Standing Committee B
Tuesday 15 June 1999
(Morning)
[Mr. Frank Cook in the Chair]
(Except Clauses 2, 28 and 99)
Clause 92
Gifts
10.30 am
Question proposed, That the clause stand part of the Bill.
Mr. John Whittingdale (Maldon and East Chelmsford): We now come to inheritance tax. Clause 92 is the dog that did not bark because it is narrowly focused on a specific scheme which has been used to avoid inheritance tax. Some commentators had expected the Government to introduce a more substantial change to inheritance tax and in the run-up to the Budget a number of articles predicted that the Chancellor would make major changes. The Financial Times stated:
"Accountants and tax advisers think IHT could be a top target for Brown in the March 9 Budget. For one thing, Labour was vocal about reforming IHT in opposition but has so far done nothing in government."
That fact that the Government chose not to make major changes to inheritance tax came as a surprise to some people and it would be interesting to hear from the Minister whether the Government have decided not to make substantial changes to inheritance tax and have dropped suggestions made when they were in opposition, or whether we can expect to return to the matter in future Finance Bills.
The purpose of the clause is to deal with the Lady Ingram case, which involved a simple scheme in which children were saved from having to pay inheritance tax on their parents' home. The freehold was transferred to the children and a leasehold interest was retained by the parents with the right to live in the property remaining with the leasehold. The Law Lords held that that was legitimate tax planning and not deliberate tax avoidance because it made use of the existing law. It is not a loophole as such, and the clause extends the scope of inheritance tax, but we accept that it was not the intention that such a scheme should be successful, so we do not oppose the clause.
The clause is narrowly drawn and not many people would have been able to take advantage of the Lady Ingram scheme, but there is concern--some might say an opportunity, depending on their profession. Accountants have identified the fact that it would be possible to exploit a variation of the Lady Ingram scheme and gain the advantage of not paying inheritance tax. That was described in an article in The Tax Journal in which the author suggests that there is still scope for estate planning by use of gifts to the spouse of the donor. He states that the provisions in section 102 of the Finance Act 1986, which the clause amends,
"only