be squandered to fund irresponsible behaviour than money that is transferred at 25. Research by the Financial Services Authority, for example, shows that 18-year-olds are much less financially capable than 25-year-olds. In its report, “Levels of Financial Capability in the UK”, the FSA concluded that 18-year-olds have a factor score of just 27 out of 100, while those aged 20 to 29 have a higher factor score of 40.

Frankly, I received too many representations on this point to hope to be able to cover them all, so I shall select just a few. Ian Buckley of Rathbones solicitors, which has many years of experience with wills and trusts, wrote:

“The Accumulation and Maintenance Trust was the creation of a previous Labour administration and has been used in good faith pursuant to legislation distinguishing them from discretionary trusts. To unravel these in order to avoid a punitive extra charge will have a negative effect on savings and furthermore assets in the hands of 18 year olds are more likely to be spent than saved...It is our view that 18, an age when many young people can be particularly vulnerable is not a suitable age for an individual to receive material wealth absolutely. 25 is widely regarded as a more acceptable age.”

Colin Jelley of Skandia Life was even more outspoken. He stated:

“Forcing beneficiaries to get outright entitlement at 18 simply fuels the conspicuous expenditure of teenage alpha males.”

A solicitor practising in the Paymaster General’s home city, Bristol, contacted her local MP, my hon. Friend the Member for Woodspring (Dr. Fox), to protest about the shift in the vesting age from 25 to 18. She did not want to be named directly but wanted her views made known. She wrote:

“My clients are responsible and caring adults; they are infuriated by the State’s attempt to manoeuvre them with the threat of unfair tax penalties into making decisions which they believe to be fundamentally wrong and against the best interests of those they hold dear.”

She goes on to outline the following case:

“The client is a widower. He lost his wife 8 years ago. He has3 children aged 16, 13 and 11. His sister lives with the family and helps care for the children. His estate comprises a house worth about £350,000 plus savings of about £200,000. He has recently been diagnosed with a brain tumour and is not expected to live for more than a few months. He knows and accepts that his estate is above the IHT threshold. If he dies this year, as is likely, his estate will face a bill of £106,000. He wants to leave what is left of his estate after tax in trust for his children. He wants the fund retained until the eldest child is 25. This way, he hopes that there will be enough to provide all 3 children with a roof over their head at least until the youngest child is 20. If he tries to avoid the penalty Inheritance Tax of the Budget and chooses 18 instead, child 2 will be 15 and child 3 only 13 when the house will have to be sold to provide child 1 with the one third share to which he will then be absolutely entitled. If the client chooses the more prudent course, the capital (not just the income gains) of the trust will be eroded with the periodic inheritance charges and exit charges. This man is not one of the super-rich but the Budget for him and his family produces an atrocious result. He is not alone.”

Another case was reported in The Times on 1 April 2006:

“Girl A, who cannot be named, lost her father in the Hungerford massacre in 1987. Her mother later died of an atrophying illness. Her parents’ assets were put into trust to be held until she was 25. The trust was supposed to pay out its assets to Girl A in 2011 with no tax liability. After Gordon Brown’s Budget attack on trustafarians, the funds could be hit with a tax charge of up to 6 per cent. David Rule, head of trusts at Moore and Blatch, the solicitors in Lymington...that run the trust, says that the trustees could override the deeds and pay out early. He says, ‘We are being bullied into the tax charge. If it’s right for the trust to pay out at 25, it’s wrong for the trustees to pay out at 18 instead to avoid the tax.’”

That is the background to the problem that we face this afternoon. In a spirit of compromise, I tabled different sets of amendments to try to find at least one option that might find favour with the Government.

Amendments Nos. 272 to 279 would amend the regime for bereaved minor trusts, restoring the vesting age to 25 instead of 18, and for all the reasons that I have just set out I would urge the Government seriously to consider them.

As an alternative, I have tabled amendmentsNos. 280 to 286 as a compromise that would mitigate the damage done by schedule 20. They would disapply the new, penal, IHT charges in cases in which income vests at 18 and capital at 25.

Helen Goodman (Labour, Bishop Auckland)

I do not wish to make light of the problems of those families to which the hon. Lady refers. Her earlier argument was that 18-year-olds are not competent to manage such money, yet many young people of 18—more now than in 1997—go to university, and it is precisely then that they need a lot of money. Has she considered that?

Theresa Villiers (Conservative, Chipping Barnet)

It is true that children going to university need financial support, because they have tuition fees to pay, but accumulation and maintenance trusts have the facility to cover such needs. Income can be paid out while the student is at university and chunks of capital can also be paid out if necessary, to provide accommodation for example. The trusts that I am proposing be retained would meet the needs of such situations, because one could tailor the amount that was given to the needs of the student—it would not have to be huge.

As the argument has moved on, I shall probably not be pressing the compromise amendments that would have vested capital at 25 and income at 18.

Government amendment No. 358 sets out proposed new provisions relating to trusts in which property does not vest until the age of 25. This morning the Paymaster General indicated that the Government position represented no change. However, I believe that the new provisions demonstrate a welcome shift of position since the original draft of schedule 20 and since the debates on Second Reading and in Committee of the whole House, when no Minister seemed inclined to accept that there was any problem regarding trusts for those aged 18 to 25. The fact that some relief is now envisaged for such trusts represents a welcome change.

The way in which the amendments work is currently defying some of the best legal brains in London, so I will let the Paymaster General explain her own amendments. The thrust of the changes seems to be to allow parents to provide that the vesting of income and capital be postponed to the age of 25, without the20 per cent. up-front entry charge being incurred. However, the trust property will be subject to the periodic charge during the seven-year period when the beneficiary is aged between 18 and 25. That would amount to approximately 4.2 per cent. of the property in the trust at the time.

The shift is obviously welcome but it still levies an extra charge, albeit a reduced one. There is also an important question which I hope that the Minister will be able to address for the Committee. The supporting documentation issued by the Treasury in relation to the amendments indicates that the option could be used by all existing A and M trusts, rather than just in the future. However, proposed new section 71D(1) provides that it only applies where one of the beneficiary’s parents is dead.

With that limitation, the relief will have limited impact on the thousands of responsible parents and grandparents who have set up such trusts to provide for children. It would mean that the harsh consequences of retrospective legislation would still apply to many A and M trusts. It seems that the later provisions in the Government’s amendments can be interpreted to disapply the restriction and to extend the relief provided for in section 71D to all existing A and M trusts, even when both parents are still alive, but I would welcome clarification from the Paymaster General on the extent of the relief provided by the Government’s amendments. Even if she is able to give that assurance, her amendments seem to presume that setting up trusts that do not vest until the age of 25 is some sort of privilege that has to attract a tax penalty, albeit a smaller one than originally proposed. That is why I am still minded to press both my amendment that would retain the current A and M structure and keep the vesting age at 25, and my amendment to ensure that existing A and M trusts are not affected by the schedule 20 changes.

That brings me to the group of amendments that would remove the retrospective impact of the Government’s proposals on existing A and M trusts. It is not the Opposition’s view that there should be an absolute bar on retrospective legislation. No doubt the Paymaster General will be able to cite instances of such legislation that has been adopted by previous Conservative Governments. However, we believe strongly that retrospective legislation should not be adopted unless there is a good reason and a clear justification for doing so. We believe that there is no such clear justification in this case.

The use of retrospective provisions in this case jeopardises confidence in the tax system and deters people from saving and taking responsible steps to provide for their future and that of their children. The Society of Trust and Estate Practitioners points out the similarity with the pensions system as an area where long-term stability is needed to encourage people to make long-term provision for their future and that of their families. It states:

“Individuals enter into long-term arrangements in expectation of a particular tax treatment. The professionals believe that the government should not bring forward legislation which bears upon the decisions of families who have no opportunity to unravel arrangements that they would never have entered into if they had known the change was coming.”

I received too many representations on this matter to recount them all. However, I think accountant Richard Meynell summed up the feelings of many when he wrote in forthright terms to a national newspaper:

“Regardless of the merits or demerits of the proposed tax, the fact that it is to be retrospective is unfair, unethical and an intolerable betrayal of trust. If one cannot trust the law extant at the time of making the decision, what can one trust?”

This legislation is genuinely retrospective. When the matter was discussed in Committee of the whole House, the Paymaster General argued that it was not because wills and trusts can be varied. As I shall describe in relation to the discussion of immediate post-death interest, where this matter is even more crucial, variation of wills and trusts can often be problematic. Even if one gets over such practical problems, to which I shall come in due course, it is still no answer in this case because settlors simply do not have the options open to them that they did when the trust was initially set up. At that point, they could have decided not to set up any trust, they could have set up a trust that contained less property or they could have taken the tax hit and set up a fully discretionary trust.

The clock cannot be wound back to enable settlors to make a decision on whether to set up the trust all over again, as illustrated by the case study provided by David Rule at Moore and Blatch, which I outlined before. Trustees face the invidious choice of taking the tax hit or seeking to change the trust so that income vests at 18, knowing that the settlor did not believe that this was in the best interests of the beneficiary. I welcome the limited but important relief provided by the Government’s amendments in this area. However, in the light of the very serious concerns that have been expressed on the retrospective nature of the legislation, I am keen to press the matter to a Division, specifically in relation to retrospectivity.

Finally, we come to Government amendmentNo. 384, which extends the scope of persons who can set up bereaved minor trusts from parents to include step-parents. That extension widens the scope of the bereaved minor trust and from that point of view it is welcome. I shall return to that issue in relation to amendments Nos. 270 and 271, which seek an even broader expansion of the ability to set up a trust for a bereaved minor. In my view, there is no sense in limiting such trusts to settlors who are parents. They should be open to all relatives, and I have tabled amendments to that effect.

I close my remarks by welcoming the modest change of position as helpful to existing A and M trusts, while maintaining that the Opposition still have significant concerns about the vesting age, even assuming that the Government’s changes are incorporated in the Bill.

Celia Barlow (Labour, Hove)

I should like to speak to amendment No. 358. The Government’s decision provides a good answer to the concerns that several professions and official bodies raised on behalf of families during the Bill’s consultation period. The Government have rightly argued that people gain their legal maturity at 18. People aged 18 are old enough to drive, to sign contracts on their own and, happily, to vote. It was therefore unreasonable to go on protecting people’s personal choices to make their money available to children only when they are 25, and to grant them certain exemptions in inheritance tax. The Government are forcing no one to pass on their money when their children are 18. All sorts of provisions in wills are still possible; they just do not enjoy tax exemptions. On the other hand, I recognise the arguments that have been put forward. Inheriting a certain sum of money when one turns 18 can be a dangerous temptation, especially if one is not prepared for it. It might be reasonable advice to gain some experience in managing one’s own finances before the assets are finally bequeathed.

The Government have found a good compromise. The new tax charge of 4.2 per cent. is not punitive; it makes it clear that all the choices that the individual makes can be tax free. The Government have taken into account the legitimate interests of bequeathers and the necessity to close tax loopholes. I therefore support the provisions.

Philip Dunne (Conservative, Ludlow)

I am pleased to serve under your chairmanship this afternoon, Sir John. I shall start by declaring an interest: I am a settlor of an accumulation and maintenance trust for my children.

In addressing this group of amendments, I start by requesting that the Paymaster General answer the questions that I put to her in this morning’s sitting in relation to the request from the Treasury Committee for detailed information on the evidence of the abuse that the clauses seek to address. She chose not to respond to my challenge, and I hope that she will do so when she makes her winding-up speech on these amendments. I particularly hope that she will do so, because having re-read the contributions made in the Committee of the whole House, I think that the Government’s intent is clear. The statement was made:

“We believe that trusts have an important role to play in helping people to manage their affairs—of course they do—but we also believe that a person's choice whether to use a trust structure should not be tax driven.”

It continued, stating that

“it is unfair that some people exploit the trust rules in order to avoid inheritance tax.”—[Official Report, 2 May 2006; Vol. 445, c. 866.]

Those were not my words, but those of the Paymaster General. The Government clearly believe that exploitation is taking place for tax avoidance purposes, but they have provided no evidence whatever to establish the scale of the problem or, indeed, whether the problem exists.

We heard the hon. Member for Hove (Ms Barlow) talking about age discrimination, and the argument has been made that there is a discriminatory impact, but those on the Government Front Bench have not advanced that argument with any coherence. The professionals, whom my hon. Friend the shadow Chief Secretary to the Treasury has cited on more than one occasion, deny that any significant avoidance is going on through those trusts, and they are united in that view. I shall quote from the Society of Estate and Trust Practitioners in relation to accumulation and maintenance trusts. It says:

“We do not think that the Government has made the intellectual case or evidenced any form of inappropriate tax avoidance that justifies such a material unlevelling of the playing field as between the ability to make gifts outright free of IHT under the potentially exempt transfer regime compared with gifts into trust.

Going forward, the ability to use trusts will therefore remain a poor second in fiscal terms to outright gifts which means that many of the socially desirable uses of trusts continue to be penalised.”

That statement was issued in a press release following the publication of the Government’s amendments, in full recognition of the moves that the Government have made in an attempt to climb down from the untenable position that they adopted at the time of the Budget and in the debate on the Floor of the House.

There is no abuse going on through accumulation and maintenance trusts; if there is abuse, the Government need to demonstrate it to us. Such trusts are used, as my hon. Friend has clearly mentioned, to enable settlors to provide some protection for capital value assets for those who are not in a position to manage those at a young age. This is not a discriminatory device; it is a protective device to enable individuals to reach a level of financial sophistication and maturity before they have access to their capital. That is perfectly reasonable. I urge the Government to withdraw these proposals completely, not in part. I support my hon. Friend’s amendments.

Julia Goldsworthy (Liberal Democrat, Falmouth and Camborne)

I welcome you, Sir John, to the Chair.

I have three fairly straightforward questions for the Paymaster General. First, if the Government are insisting on applying the new regime, on what basis did they choose to apply it to existing trusts as well as new ones from the date of the Budget? I should be interested to hear what impact they judge it will have and how many people will be affected. Secondly, on trusts for bereaved minors, can the Paymaster General confirm that the proposed changes will restore the pre-Budget situation to people who are eligible on the basis of their age and if their parent is deceased? Unlike the hon. Member for Hove, I found Government amendment No. 358 tortuously complicated to understand.

Finally, will the Paymaster General explain the situation for those currently over 18, who were due to benefit at 25 before the new proposals were put in place? Under the proposals being enacted, will those people become immediately liable for the new tax treatment unless they withdraw?

David Gauke (Conservative, South West Hertfordshire)

Earlier today, the Paymaster General said that she was taken by surprise by the reaction to many of the elements of the Budget proposals, including those on IHT and trusts and the publication of the Finance Bill. However, it is not just the Government who were taken by surprise. The proposals took the whole profession by surprise, including the accountants and lawyers who deal with this matter. There had been no indication that something of this sort was on the way. Indeed, Government policy had been to avoid creating artificial obstacles to using trusts where they would bring significant non-tax benefits.

I am grateful that the Government have made some movement in this area and introduced amendments, but one has to question them. This matter has been going on for some months. Why have the Government only now brought out their amendments? There were only available on Friday, which does not give the Committee a great deal of time to evaluate their contents. As we have heard from my hon. Friend the shadow Chief Secretary and the hon. Member for Falmouth and Camborne (Julia Goldsworthy), many of these provisions are complex. I suppose that I should declare an interest, of which everyone in the room is aware, because I am married to a tax lawyer.

On a number of occasions in these proceedings, the Government have noted comments made by the professionals and tabled amendments, which is sensible. That is the nature of this proposal and the process. We are considering perhaps the most controversial part of the Bill, but the Government have, it seems, substantially changed their original position. The period in which professionals can analyse the new sections—we have heard particular mention of Government amendment No. 358—is absolute minute; we are talking about a couple of days. That seems to be a failure in the system. There will not be adequate scrutiny of the Government’s amendments if we work within such a time frame. Although it is pleasing to have these amendments, it is regrettable that they came out so late. We are debating them on a Tuesday, but they became available only on the previous Friday.

On whether it is right for 18-year-olds to receive the bequest, or whether there should be some sort of tax penalty or charge if it is delayed until the child is 25, the starting point ought to be that parents are in the best position to decide on the appropriate time. Common sense might say that 25 is better than 18, but people may take a different view; we hear the argument, “People can vote and have all sorts of rights at the age of 18, so why delay until 25?” We can have an argument about that, but who is best placed to decide—the Government, or the parent making the bequest?

Helen Goodman (Labour, Bishop Auckland)

Does the hon. Gentleman not think that there is something rather ridiculous about the position that is being taken up? It is possible to be a Member of Parliament at 21, and someone under 25 could sit with us on the Finance Bill Committee, deciding what the rules are, but Conservative Members say that individuals are not sufficiently responsible to take charge of their own money until they are 25.

David Gauke (Conservative, South West Hertfordshire)

No, I do not think that it is a ridiculous position, because we are talking about a person deciding how they wish to bequeath their own assets to their children; they will clearly have the best interests of their offspring at heart, and they will take a view on what is the best age—18 or 25. I do not see that that has to be determined by the Government, or that the Government should say, “No, no, this is terribly paternalistic, and the age must be 18.”

Mark Francois (Conservative, Rayleigh)

As far as I know, there are 649 Members of this House. Just out of interest, does my hon. Friend know how many of them are under 25?

David Gauke (Conservative, South West Hertfordshire)

I suspect that the answer is none, but perhaps I had better check with the hon. Member for Falmouth and Camborne.

Julia Goldsworthy (Liberal Democrat, Falmouth and Camborne)

It is my understanding that the youngest Member of Parliament, my hon. Friend the Member for East Dunbartonshire (Jo Swinson), was elected at the age of 25.

David Gauke (Conservative, South West Hertfordshire)

I am grateful for that. My argument—[Interruption.]

John Butterfill (Conservative, Bournemouth West)

Order.

David Gauke (Conservative, South West Hertfordshire)

Thank you, Sir John, for stopping us before we drift off on to matters that are probably best not recorded by Hansard.

Rob Marris (Labour, Wolverhampton South West)

I caution the hon. Gentleman from the opposite end of the age spectrum: some mothers with a 51-year-old son who is an MP think that he is not grown up.

David Gauke (Conservative, South West Hertfordshire)

I have absolutely no doubt that the hon. Member for Wolverhampton, South-West (Rob Marris) is correct in that assessment. He makes a fair point, and I suspect that the mother is perfectly right to hold that opinion. None the less, I question the certainty with which the Government express the view that the age should be 18, and not 25, and that it is terribly paternalistic to say otherwise. A tax-neutral judgment should be made by the parent, but we have moved away from that. That is the key element. We have come back from where we were, but it has been established that the decision on whether the age should be 18 or 25 is no longer tax-neutral, and that is regrettable; that is a freedom that parents should have when determining the arrangements that they wish for. We can all look at our own experiences—and those older than me may be able to look at their children’s experiences—and see that individuals vary, and the age at which one is appropriately mature may vary from person to person. The flexibility should be there, but the provision is no longer tax neutral.

Philip Dunne (Conservative, Ludlow)

Does my hon. Friend agree that if the principal plank in the Government’s argument against the trusts continuing until age 25 is so significant, the subject should have come up during the two-and-a-half-year debate with the industry on the future of modernising trusts? As far as I am aware, it was not raised.

David Gauke (Conservative, South West Hertfordshire)

My hon. Friend makes an excellent point and takes me back to where I began these few comments. The industry was taken by surprise. No one was expecting this provision to come along. There should have been a long-lasting debate about it. It is regrettable that it is now crammed into the Finance Bill and that the Government’s position has changed a couple of days before we debate the issue.

However, the fundamental point is the one made by my hon. Friend the Member for Ludlow (Mr. Dunne). What is the harm done by the existing arrangements? How is there an abuse? What is the cost of the abuse? The Government have not been able to establish that there is an abuse and if they cannot establish that, I do not see why we should change the law in this area.

Jeremy Wright (Conservative, Rugby and Kenilworth)

I also welcome you, Sir John, to the Chair. I want to make a brief contribution and endorse many of the things that have been said by my hon. Friends, particularly the point made by my hon. Friend the Member for Ludlow, which has just been referred to. Despite the encouragement of the Select Committee, it seems that the evidence in favour of the change has not been presented to us. The Committee are entitled to see it before we judge whether or not it is a sensible change in the law.

Dawn Primarolo (Labour, Bristol South)

What is the hon. Gentleman referring to? The Select Committee did not ask for examples of abuse. It asked for how we settled on the numbers that we thought would be affected by the changes. Is he referring to another recommendation or to something different?

Jeremy Wright (Conservative, Rugby and Kenilworth)

I would settle for that information, but I do not believe that we have seen that either. The Government have the obligation to provide the justification for the changes that they wish to make. To date, the Committee has not been presented with that justification. The Government have the opportunity to do that in this Committee sitting. I hope that they take advantage of it.

When the point was put to the Paymaster General that 18-year-olds might not, in some cases, be suitably mature to deal with the substantial amounts of money that might be involved, she said, “Well, I prefer to trust 18-year-olds in this country.” She did not think that we were giving 18-year-olds enough credit. It is clear from that statement that the people she does not trust are the parents and the grandparents who set up the trusts in the first place. They must surely know their children and grandchildren better than the Government do. The whole problem with the measure is that, yet again, it indulges the Government’s view that they know best. The truth is that parents and grandparents often know best and that is why the trusts ought to be available up to the age of 25.

Stephen Hesford (Labour, Wirral West)

The hon. Gentleman has just let the cat out of the bag. Those on the Conservative Front Bench argue that the change will affect those who are on a middle income—those who are not very well off. What he has just said is that the issue may involve considerable sums of money. That is what it is about. It is about people settling considerable sums of money to those at 18.

Jeremy Wright (Conservative, Rugby and Kenilworth)

It may involve considerable sums of money. The question that I am raising is whether 18-year-olds are, in every case, sufficiently mature to deal with the money that they are given or left. The bigger the amount of money and the more irresponsible the 18-year-old, the bigger the problem. That is common sense. That is the point that I am making. The problem is that, as I would have thought every Member of the Committee would accept—

John Hemming (Birmingham, Yardley) (LD) rose—

The Economic Secretary to the Treasury (Ed Balls)rose—

Jeremy Wright (Conservative, Rugby and Kenilworth)

If I may finish the sentence, I will certainly give way to the hon. Gentleman and then to the Economic Secretary. The problem is, as I would have thought every Member of the Committee would understand from their own personal experience, that all 18-year-olds do not mature at the same rate. Therefore, some will be well and truly ready for the responsibility that will be passed on to them. Some 16-year-olds will be ready for it and as the hon. Member for Wolverhampton, South-West suggested, some 51-year-olds will not. However, the point is surely that the greatest discretion must be given to those who know the individual best.

John Hemming (Liberal Democrat, Birmingham, Yardley)

Given that property values are now so relatively high and that about 70 per cent. of the population own their own property, does the hon. Gentleman agree that the amount to appear in the trust would be a considerable sum for an average family?

Jeremy Wright (Conservative, Rugby and Kenilworth)

I certainly agree with the hon. Gentleman. In many cases, the sums that we are considering will be a lot of money for an 18-year-old. That is the difficulty that we are addressing specifically.

Edward Balls (Labour, Normanton)

I hesitate to inform the Committee and Mrs. Gauke about house prices in Hertfordshire, but I shall come back to that later.

I am interested in the issues to which the hon. Member for Rugby and Kenilworth referred because I have ministerial responsibility for matters that pertain to them. If we take the logic of his argument about a child trust fund to a sensible conclusion, it becomes clear that access to funds should be open only to individuals when they have reached the degree of maturity needed to make sensible financial decisions. Is he proposing that we should change the limit from18 to 25-years-old? It is interesting that he suggested an increase in the inheritance tax threshold this morning. Does he wish to create some further policy for the Conservatives?

Jeremy Wright (Conservative, Rugby and Kenilworth)

I think that the Economic Secretary fully understands what I am saying, but let me explain it again. We are talking about money that belongs to the parent or the grandparent. It is for them to decide what they wish to do with it. The Government are arguing that the law should be changed and that we should alter the age from 25 to 18 years in all but certain circumstances. I wonder, first, whether they have the evidence to back up that change and, secondly, whether they have really thought the matter through. It cannot be right for all 18-year-olds to be considered similar in this regard, and it must be right that parents and grandparents know their children and grandchildren better.

Helen Goodman (Labour, Bishop Auckland)

Will the hon. Gentleman give way?

Jeremy Wright (Conservative, Rugby and Kenilworth)

No, I will not give way to the hon. Lady because I am about to come to a point that she made earlier.

Edward Balls (Labour, Normanton)

Perhaps I made the mistake of taking the arguments made by the hon. Gentleman too seriously. Given what he said about the maturity of 18-year-olds to make financial decisions for themselves, surely I should be as worried about the maturity of individuals to make decisions about the use of child trust fund money when they reach the age of maturity. Surely, he should consistently say that all people are not really fit to make those decisions until the age of 25. That is a perfectly sensible position for him to hold. I disagree with it, but if he wants to be consistent, he should say that to the Committee rather than hedging around.

Jeremy Wright (Conservative, Rugby and Kenilworth)

We are discussing not the child trust fund, but a change in the law that the Government wish to make. The task for the Committee is to test whether that change is the right thing to do.

The hon. Member for Bishop Auckland (Helen Goodman) drew an analogy by referring to the age at which people can become Members of the House. They can do that at 21. The problem with her analogy is that, in order for people to get here at the age of 21, the electorate would have to make a judgment on whether they are fit to hold that responsibility. It does not come automatically. Every 21-year-old is not entitled to become a Member of the House. There is a test whether the 21-year-old in question in sufficiently mature to hold the job. The same test applies here. The Government have not made their case.

Helen Goodman (Labour, Bishop Auckland)

It would be nice if the electorate were in a position to judge the financial competence of all hon. Members, but they are not. Furthermore, the hon. Gentleman is inconsistent in other respects. We are sending young 18-year-old men to Iraq to fight for this country. At the same time as we are giving them that responsibility, which is a far more serious responsibility than that of looking after a little packet of money, Opposition Members are saying that, because they are really concerned about maintaining the loophole, they want to keep the age at 25.

Jeremy Wright (Conservative, Rugby and Kenilworth)

I should be delighted to discuss the hon. Lady’s analogies all afternoon, but I do not think that I should do so. I am making a straightforward argument that she well understands. Her analogy was flawed because intervening in the process is the judgment of those who know the individual well. That is what should happen in the circumstances that we are discussing; that is what has been happening. The Government argue that the age should change. They have not made their case on that. The trusts are made for good reasons by people who know the individuals concerned very well.

Helen Goodman (Labour, Bishop Auckland)

Will the hon. Gentleman give way?

Jeremy Wright (Conservative, Rugby and Kenilworth)

No, I will not. The Government have not made a convincing argument about why the change should be made. Until we have heard such an argument, the Committee should reject the proposal.

George Young (Conservative, North West Hampshire)

I am sorry that my stature is so reduced, Sir John, that you almost did not notice me.

I want to ask the Paymaster General two questions before she winds up. First, following on from what my hon. Friend the Member for Ludlow said, have the Government rejected the Treasury Committee’s recommendation in paragraph 109 of its fourth report which states:

“We recommend that the Government provide detailed information”?

If they have not rejected it, at what point did they provide the information before we reached clause 57 of the Bill?

My second question arises from the speech that my hon. Friend the Member for Rugby and Kenilworth (Jeremy Wright) has just made. Does a tax loss arise for the Government if the age remains at 25 and is not reduced to 18? If there is a tax loss, it seems to me that the Government have a legitimate interest in the ageat which trusts vest in the beneficiaries. If the Government have no interest whatever in the financial outcome, their position is somewhat less secure and they owe it to the Committee to provide slightly more reasons than they have so far as to why they wish to second-guess the beneficiaries.

The hon. Member for Hove (Ms Barlow) said that if we do not reduce the age to 18 that would erode the personal choice of the 18-year-old, but the personal-choice argument, as my hon. Friend the Member for Rugby and Kenilworth said, works both ways. If the age is reduced to 18, the personal choice of the person who currently has the assets—the beneficiary—is eroded. The Government should make a slightly stronger case.

Celia Barlow (Labour, Hove)

The issue perhaps is not, as the right hon. Gentleman said, the personal choice of the beneficiary. What is in question is the right of the nation as a whole that the money should be taxed as other forms of income are taxed.

George Young (Conservative, North West Hampshire)

The point is that the Government are seeking to influence the personal choice of the donor by imposing a tax penalty if the age at which the trust vests is 25 and not 18. A number of my hon. Friends have asked what the argument is that forces the Government to reduce the age from 25 to 18 given that they may have no financial interest in the outcome. If the Paymaster General cannot produce a figure for the loss to the Government if the age remains at 25, their argument so far seems to be astonishingly weak.

Dawn Primarolo (Labour, Bristol South)

Perhaps I could start by explaining the Government amendments and then return to the issues about misuse under certain circumstances of A and M and interest in possession trusts.

In the nicest possible way, I caution the hon. Member for Chipping Barnet against continually referring back to 1975 and what happened in that context. If she looked a little more closely, she would see that the context in which the 1975 rules were introduced with capital transfer tax was a background of every transfer from an individual during life or after death being liable to CTT. If she dug a little further, she would see that the technical debate at that time in connection with interest in possession trusts were treated as being earned by a tenant and were not subject to the mainstream periodic and exit charges in that context. At that time, trusts that were not a vehicle were subject to a series of changes that started in 1986—the hon. Member for Falmouth and Camborne touched on this when she hinted that the Liberal Democrats might want to abolish potentially exempt transfers—and were developed in 1987 through subsequent changes. That began a process that paved the way for some of the tax planning that the Government now wish to deal with.

This is the first opportunity that we have had to debate the schedule. Second Reading did not give us an opportunity, and we debated a new clause in Committee on the Floor of the House. I have no complaints about it, but the Opposition chose to debate a new clause rather than the clause and schedule. In those debates, I tried to make it clear that it was the Government’s intention to make progress in this area.

I shall deal first with the amendments themselves and then the points that the hon. Member for Ludlow and others made about the mischief. I shall do my best to describe the mischief without breaking taxpayer confidentiality. I am sure that Members will understand that some of these arrangements are long in the maturing—the time from when arrangements are put in place to when they take effect.

The amendments are specifically concerned with the provisions in the Bill for trusts for young people and, in particular, trusts set up when parents die and leave money to young children. It is true that there has been a good deal of reaction to the proposals in schedule 20, and it has focused on the rules for bereaved minor children. It may help the Committee if I explain what our legislation and associated amendments do and then turn to the Opposition amendments.

It is clear that the pre-Budget tax rules for A and M trusts were being exploited to avoid inheritance tax. I shall give examples later, as they are rather complicated. Opposition Members are trying to conflate the sensible financial planning that parents or grandparents might make for their children or grandchildren with the added advantage of getting around the inheritance tax laws. The provision is not about that. I do not have a trust, so I do not have one to declare. I have a will, but it is not very complicated as I will not be paying—not yet, I hope—inheritance tax on my estate. For most people, it is very straightforward.

It was clear that A and M trusts have been routinely used to shelter large amounts of wealth from inheritance tax for long periods of time. We are talking about money going into trusts in excess of the IHT threshold. We are not talking about somebody’s house, but about £285,000 going in to a trust with specific objectives in mind about the tax consequences of the trust.

A debate that we have had on many occasions in Finance Bills is about the development of tax-driven strategies, as opposed to sensible strategies that people would have engaged in anyway, all things being equal. That is what we are trying to get to in dealing with these arrangements.

Theresa Villiers (Conservative, Chipping Barnet)

Will the Paymaster General give way?

Dawn Primarolo (Labour, Bristol South)

I would like to make some progress, but I shall give the hon. Lady an opportunity later. I am trying to lay out the Government’s changes and why we have made them. I shall then come back to the abuse that we are attempting to deal with, and also the point about the age of 18 or 25.

Trusts are set up ostensibly to provide for minor children, but that often happens in circumstances in which there is no particular need for a trust—the sums involved being grossly disproportionate to those required to provide for the child and most of the trust assets being destined ultimately for other beneficiaries. However, let us park the difference between sensible planning that allows children to have a nest egg—quite a large one in some cases—and cases in which there are other beneficiaries.

I have repeatedly said that continued special provisions are justified when trusts for bereaved minor children constitute a way to protect children should they lose one or both parents, and that is precisely the situation with which the provisions of schedule 20 are designed to deal. The Government have also made it clear, as have I, that special tax rules for bereaved children should no longer apply when children reach adulthood at 18. It seems to me that however much to-ing and fro-ing there is in the Committee, the age of maturity is 18, and the point is the age of interaction with the tax system, rather than whether parents want to tell their children that they cannot have the money.

Mrs. Villiersrose—

Dawn Primarolo (Labour, Bristol South)

I shall not give way, because it is important to advance the Government’s case so that people are clear what is happening. I did not say that others did not have faith in young people; what I said was that I have more faith in them. The disservice is done by saying that none of them is ever entitled at the age of 18, regardless of circumstances—[Interruption.] Good, because that leads us on to the Government amendment. I do not accept that people are so irresponsible that they cannot be trusted with their own inheritance once they become an adult.

Mrs. Villiersrose—

Dawn Primarolo (Labour, Bristol South)

No, I will not give way. Please allow me to advance my case. The discussion is going to be a long one and it is important that the Government’s approach be put on the record on the first occasion.

I draw the attention of Opposition Members to the rules applying to trusts that pay income tax and capital gains tax. Special tax treatment ends when a bereaved child reaches adulthood at the age of 18. My hon. Friend the Economic Secretary has referred to child trust funds.

I remind the Committee that there is nothing in the Bill that forces settlors or trustees to do anything whatever. The Government are providing a specific inheritance tax regime for trusts for bereaved minor children and it is subject to the conditions that we regard as appropriate. If people do not wish to meet the conditions, they can still set up a trust and pay some tax under the relevant tax legislation conditions. In other words, they will simply fall within the mainstream rules that apply to any other trust.

The Government have tabled amendments that refine the provisions in this area—amendments that are necessary to ensure that the legislation accurately reflects the Government’s intention on the treatment of trusts for bereaved minors. Opposition Members were not inclined to agree when I said that that was my intention and the Government’s intention, but it is. As drafted, the Bill requires parents to decide in advance in their will whether, if they should die, the trust that they have established for their children should end at 18 and receive special treatment, or end at a later age and not receive such treatment.

The Government have always recognised that that can be a difficult judgment, and I entirely agree with the points that some Members made. Particularly if one is settling something on the child when they are very young, it is difficult to decide whether, at 18, the child will be alright, but the point that we are advancing is that we should not assume that they will not be. However, I understand—the point has been put very well—that people want their trustees to have some flexibility, so that they can decide to hold back the full entitlement to an inheritance past the age of 18 if that seems appropriate to them in the circumstances.

Just to remind us, A and Ms terminate at 25—well, they are supposed to; we will come to that. That is the Government’s view. People often overestimate the risk that such a deferral will ultimately be needed. When people talk about what is in wills, we have to remember that they are a sort of precautionary principle—just in case. Presumably, in the case of most wills, the children are not bereaved before the age of 18; in fact, their parents go on to live happy and long lives. The question is whether our intention has always been to allow a degree of flexibility, and whether that flexibility can be provided in a manner consistent with our objectives.

The amendments tabled by the Government make sure that the legislation for trusts for bereaved minors operates in line with our intentions. When a trust that is set up for a child in the event of the death of their parent is set to run on until the child is 18 and 25, the amendments provide that charges—as the hon. Member for Chipping Barnet acknowledged—will apply only after the child’s 18th birthday. Amendment No. 384 makes it clear that the term “parent”, in the context of a new trust for bereaved minors, extends to step-parents. Taken together, the amendments mean that the rules will operate fairly, but of course if there is an absolute disagreement on whether the age should be 18 or 25, that cannot be resolved in this Committee; that is where the Government stand on the issue.

The amendments tabled by the Opposition appear to be designed to achieve a number of different but related effects. One set of amendments—Nos. 272 to 279—allow trusts for minors to run on through to the age of 25 as a matter of course. The Government do not accept those amendments, and I have explained why. It is clear that if we provided for that, the maximum age would in practice become the standard age, and that is how the system operates under the existing rules. I have already explained why the Government believe that the special tax rules for children should end at adulthood, at 18.

Another set of amendments in the Opposition’s name—Nos. 287, 290 to 294 and 297—seek to shelter existing A and M trusts from the new charges. There is no justification for that. The mainstream charge will not arise on the existing trusts until the end of the transition period in April 2008, and even then charges will only start to accrue when such a trust goes on after the child has reached 18. That seems a perfectly reasonable arrangement and I see no reason to go further.

The remaining Opposition amendments in this group—Nos. 280 to 282, and 284 to 286—seek special treatment for A and M trusts if the beneficiary becomes entitled to the income, but not the capital, when the young person reaches 18. I think that the hon. Member for Chipping Barnet sensed that that was open to manipulation, and so did not particularly want to speak to that point. As we discussed in our earlier, broader debate, the heart of the issue is that the gift is controlled.

I shall conclude my points about the amendments before coming to the abuse. I hope that I have clarified matters for the Committee. The course of action that I propose is fair and proportionate and offers a way through, particularly in respect of the issues about parents of much younger children setting trusts up and not having to look forward to decide what might be the case when the children reach 18. Allowing flexibility for trustees is a sensible way forward.

David Gauke (Conservative, South West Hertfordshire)

The Paymaster General stated that the question was about whether the legislation accurately reflected the Government’s intention, which was to allow flexibility. Will she clarify something? Has the Government’s intention all along been to allow flexibility, but in its original drafting the Bill woefully failed to do that, or have the Government changed their intention in favour of flexibility and amended the Bill accordingly?

Dawn Primarolo (Labour, Bristol South)

On the issue of 18 to 25, it was, on reflection, a little harsh to start the charge immediately, so we are making the relevant changes. On flexibility, as I have said during Second Reading debates and in Committees of the whole House, I have always tried to concentrate on the point at issue, which is when the tax system engages. I have acknowledged that trusts are made for many reasons that have nothing to do with the tax system, and there is no intention to disturb that. It is a question of when the tax system engages.

Theresa Villiers (Conservative, Chipping Barnet)

Will the Paymaster General give way?

Dawn Primarolo (Labour, Bristol South)

I will, but I should like to assure the hon. Member for Ludlow that I shall return to his point, if other Conservative Members allow me.

Theresa Villiers (Conservative, Chipping Barnet)

I still do not feel that the Paymaster General has explained why the shift in the vesting age addresses the point about which she is concerned. A number of her comments seem to have been predicated on anxieties about the potentially exempt transfer system. Are the proposals in schedule 20 a prelude to a Government proposal to get rid of the potentially exempt transfers? What is it about a vesting age at25 that gives rise to the possibility of abuse when that is not present for a trust for which the vesting age is 18?

Dawn Primarolo (Labour, Bristol South)

If I address the issue of abuse, perhaps that will answer the hon. Lady’s questions. Unfortunately, I fear that whatever I tell her, she simply does not believe me. I explained that the changes under discussion and those we made elsewhere were part of a longer process of making sure, whenever possible—as the hon. Lady has acknowledged, the area is incredibly complex and at least a modicum of simplification, and a modicum of standardisation of rules across trusts, should take place.

In this area, we were also looking to deal with a small number of specific cases, which caused people to fear the worst, hence the sense that somehow we were going to deal with potentially exempt transfers. People feared that something huge was happening when it was not. Let us not go back over what helped to contribute to those perceptions; I have advanced my view.

We should look first at what has been said. I dealt with the question of retrospection, and the date is April 2008. On 10 May, a leading accountant appeared before the Lords Economic Affairs Committee. He comments a lot on Finance Bills, and has done for many years. He said that many of the professionals are exaggerating the problem, and that the problem for the Government was that if they had consulted when they were dealing with what they perceived to be an avoidance mechanism, there would have been forestalling, and dealing with the problem would have been more complicated.

In the context of all those millions being bandied about, the Treasury Committee rightly questionedhow the estimates were achieved. Under the new rules, A and M and IIP trust charges apply on trusts with assets exceeding the inheritance tax threshold of £285,000. Anything under that is not affected. The transitional rules mean that pre-Budget IIP trusts are effectively grandfathered. So, taking into account the exemption for trusts with assets under the IHT threshold and the transitional provisions, it was modelled as best could be that there were about 100,000 discretionary and A and M trusts. Only some of them are A and M trusts, and of them, only some are large enough to be potentially liable for trust charges. Believe it or not, people do not actually tell HMRC when they are making financial arrangements to try to get around tax charges for which they should not be making arrangements.

Theresa Villiers (Conservative, Chipping Barnet)

Will the hon. Lady give way?

Dawn Primarolo (Labour, Bristol South)

I shall just finish, because I want to give the examples of abuse. It was interesting that the hon. Member for Rugby and Kenilworth (Jeremy Wright) talked about grandfathers and grandparents, and we are talking about inheritance tax so we need to be clear.

I want to give two examples of the type of arrangements. The first is in answer to the hon. Member for Ludlow, using an A and M trust in line. Grandparents put£1 million into an A and M trust in the name of their newborn grandchild. No IHT is paid when the trust is set up, and once the grandparents survive seven years, any potential IHT liability is wiped out. The trust is set to operate in accordance with the grandparents’ wishes, even after they have died. The trust is set up ostensibly to pay for the grandchildren’s education, but the child’s parents also have substantial wealth, so in practice, the contents of the trust are barely touched. At 25, theA and M trust, now worth £2 million, having been actively invested in, transforms into an IIP trust for the grandchild. No IHT is paid at that point. Trustees will follow the grandparents’ wishes in deciding how the now adult grandchild will benefit from it. The grandchild might eventually receive it outright, or alternatively, the trustees might decide to give the trust to someone else entirely. In the meantime, the trustees can make other payments to anyone else they feel like.

In summary, by putting money into a trust during their life, a wealthy grandparent has transmitted significant wealth down the generations without paying any IHT and while effectively retaining control of how the money and trust is used. If the £2 million had been left outright in a will and had attracted IHT at 40 per cent., the Exchequer would have been paid £800,000. This is not a debate about whether people agree with inheritance tax and with a tax on the estate of a person who dies. That is how it operates, and this is about making sure that it operates for everyone else.

Philip Dunne (Conservative, Ludlow)

The comparison should not be between the amount of money that the grandparent leaves in their will, because they have decided to gift their money at a much earlier stage, and as a result of the potentially exempt transfer, it escapes IHT. It could have been gifted outright, survived the seven years and there the money is: £2 million, once well invested. That is the comparison.

Dawn Primarolo (Labour, Bristol South)

I agree, but the hon. Gentleman heard what I said this morning: it is not gifted. “Gifted” means complete control and Opposition Members are making a case in favour of there not being control until the age of 25. I shall give an example of how, even at 25, it finds its way somewhere else. At the heart of the matter is the use of potentially exempt transfers and the question of whether it was a gift—complete control—or an arrangement in name only, without the control and with directions on the use of the assets not coming from the person who is supposed to be the beneficiary of the gift.

Let us consider the example of an A and M trust on death. Grandparents state in their will that on their death £1 million will go into an A and M trust for their grandchildren. When they die, 40 per cent. IHT is payable on the grandparents’ estate, but moving the money into an A and M trust is the first step in a series of transactions—the interaction of A and Ms and IIPs—that could enable the money to remain completely free of IHT for several generations. IHT is not paid once for all the generations in a family: that is not how it operates.

At step 1, because £1 million was moved into atrust for grandchildren, a generation is skipped. Before schedule 20 was introduced, the A and M trust was completely exempt from IHT for as long as the money remained in the trust. At step 2, when the grandchildren reach adulthood, the trustee often sets up an interest in possession trust with the capital, which presumably led the hon. Member for Chipping Barnet to table her amendment that sought to separate the interest, as opposed to controlling the capital because it is the capital that can then be transmitted on to the interest in possession trust. The grandchildren do not have access to the capital. The trust remains free from inheritance tax and the trustees are able to make ad hoc payments out of the trust to any other beneficiary. Those payments are free from inheritance tax as long as the grandchild lived for seven years after the transfer.

However, at step 3, the trustees can resettle the capital in the trust to a new A and M trust for the grandchildren’s children. Again, those resettlements are free from IHT if the relevant grandchild survived for seven years. That pattern can repeat itself for as long as the money lasts.

In summary, wealth is put into trusts at the death of the grandparents. They ensure that they are sheltered from IHT for several generations, while at the same time ensuring that they effectively retain control over the assets indefinitely. That is the narrow mischief that the Government want to deal with in the schedule. As we deal with the rest of the amendments, we shall see how that matter plays out in relation to the different subject areas.

Philip Dunne (Conservative, Ludlow)

Will the right hon. Lady give way?

John Butterfill (Conservative, Bournemouth West)

Order. I think that the right hon. Lady has completed her remarks, but I also want to raise a point of order. Could I ask the hon. Member for Wirral, West (Stephen Hesford) to ensure that his communication device is not audible in future? I also remind all hon. and right hon. Members that the Chairman of Ways and Means has ruled that communication devices should not be used in Committee: that includes BlackBerrys and everything else. If anyone has a mobile phone or something similar, can they ensure that it is set to silent and does not interrupt the work of the Committee?

Stephen Hesford (Labour, Wirral West)

Further to that point of order,Sir John, I apologise to you and other Committee members for that momentary lapse.

John Butterfill (Conservative, Bournemouth West)

Thank you.

Philip Dunne (Conservative, Ludlow)

I thank the Paymaster General for illustrating the mischief. I should like to make two points arising from her remarks. First, I believe that she said that the Treasury had modelled the number of discretionary trusts to which the measure might apply. I am pleased to hear that the Treasury is capable of doing some modelling. Will she please elucidate further by declaring the basis of the modelling and the assumptions that were used?

Dawn Primarolo (Labour, Bristol South)

I apologise to the hon. Gentleman. I did not mean to mislead him. I told him how we settled and how I was advised on the number of trusts. I concede that that is difficult to do. That is our view and that is how we settled on those numbers. I should not like to lead him to believe that there is some economic model operating. I am sorry if that was the impression that I gave; that is not true.

Philip Dunne (Conservative, Ludlow)

I am grateful for that. It is clear that the Treasury has no idea how many trusts are involved and, therefore, has no clear idea of the extent of the mischief.

The Paymaster General gave the Committee some examples. I congratulate her on the complexity, particularly in her second example about assets cascading forever, potentially, from generation to generation. With regard to the second point that I was going to make, I should be interested to know how many instances of that type of thing have been reported to HMRC. I suspect that it is a very small number. As is so often the case with this Government, a sledgehammer is being used to smash a minuscule nut.

Rob Marris (Labour, Wolverhampton South West)

I am grateful to the hon. Gentleman for giving way. I am not sure in the complex example given—I may not have understood it correctly—how the Government would ever know. That is the point of the example; there is no tax being paid.

Philip Dunne (Conservative, Ludlow)

I had finished my remarks.

Theresa Villiers (Conservative, Chipping Barnet)

I should like to take the opportunity to respond to some of the points made by the Paymaster General. I remain concerned, like a number of my hon. Friends, about the Government’s assessment of the number of families and trusts affected by the proposals. As we shall see, in relation to the IIP provisions and the spouse exemption, the impact of the proposals will potentially be felt much more broadly than in the small fraction of the wealthiest of the wealthy that the Paymaster General envisaged being affected.

The Committee still lacks much information about how the Treasury reached its conclusion. Of course, had the Government chosen to consult on the proposals before introducing them, they would have had a much clearer understanding of who would be affected by them and we would not have a problematic schedule amended by highly complex amendments that still leave a number of people puzzled about how they work, as the hon. Member for Falmouth and Camborne explained. This is not the best way to write the tax law of this country.

I return to the point that I put to the Paymaster General, which is that the heart of her concern seems not to be the fact of setting up a trust, but the availability of a potentially exempt transfer. That seems to be the vice that she is concerned about. It is unfortunate that the trusts are attacked as a result of something that is available to outright transfers. There seems to be no justification for attacking a trust used for all sorts of responsible reasons, as I outlined in relation to clause 157, merely because of the application of the potentially exempt transfer system, which can be used in relation to outright transfers as well. Under the schedule—departing from many years of consensus on the approach to taxation—taxation of trusts will be more penal than the situation that is applicable to outright transfers.

Returning to the 18 to 25 age issue, the Paymaster General was focused on schemes that she saw as abusive. She has not yet answered the concerns expressed by a number of my hon. Friends on the right of parents to take a decision about how much wealth to pass to their children. She says that no one will be forced to transfer wealth to 18-year-olds, which is correct in a literal sense, but the reality is that if a penal tax charge is imposed on an existing trust, which can be relieved only by changing the vesting age to 18, that is likely to put pressure on parents to do so. As I said, the amendments would mitigate the size of the tax penalty so that it would no longer be such a significant problem. The changes to the IIP regime, which the Paymaster General is also putting forward, would mitigate the problem because parents and grandparents would have the option to set up IIPs on death.

I suspect that with existing A and Ms and the 4.2 per cent. tax hit that is envisaged in the schedule as the Paymaster General proposes to amend it, many parents will decide to take the hit. They may prefer to pay the tax rather than see wealth vested in their children before they are mature enough to cope with it. Contrary to the assertions made by a number of hon. Members, the Opposition are not saying that every 18-year-old is incapable of handling their own money. Many 18-year-olds may be mature enough to cope with vast quantities of cash, although I am not sure that they are that common. We are obviously not saying that no teenager is capable of handling money. But we are saying that the people who are best placed to decide when teenagers should get the money are their parents, not the Government.

Helen Goodman (Labour, Bishop Auckland)

The hon. Lady has made much of the point about parents deciding about the maturity of their children. Will she suggest the age that children need to reach in order for parents to make such a judgment? It would be ridiculous for parents to make that judgment when the children were only five, but would the parents be in a position to do so when the children were aged 15? The reality is that such judgments are made more than 10 years before anyone is 18 or 25.

Theresa Villiers (Conservative, Chipping Barnet)

There are many ages at which a parent could make a decision on how responsible a child is likely to be at 18.

Turning to the point that the Economic Secretary made repeatedly—that the child trust fund vests at 18—my understanding is that parents cannot claim tax credits until they are 25, so there are other ways in which the law recognises the higher age. [Interruption.] I am prepared to be corrected, but I understand that some tax credits are not payable until the age of 25. No doubt the Paymaster General can explain the correct position.

A number of my hon. Friends mentioned the last-minute tabling of the amendments. It has proved to be a challenge to consider them in the short period before they were discussed in Committee and I hope that there will be an opportunity to return to the matter on Report if they have significant defects. During the period before Report, I hope that we can have a little more clarification on how they will work.

I am still unsure about whether the relief for existing A and Ms will apply to trusts where neither parent is deceased or whether it is restricted to A and Ms where there is one deceased parent. If the Paymaster General can give me an indication one way or the other it would be useful because it has a significant impact on how positive the changes provided by her amendmentswill be.

I think that that more or less concludes what I wanted to say. I reiterate our concern about the amendments. Many parents who are faced with the choice will probably retain the vesting age at 25 and pay the tax. That is further proof of the critique of these proposals that the Opposition made from the outset: that in the main the vast majority of trusts that will be hit by schedule 20 as drafted are motivated not by tax considerations but by prudent families trying to provide responsibly and sensibly for their children and their relatives. That is why I propose to press our amendment to retain a vesting age of 25 and to disapply the retrospective effect to current A and M trusts.

Julia Goldsworthy (Liberal Democrat, Falmouth and Camborne)

I have a couple of brief points. During her earlier remarks, the Paymaster General referred to the fact that the Opposition chose not to call this matter for debate on the Floor of the House. I would imagine that the Government were relieved by that, given the number of amendments that they tabled and the time at which they tabled them.

I thank the Paymaster General for the examples that she gave. Unlike the hon. Member for Chipping Barnet (Mrs. Villiers), my concerns do not focus around the age at which individuals should have access to capital or income from trusts but around retrospection, which is my primary concern. I may not have heard the Paymaster General discuss that issue. I would appreciate her comments on why the Government chose to apply the new regulations to existing trusts as well as new ones. Clearly, trusts below the inheritance tax threshold may need to change to reflect the changes in the legislation in order to comply or if in the future they fall above the threshold. I would be grateful if she would clarify why it is not possible after 22 March to apply the legislation to new trusts only.

Dawn Primarolo (Labour, Bristol South)

I thought I answered the hon. Lady’s point when I gave examples of how the trust structure was being misused. As existing trusts are the very point that we are trying to deal with, the obvious question is why the Government would countenance allowing all the trusts that are at present undertaking avoidance to continue to do so, given that the Finance Bill is about limiting damage. I thought I dealt with that.

Dawn Primarolo (Labour, Bristol South)

I beg to move amendment No. 383, in page 111, line 21 [Vol II], leave out

‘to which section 89 below applies’

insert

‘in which a disabled person’s interest subsists’.

John Butterfill (Conservative, Bournemouth West)

With this it will be convenient to discuss the following: Government amendment No. 388.

Amendment No. 199, in page 116, line 41 [Vol II], at end insert—

‘(1A) After subsection (1) insert—

“(1A) This section also applies to settled property, whenever transferred into settlement, which is held on trusts in which an interest in possession subsists, and in which the person beneficially entitled to the interest in possession is a disabled person.” '.

Amendment No. 200, in page 117, line 1 [Vol II], after ‘means' insert ‘—

(a)'.

Amendment No. 201, in page 117, line 3 [Vol II], at end insert—

‘(b) an interest in possession in settled property to which a disabled person is beneficially entitled.

(2A) For subsection (4)(a) substitute—

“(a) a person who lacked capacity, within the meaning of the Mental Capacity Act 2005, or was expected to lack capacity at some time in the future;”.

(2B) In subsection (4)(c), omit the words “by virtue of” to the end.'.

Amendment No. 344, in page 117, line 3 [Vol II], at end insert—

‘(b) an interest in possession in settled property to which a disabled person is beneficially entitled.'.

Amendment No. 345, in page 117, line 3 [Vol II], at end insert—

‘(2A) For subsection (4)(a) substitute—

“(a) a person who lacked capacity, within the meaning of the Mental Capacity Act 2005, or was expected to lack capacity at some time within the following five years;”

(2B) In subsection (4)(c), omit the words “by virtue of” to end.”.'.

Amendment No. 346, in page 117, line 5 [Vol II], leave out from ‘the' to ‘a' in line 6 and insert

‘references in subsections (1) and (1A) above to a disabled person include, in relation to any settled property, references to'.

Amendment No. 202, in page 117, line 5 [Vol II], leave out from ‘in' to second ‘to' in line 6 and insert

‘subsections (1) and (1A) above to a disabled person include, in relation to any settled property, references'.

Amendment No. 203, in page 117, line 15 [Vol II], leave out from ‘allowance' to ‘had' in line 17.

Amendment No. 348, in page 117, line 21 [Vol II], leave out from ‘the' to second ‘to' in line 22 and insert

‘references in subsections (1) and (1A) above to a disabled person include, in relation to any settled property, references'.

Amendment No. 349, in page 117, line 35 [Vol II], leave out from ‘by’ to ‘rate’ in line 36.

Amendment No. 205, in page 117, line 41 [Vol II], at end insert—

‘(7) The references in sections (1) and (1A) above to a disabled person include, in relation to any settled property, references to a person who satisfies Her Majesty's Revenue and Customs that he would, when the property was transferred into settlement, have been entitled to an attendance allowance or a disability living allowance had he claimed it.'.

Amendment No. 206, in page 117, line 41 [Vol II], at end insert—

‘(3A) Sub-paragraph (2A) shall come into force immediately after section 2 of the Mental Capacity Act 2005 comes into force.'.

Government amendments Nos. 389, 390 and 392.

Amendment No. 207, in page 127, line 13 [Vol II], at end insert—

‘(iii) a disabled person's interest, within the meaning given by subsection (2A) of section 89 of that Act; or'.

Dawn Primarolo (Labour, Bristol South)

The amendments relate to rules for trusts set up to provide for a disabled person. At the outset, let me briefly set out the broad purpose of the measure. As I said earlier, it had become clear that some individuals were using trusts—in particular, trusts set up by people during their lifetimes—to achieve an unfair IHT advantage. That is the primary source of IHT avoidance, which amendment No. 383 is trying to counter, and that is why the Government believe that it is right to bring the sorts of trusts that we have been discussing under the mainstream IHT rules for trusts.

However, the inheritance tax rules have always contained special provisions for trusts set up to provide for a disabled person. For people who find it difficult or impossible to cope with the demands of owning assets outright, a trust will often be the most practical way for substantial assets to be held. The rules recognise that, and in such circumstances treat those trusts in the same way as outright ownership. Trusts for disabled people are the only exception to the new rules for trusts set up in life. The Government have always tried to be clear that that treatment is justified. Furthermore, the Government took the opportunity in the draft Bill to bring the rules into line with the equivalent parts of the income tax and capital gains tax rules.

Government amendment No. 388, along with the consequential Government amendments Nos. 383, 389, 390 and 392, will introduce new sections 89A and 89B into the Inheritance Tax Act 1984. They will extend the relief in two further respects. First, the Government amendments make technical changes that will ensure that the rules operate for all types of trust set up for a disabled person. The old rules made explicit provision for discretionary trusts for disabled people, but not for interest in possession trusts for disabled people. An omission in the drafting of the Bill meant that some interest in possession trusts for disabled people might not be brought within the new rules. That is clearly not what was intended, and the amendments rectify the situation.

Secondly, the amendments extend what is already in the Bill to cover people with degenerative illnesses. I am talking about people who do not yet fall within the definition of “disability” in the rules, but who have good reason to expect that they will shortly be incapable of dealing with outright ownership of their assets. There are good arguments for the use of a trust in such cases, and our amendments will extend special treatment to trusts set up for people in those circumstances for their own future benefit.

Turning to Opposition amendments Nos. 199 to 203, 205 to 207, 344 to 346, 348 and 349, I am pleased to say that the Government amendments make the same technical changes as many of the Opposition amendments, particularly amendment No. 344. However, I am afraid that the other amendments in the group would modify the Bill in ways that we do not propose to accept. One theme in the amendments is to replace the current reference to people who are incapable as defined under the Mental Health Act 1983 with something based on a notion of capacity within the Mental Capacity Act 2005. While I sympathise with the desire to keep the tax code up to date with developments in non-tax legislation, I do not consider that those particular changes would really improve matters.

First, the amendments raise doubts over the continuing eligibility of trusts already in existence that qualified originally for special treatment by reference to the provisions of the Mental Health Act 1983. The majority of the trusts in question will fall into that category for many years to come. Secondly, the Mental Capacity Act 2005 is not yet in force, which would mean a delay in introducing the provisions for disabled trusts. Thirdly, even when the Act does come into force, it will be effective only in England and Wales.

Theresa Villiers (Conservative, Chipping Barnet)

If the Paymaster General is worried about the impact of trusts that qualify at the moment under the terms of the Mental Health Act 1983, could not transitional provisions be included to ensure that they continued to receive the same treatment? As for the point that the Mental Capacity Act 2005 is not yet in force—it is not expected to be for another couple of years—it would be a problem if we were to postpone the implementation of the definition for that period, which one of the amendments tabled by the hon. Member for Falmouth and Camborne proposes. It would leave the trusts in limbo. The Mental Capacity Act received Royal Assent, but the fact that it is not yet in operation does not stop the Bill cross-referring to it.

Dawn Primarolo (Labour, Bristol South)

The final important problem is that the amendments make a fundamental mistake about how the Mental Capacity Act is meant to work when the amendments refer to an individual who lacks capacity. The whole point of the Act is that capacity is not an all-or-nothing issue. People may lack the capacity for dealing with some matters while remaining quite capable of dealing with other aspects of their life. The Act is designed to ensure that affairs should only be interfered with to the minimum possible extent, so any reference to it would have to spell out precisely what sort of matters a person would have to lack capacity to deal with in order to qualify for the special IHT treatment. That would be especially difficult when looking ahead five years along the lines of the Opposition amendments.

We have discussed what Act is the most appropriate to use at different points of the tax system with regard to mental health. It is difficult to see how that can be made to work without attempting to put hugely complex and probably highly subjective statements and definitions into tax legislation. The Government’s view is that the existing legislation works perfectly well by reference to the Mental Health Act.

It is also suggested that we should allow someone to set up a disabled trust if they can show HMRC that, when the trust was set up, the disabled person would have qualified for the allowance if they had claimed it. I am reluctant to accept the amendment for a practical reason. HMRC is capable in many ways—never a truer statement—and the growing department is handling more and more. However, it is not equipped to reach medical judgments on whether an individual would in the past have been capable or able to claim attendance or disability living allowance had they decided to do so. We have had similar discussions when considering different Finance Bills and that has always been my view. It is not a poor reflection on HMRC. I just think that there are limits.

If someone were thinking of setting up a trust for a disabled person, I am sure that arrangements could be made for that person to submit a claim if that were believed important for tax purposes. We have discussed that in relation to other parts of the Bill and other tax legislation. It may only be necessary when the amounts involved exceed the inheritance tax threshold—currently £285,000, rising to £325,000 in 2009.

The final substantive proposal in the Opposition amendments would extend the scope of IHT provision to beneficiaries who have any form of entitlement to disability living allowance, rather than restricting it as at present to those who are eligible specifically for the care component of DLA at the highest or middle rate. That might reflect a straightforward difference of opinion between the Government and the Opposition.

The IHT reliefs have never been designed to deliver extra resources to disabled people on account of their disability. It is clear that many people who suffer some degree of disability as a matter of general law may have no material difficulties in handling the financial aspects of their life. That is true for many people who are entitled to disability living allowance but who do not currently fall within the tax definition. The mere fact that an individual has a mobility problem does not mean that they cannot handle their own finances, and to assume otherwise would take us down a difficult and unhappy route—one that tax legislation took in the distant past, when judgments were made about the capacity of individuals.

The definition in the Inheritance Tax Act 1984 is the same as the definition for income tax and property gains purposes, which itself has only recently been subjected to extensive consultation. There is a surprise. The consensus in that consultation, which included contributions from a wide range of groups representing the disabled, and some large charities for the disabled, was that the definition used by the Government is the right one.

I hope that I have explained the Government amendments. I can see the desired effect of the changes proposed by the hon. Member for Chipping Barnet, but the route she suggests would be a difficult one to take at this point. The Government have taken care to ensure that the rules for disabled people’s trusts will operate fairly and practically. The amendments do not provide for a better system—they could lead to a more difficult situation and could have some unintended effects.

Theresa Villiers (Conservative, Chipping Barnet)

I thank the Paymaster General for her thoughtful account of her own amendment and for her discussion of my proposed amendment and the amendment in the name of the hon. Member for Falmouth and Camborne. Members of the Committee will notice the overlap between the amendments tabled by myself and her. Some of them are identical, and both are based on those contained in the useful briefing that was circulated by members of the Low Incomes Tax Reform Group, which has worked with a number of organisations on the matter.

The group has expressed grave concerns that the provisions in the Bill could have a negative impact on a number of vulnerable groups. I emphasise that the amendments do not imply that the disabled are incapable of managing their own affairs—far from it. The Opposition amendments are designed to give to the disabled every facility to use trusts when they feel that it would be in their best interests to do so, and I understand from a number of groups that work closely with those affected by disability that the trust device is an extremely useful one for many of them in dealing with their daily lives.

6.15 pm

We are looking at the carve-out in section 89 from the new inheritance tax charges. There is concern that the carve-out is too narrow even with the small extensions proposed in schedule 20. It has even been assumed that the Government’s amendments go through to schedule 20 as well. The Low Incomes Tax Reform Group is concerned

“that the definition of disabled person used in the proposed legislation...should be correctly targeted at people who, because their disability prevents them from handling their own finances, need and want their affairs to be conducted through the medium of trusts.”

Organisations such as that group believe that the definition is too narrow, hence my amendments and those tabled by my hon. Friends to broaden that definition.

Prior to the Budget, the section 89 carve-out received little attention and was seldom used. It has only become more important with the imposition of new charges on a range of other trusts. It has grown in significance. Prior to the Budget, most people who set up trusts for disabled children or relatives chose to set up life interest trusts. They were considered simpler and more user-friendly than the rather clunky discretionary trusts that could be used within section 89. Typically, trusts for the disabled are set up inter vivos—during the lifetime of the settlor. Therefore, given the changes in the Budget, they will attract the new charges, unless they fall within section 89 or within the scope of the Government amendments tabled in the past few days.

I welcome the move to embrace interest in possession trusts, which is envisaged by the Paymaster General’s amendments. The problem with section 89 and schedule 20, as originally drafted, is that it provided for discretionary trusts under section 89 but did not provide for interest in possession trusts; and it did not allow disabled people to set up trusts over their own property. Schedule 20, as drafted, would apply the new charges to such trusts because they are set up inter vivos and trusts set up during the lifetime of the settlor will attract the new charges, unless they can be fitted into the carve-out.

I turn to the problems in relation to the definition of disability that the Paymaster General has already outlined. Organisations such as Mind, the Parkinson’s Disease Society and the Low Incomes Tax Reform Group are concerned about the limits set on the people who are considered to be disabled for the purposes of the new IHT regime. There is the question whether it is appropriate to include a definition from the Mental Health Act 1983 as opposed to the more up-to-date legislation contained under the Mental CapacityAct 2005. There is also the matter of the limitation to people who are in receipt of attendance allowance or disability living allowance by virtue of entitlement to the care component at the highest or middle rate.

There is another definition of disability used in statute. It is not contained in the amendments because it was felt to be too radical. However, under the Disability Discrimination Act 1995, the definition of disability is:

“a person has a disability for the purposes of this Act if he has a physical or mental impairment which has a physical or mental impairment which has a substantial and long-term adverse effect on his ability to carry out normal day-to-day activities.”

The Low Incomes Tax Reform Group cites that broad definition in contrast to the restricted definition on which the Government are relying. It highlights a number of groups that will fall outside the categories proposed in schedule 20 and section 89, including people who receive one of two mobility components of DLA, those who get a lower-rate care component of DLA—people who need an hour’s care or more a day, but not frequent care—non-claimants who would have been entitled if they had claimed, as the Paymaster General mentioned, and people who are not mentally disordered, but have a partial capacity or who have a progressive illness and need to organise their affairs in advance to take into account the deterioration of their condition.

The group also highlights concerns about people who have fluctuating capacity, such as those with periodic attacks of mental illness. In particular, beneficiaries under trusts set up over personal injury damages or money from disaster funds who may have a high mobility component and a lower care component of DLA are excluded. Falling outside the scope of section 89 means that their trust funds will suffer the 10-year charges and exit penalties, so it is important to get this issue right.

Schedule 20 could also mean that similar charges apply to trusts set up for the benefit of people with progressive illnesses such as Alzheimer’s, which is also an important matter. Those with fluctuating conditions such as depression or schizophrenia may also be outside the scope of the definition since their conditions may not be serious enough to deprive them of capacity as set out in the Mental Health Act 1983.

Of course there are other options for dealing with the situation of disabled people or those who lack capacity. It is possible to protect vulnerable beneficiaries of that nature via an enduring power of attorney or the Court of Protection. Those options are important, but they may not be an adequate or suitable way to deal with the needs of many people. In particular, the Court of Protection route is highly prescriptive and very expensive, and an enduring power of attorney suffers the drawback that it is granted to an individual. If anything happens to them, they may not be available to deal with problems. Therefore, it does not have the flexibility of a trust in all cases.

Neither the enduring power of attorney option nor the Court of Protection option caters well for people with a fluctuating capacity. Both options are important, but the Low Incomes Tax Reform Group states that there should continue to be the same choice available to vulnerable beneficiaries of the sort that we are discussing—that is, the same choice between use of trusts, enduring power of attorney and Court of Protection. It states that

“the determinant of the choice should be the best interests of the vulnerable beneficiary, not the vagaries of the tax system.”

As the Paymaster General said, I have tabled amendments—in some cases with the hon. Member for Falmouth and Camborne—that seek to deal with the problems that I have outlined. Amendments Nos. 199 and 201 deal with the life interest point by extending the carve-out in section 89 to cover interest in possession trusts for disabled people. Consequential drafting changes are made in amendments Nos. 200, 202 and 204. The result of the amendments would be that life interest trusts set up for people who count as disabled within the definition contained in section 89 would be free of the new entry and periodic charges. Such trusts would continue to be governed by the present rules, with an IHT charge on the death of the life tenant. The amendments would have that result regardless of whether a disabled person set up a trust over their own property or whether someone else set up a trust for them. Thus the amendments would also cover the self-settlement point, which I shall address later.

Further assistance in respect of self-settlement would also be derived from amendments Nos. 300 to 318, which we shall discuss in due course. They would put all self-settlement outside the scope of the new charges.

In the short time since the Government amendments in the group were tabled, it has not been easy to establish exactly how they will work, but it appears that many of the issues that I have outlined in respect of interest in possession trusts and self-settlement will be solved with adoption of the Government’s amendments. I welcome them as a response to the amendments that I tabled along the same lines.

It seems from the drafting and from what the Paymaster General said that new section 89B(1)(d) will make it possible for a disabled person to set up a life interest trust over their own property. That is a welcome move by the Government. New section 89B(1)(c) seems to provide that a third party can also set up a life interest trust for a disabled person. Again, the Paymaster General’s earlier remarks seemed to confirm that my understanding of that is correct. It seems that the primary problems with life interest trusts would be solved by the Government’s amendments.

New section 89A provides that someone who has a condition that is likely to lead to their becoming disabled can set up a trust over their assets. It seems to provide some comfort to those with degenerative diseases such as HIV, Alzheimer’s and Parkinson’s. With diseases of that seriousness, one would have thought that many of them would be able to show on the balance of probabilities that their condition would eventually lead to the ability to make the required benefits claims within the meaning of disability, or to bring themselves within the capacity definition that is contained within the meaning of disability for the purposes of section 89.

The Government’s amendments do not appear to resolve one problem concerning IIP trusts that those people with the degenerative conditions to which I have referred set up in contemplation of the onset of disability. Although the individual themselves can set up that trust, if their parents, relatives or other people wish to pay into it, they would have to pay the new IHT charges. I should be interested to hear from the Paymaster General whether I have understood that section correctly, because it would seem to be a drawback, preventing others from contributing to the trusts that the disabled person set up.

Although I welcome those moves, the Government’s amendments leave a number of other significant problems that have not been solved. I received an e-mail from Mind this morning, which confirmed its view on the matter:

“The sensible approach would be for the government to undertake a longer and more considered review of the issue relating to charges on trusts for people without mental capacity, people with fluctuating capacity and/or disabilities.”

The barrister, James Kessler QC, who is very much an expert in this area, said—in my view rather harshly—of the amendments:

“In my view, the new clauses offer about 1 per cent. of what is needed to give us a proper system of trusts taxation for the most vulnerable in society.”

The key drawback, as we have already heard from the Paymaster General, is that her amendments do not address the problems with the definition of disability.

My amendment No. 345 removes from section 89 the reference to the definition contained in the Mental Health Act 1983 and inserts instead a reference to the definition of mental incapacity contained in section 2 of the Mental Capacity Act 2005. There is a fundamental difference between the two. First, the Paymaster General has already referred to the fact that the Mental Capacity Act is more up to date. It represents more closely the current thinking on the issue, it was consulted on for about 12 years and it includes a good definition.

However, there is another serious distinction between the way in which those two statutes work. The 1983 Act is about deciding who should receive compulsory treatment—the criteria at the heart of it are about whether the person is a risk to themselves or others—whereas the 2005 Act is designed to be empowering and to focus on capacity and people’s ability to make their own decisions about their own lives.

I take on board the Paymaster General’s point that the test is more complex, and that it applies differently in different situations. The definition provides simply:

“For the purposes of this Act, a person lacks capacity in relation to any matter if at the material time, he is unable to make a decision for himself because of an impairment of or disturbance in the functioning of the mind or brain.”

That is a superior definition, and it relates more closely to the situation with which we are dealing: for example, the question about whether the person is happy and able to deal with their own affairs. That is a different criterion from that in the 1983 Act.

As I said in an intervention on the Paymaster General, it is not necessary as a matter of logic to postpone an implementation of a definition based on the 2005 Act. It may not be in force, but the definition is clear, and the fact that it is not in force does not prevent us from incorporating it in section 89 of the Inheritance Tax Act 1984. I agree that significant problems would arise if we were left in limbo without a definition for several months, because section 89 could not be used. As we have heard, the significant extension of the new IHT charges will mean that the importance of section 89 will be increased, and it would be very difficult if the disabled were prevented from using it.

My amendment No. 345 would not only substitute an up-to-date definition of mental capacity, but provide protection for people who are expected to lack capacity at some point in the following five years.

I note that the hon. Member for Falmouth and Camborne has tabled amendment No. 201, which is similar to mine. I prefer my formulation; hers could be interpreted very widely, because it brings into the definition anyone who might be expected to lack capacity in the future. On the balance of probabilities, we are all eventually likely to lack capacity, even if only during our closing illness. By limiting the carve-out to those instances in which incapacity is likely to follow within a particular period, my amendment focuses more clearly on the concerns about degenerative illness and fluctuating capacity that I have outlined.

Amendments Nos. 203 and 349 widen the definition of the benefits relevant to determining whether someone falls within the definition of “disabled”. They would delete the restriction to those claiming the highest or middle rate of the care component of the disability living allowance, and therefore allow someone claiming the low component of the care allowance to be included in the definition. Amendment No. 205 provides that people who are entitled to attendance allowance or disability living allowance will qualify under that provision, even when they are not claiming it.

It seems arbitrary to base the criteria on those who choose to claim benefits, rather than those entitled to claim them. I acknowledge the administrative implications of the change that agreeing to my amendment would involve, but I hope that the Government will consider it, given the importance of the issue. We have inherited the definition of “disabled” from a tax statute that dates back many years and is in pretty dire need of updating.

Dawn Primarolo (Labour, Bristol South)

I want to help the hon. Lady so that she does not dig herself into a very deep hole. The Government consulted extensively on the definition with charities and groups representing the disabled, and that is how we arrived at the definition of “disabled” for income tax and capital gains tax purposes. We have simply used the same definition here. The hon. Lady has cited organisations that took a different view, but in that consultation, 41 organisations advised the Government to go the way that we have gone. I entirely accept that there are different views, but there are substantial organisations that say that we are using the definition that we should.

Theresa Villiers (Conservative, Chipping Barnet)

I am grateful to the Paymaster General for that, but the organisations to which I referred are concerned. The National Autistic Society also has concerns and a number of organisations have written only very recently to the Treasury to ask it to consider the issue again.

I acknowledge that the Government amendments help to mitigate what would otherwise be the very damaging impact of schedule 20. Once agreed to, as I assume they will be, I hope that it will be possible for IIP interests to be set up for and by disabled people. However, those amendments will not protect vulnerable people who fall outside the definition of “disabled”, nor those struggling with addiction problems, who may wish to self-settle to protect their assets when they perhaps fall off the wagon.

Nor will the amendments protect people who may be mentally vulnerable but are not so seriously ill as to lack capacity. A classic example would be manic depressives. On its website, Rethink, the charity that campaigns on mental health matters, sets out some of the reasons why those with mental health problems might wish to set things straight on their use of their own property. It states that

“Debt can also be brought on by symptoms of the illness itself. People with mania sometimes believe they are rich and go on spending sprees and people with depression commonly spend money in an effort to make themselves feel better. Conversely, people with depressive symptoms may withdraw and ignore official letters, appointments and bills often leading to mounting debt and a decrease in income.”

Trusts can be an invaluable support to those people and their families struggling with mental illness and addiction.

I welcome the concessions made by the Government, but I do not believe that they have gone far enough. There is still a danger that the punitive charges under schedule 20 could be levelled at vulnerable people. The bar on self-settlement, particularly, poses significant problems for vulnerable people.

Finally, I shall quote a letter sent to the Treasury just a few days ago by the organisations that I mentioned: the Low Incomes Tax Reform Group, Mind, the Parkinson’s Disease Society, the Chartered Institute of Taxation, the Institute of Chartered Accountants, the Law Society, STEP and the National Autistic Society. In supporting the changes put forward by the hon. Member for Falmouth and Camborne and me, it says:

“We are not seeking favoured tax treatment, but to protect vulnerable trust beneficiaries from incurring a tax penalty that they would not have incurred before Budget Day. There are so many inconsistencies in the definition in”

section

“89 that we firmly take the view that legislation cannot go forward as currently drafted without causing severe prejudice to vulnerable beneficiaries and discrimination between different classes of disabled beneficiary, some of whom may qualify as disabled under the definition and some of whom will not. I hope that the government will listen to their appeal.”

Julia Goldsworthy (Liberal Democrat, Falmouth and Camborne)

Given the similarities between many of my amendments and those of the hon. Member for Chipping Barnet and her colleagues, I shall not dwell too long on the same ground. However, I have a few remarks to make. Like the hon. Lady, I can see some benefits in the Government amendments dealing with some problems, including situations where, if the Bill progressed as it is, trusts set up for disabled people by means of a life interest in possession trust—not a discretionary trust—would have been liable to charges that would have depleted funds set aside for their medical and care needs. However, the key issue is the definition of “disability”, and eligibility to fit within this regime.

We have heard plenty of contributions. The Bill currently defines a disabled person, according to the Mental Health Act 1983, as

“a person who by reason of mental disorder within the meaning of the Mental Health Act 1983 is incapable of administering his property or managing his affairs, or...a person in receipt of attendance allowance...or...disability living allowance...by virtue of entitlement to the care component at the highest or middle rate.”

The 1983 Act will be repealed when the Mental Capacity Act 2005 comes into force in April 2007. As has already been said, that should not preclude the definition of the 2005 Act being used in the Bill.

There is an argument for using the more inclusive definition, because there is also an issue about whether there is consistency with other areas. Section 1 of the 1995 Act defines as disabled a person with:

“a physical or mental impairment which has a substantial and long-term adverse effect on his ability to carry out normal day-to-day activities.”

The Department for Work and Pensions consultative paper “Delivering Equality for Disabled People”, at paragraph 5.4, sets the standard for policy making and legislative drafting in relation to disabled people:

“The Government considers that the definition used in the Disability Discrimination Act...is most likely to be suitable for public authorities working to promote equality.”

I understand that there have been representations to HMRC and it has said that the definition is too wide. If we are looking for consistency across Departments and consistency of treatment, surely we need the definition to be applied uniformly.

The current definition will exclude some people—the relevant groups have already been mentioned—and affect people with fluctuating conditions, which could include mental health problems, such as schizophrenia or depression, and physical disabilities, such as multiple sclerosis or muscular dystrophy. These issues have still not been addressed by the Government amendments, although, to some extent, they have been looked at.

I should like to mention that, under the definition in the Bill, referring to the 1983 Act, reference is made to the definition of the situation where somebody has to be in receipt of attendance allowance or disability living allowance. I am sure that the Paymaster General was aware that not all the people entitled to those benefits claim them. There is a concern that those people may fall through that gap.

On Conservative amendment No. 345, which is similar to amendment No. 201 that imposes a five-year time limit, again, people with fluctuating conditions may not qualify, but in future their condition may degenerate to the point where they would benefit from having access to such beneficial treatment. Given the long-term nature of some conditions, it is appropriate to retain the situation as it is.

The Government improvements are welcome, but there are still considerable areas that are problematic and need to be addressed.

Brooks Newmark (Conservative, Braintree)

I shall speak to amendments Nos. 201, 345 and 205.

First, on amendments Nos. 201 and 345, it is unfortunate for the Government that we are debating the potential impact of the proposals on the disabled and vulnerable during carers week and only a week after volunteers week. I mention that because I had the pleasure of spending some time last week at the Play and Resource Centre—

John Butterfill (Conservative, Bournemouth West)

Some hon. Members have complained that the cooling system is a bit too severe. This will be a democratic process, so may I have a show of hands from those who would like the heating turned up a little, and from those who would like it to stay as it is?

The result is fairly understandable. Having sat on the Government Back Bench in the past, I know that the air conditioning duct comes out directly on to the hon. Members sitting there. I suggest that the hon. Members for Llanelli (Nia Griffith) and for Worsley (Barbara Keeley) move to a slightly warmer position as the rest of the Committee seems to be adequately warm.

Brooks Newmark (Conservative, Braintree)

Before we were so rudely interrupted, I was saying that last week I had the pleasure of spending some time at the Play and Resource Centre—PARC—in my constituency, which exists to provide support for children with a wide range of disabilities. It would be accurate to refer to all the children there as vulnerable, which is why they were playing in a protected environment. Many would also qualify as disabled, although that would depend very much on which definition of disability was chosen. However, I am not at all certain how many people, once they have reached 18, will be judged incapable by reason of mental disorder within the meaning of the Mental Health Act 1983. Yet some such children, if they are fortunate, and if their parents have the benefit of sound financial advice, may well become beneficiaries of trusts that have been established in order to protect their long-term financial interests.

I remind the Committee that we are not dealing with faceless abstractions. Not only have we all been lobbied by the usual professional bodies, some of which have been mentioned today, on the potential repercussions of the proposals, but we have all met with constituents who will be directly affected. In the week after this year’s Budget, I met with members of my local branch of Rethink, the mental health charity. At the time, some of the perverse implications of Budget note 25 were just beginning to dawn, so it is fitting that months later we have the opportunity to debate the proposals at length during carers week.

Trusts are widely recognised as one of the great achievements of English law but they are also often represented as a quaint anachronism, offering great opportunities for the idle rich to cheat the Revenue of its right and due. I am fortunate that one of my constituents is the chairman of the probate and estate committee of the Society of Trust and Estate Practitioners, known as STEP. He recently gave me some historical texture, when he told me that trusts originated from the need for crusading knights to leave someone in control of their property. There was no tax motive at all.

The Foundation for People with Learning Disabilities offers a less colourful justification for what remains a practical vehicle for asset management. It comments that

“Historically discretionary trusts were set up as a fund to pay for a few extras or luxuries that welfare benefits or Social Services might not provide or might not provide enough of.”

Trusts remain practical because they remain flexible, and the essence of such flexibility is threatened by the current proposals. The amendments aim to preserve something of that flexibility by ensuring that a sufficiently large class of vulnerable beneficiaries can make use of trusts without facing punitive taxation to which they would not be liable if they held trust assets outright.

Rethink has offered a compelling justification for the use of trusts. It has said:

“For people who are vulnerable to anxiety or psychosis it’s especially important for them to have a home and a regular income...But many people with mental health problems find it difficult or even impossible to cope with a benefit system which is too complex for most people to understand and which sometimes demands interviews or physical examinations as well as a great deal of form filling.”

Trusts actually answer this need by offering both stability and flexibility to meet the needs of those who cannot cope with their own financial affairs. As Mencap says:

“A trust is a useful way to provide for a person with a learning disability who may not be able to handle money left to them outright or who may be vulnerable to pressure from other people. The trust introduces a degree of protection because the trustees are in control over the trust fund.”

The degree of protection received by a beneficiary matches his or her changing needs—it is not an arbitrary, all-or-nothing solution in the vein of an enduring power of attorney.

The proposed amendments are modest given the number of those potentially affected by the current, overly prescriptive formula. Enlarging the class of disabled persons defined by section 89 of the Inheritance Tax Act to cover those in receipt of an element of the disability living allowances still falls far short of a comprehensive definition of those that society judges to be vulnerable. Furthermore, the definition of capacity derived from the Mental Capacity Act 2005 falls short of the broader definition that derives from the Disability Discrimination Act 1995. The question remains whether even that definition is adequate, because being vulnerable is not synonymous with being disabled.

The Low Incomes Tax Reform Group has argued that the definition derived from the Disability Discrimination Act 1995 is the most appropriate to the protection of the vulnerable. However, the matter of definition is best answered by the purpose to which trusts are best suited, not as a vehicle for sheltering assets from tax, but as a means of meeting fluctuating needs. As James Kessler QC noted, while the use of the Disability Discrimination Act is an improvement,

“in several respects the definition is too narrow”

because it still does not account for progressive illnesses or fluctuating capacity to which reference has already been made.

The failure to address progressive illness is indicative of a measure that is not progressive by any stretch of the imagination. On the contrary, the fact that it is retroactive has led to the charge from the Chartered Institute of Taxation that its provisions are probably the most inefficient in history. Most worrying of all are the reservations that Mr. Kessler makes in connection with the definition drawn from the Disability Discrimination Act, which is that addictions and substance abuse are not classified as impairments. Many of those whom we think of as vulnerable are neither disabled nor lacking in mental capacity. It is a class of people that includes the naive and impressionable as well as the dissolute and insatiable.

Since the Paymaster General believes that the Bill will affect only a small number of the super-rich, it is perhaps fitting that I draw an example from that set of people. When the seventh Marquess of Bristol, dubbed by the “Oxford Dictionary of National Biography” with the simple epithet of “wastrel”, died in 1999, it was discovered that he had left almost nothing remaining from an estate that had been estimated to be worth some £40 million. Even as The Times gloated, “Junkie marquess died penniless after spending millions on drugs”, the dictionary was more phlegmatic, commenting that the true fatality lay not in the genes, rather in too money much too early. Lurid newspaper headlines aside, it is apparent that the management of money presents its own challenges to the vulnerable, and that vulnerability shows many faces.

I have quoted perhaps an extreme example and not one, I think, that will attract much sympathy—from either side of the House. However, it serves as a warning that the decision to settle assets on trust or to make an outright gift should be tax neutral and made solely in the interests of the beneficiary’s potential protection.

Helen Goodman (Labour, Bishop Auckland)

Surely the case that the hon. Gentleman has made is for absolutely swingeing inheritance taxes with rates of, say, 90 per cent.

Brooks Newmark (Conservative, Braintree)

I am sorry to say that the hon. Lady misses the point of what I am saying. I was drawing attention to mental capacity or incapacity.

The amendments would at least go some way towards widening the definition of disability—that is what I am talking about—for the purposes of section 89 of the Inheritance Tax Act. They would address the issue of progressive or fluctuating capacity by being forward looking. They would also remove artificial distinctions brought about by the restriction of the qualification of disabled persons trusts to recipients of only certain components of the disability living allowance. However, there will still be a lacuna affecting many vulnerable people who remain outside the scope of the amendments. Meanwhile, the cost of the changes will be borne by those least equipped to handle them and the gain to the Exchequer will be inconsiderable. Moreover, not for the first time, of course, the only true beneficiary of the changes will, unfortunately, be the legal profession itself.

I come now to amendment No. 205. We have heard that, broadly speaking, two categories of disabled person will be recognised as beneficiaries of a disabled person’s trust. The first relies on a stringent, punitive and unworkable definition from the Mental Health Act 1983 and the second relies on the necessity of being in receipt of certain benefits. It is hard to think of a more demeaning provision to include in a Finance Bill than the decision to define a disabled person either as incapable by reason of mental incapacity or dependent on the state for benefits.

The very purpose of trusts for the vulnerable and disabled is prudence and empowerment: prudence, as the Economic Secretary well knows, on the part of families looking to provide for vulnerable relatives, and empowerment for those who are thereby given a measure of financial security. It is true that the Government have tinkered a little with the definitions found in section 89 of the Inheritance Tax Act 1984. Relief in the tax regime applicable to discretionary trusts has been extended to those who cannot receive either disability living allowance or attendance allowance because they do not satisfy the residency requirement or because they are undergoing treatment for renal failure.

However, it is peculiar that the Government have introduced legislation that—we are told—started life as an attempt to tackle tax avoidance, but has ended up requiring the needy to be in receipt of benefits in order to avoid punitive taxation of assets held on trust. It is nothing short of absurd to suggest that disabled people must be in receipt of benefits from the state in order to be able to make use of the assets that should be free to be applied to meet their needs.

Disabled people who choose to live on their own income instead of making use of their entitlement to benefit from the state will, in future, be doubly penalised. They will lose the income that they might have enjoyed if they had decided to apply for it, and they will be penalised again because their choice subsequently places them outside the narrow definition of “disabled person”, so their assets will become subject to tax.

Let me offer a hypothetical example. A “disabled person” within the meaning of section 89 of the 1984 Act chooses not to apply for either the disability living allowance or attendance allowance despite being eligible for one of those benefits, and lives instead on trust income. There might be many reasons for not applying, ranging from a desire not to be a burden on the state, to an unwillingness to engage with the ever-increasing complexity of the benefits system. For whatever reason, that person decides to forgo their right to benefits and the direct consequence is that they are at least £41.65 per week worse off. However, that loss of £41.65 pales into insignificance when compared with the indirect cost of tax liabilities which result because they fall outside the definition of a “disabled person” as a result.

We have heard in the past that the Government are taking steps to increase the uptake of benefits, but there is such a thing as going too far. I cannot believe that it was the Government’s intention to predicate a tax exemption for “disabled persons’ interests”, which is already too narrow to be of any practical use, upon the mandatory uptake of benefits. I cannot accept that it is right to force the vulnerable into the jaws of the benefits system against their will merely in order to safeguard their own means.

It might well be argued that the number of people who fall within section 89 of the 1984 Act, by virtue of being eligible for disability living allowance or attendance allowance, but who do not choose to claim, is very small. However, we should not be tempted into thinking that small numbers justify shoddy legislation. Even if the Government remain committed to the restrictive formula offered by section 89 of the 1984 Act and its proposed amendments, the mere eligibility for benefits should be sufficient to qualify as a “disabled person’s interest”. Amendment No. 205 will ensure that eligibility for benefits and not their uptake is the crux of disabled persons’ trusts.

Philip Dunne (Conservative, Ludlow)

The Committee will be relieved to hear that I do not intend to detain it too long. Not for the first time, my hon. Friend the Member for Chipping Barnet—if I may say so without appearing too oily—spoke with considerable clarity and conviction on the issues, and with such comprehensiveness that we do not need to rehearse the subject for long. The amendments should not divide the Committee, because we are all committed to what they would do. The Government made the concession that there will be a carve-out for disabled people, but the issue is getting the definition of that carve-out right, so that we cover all the groups that are vulnerable and at risk.

I ask the Paymaster General to provide Opposition Members with some comfort about people with the three kinds of fluctuating disability: people with mental health problems, people with degenerative illnesses—both groups may be of sound mind when the trust is entered into; the examples of Alzheimer’s and HIV were given—and those who have an addiction, which is a condition that will fluctuate. The Marquess of Bristol, an example given by my hon. Friend the Member for Braintree (Mr. Newmark), might fall into that latter category, but one obviously needs to be careful about that. However, as charities have told us, there are plenty of examples of people who have an addictive problem for whom a trust provides a perfect mechanism for preventing them from damaging themselves financially during periods of unsoundness. I ask the Paymaster General to reassure Conservative Members that those issues will be properly addressed.

Dawn Primarolo (Labour, Bristol South)

We could be forgiven for forgetting that we are talking about inheritance tax, and that the new rules apply to inheritance tax amounts of over the IHT threshold of £285,000. Many of the trusts spoken about will not be worth more than that amount, and are completely unaffected.

The rest of the debate is in Hansard.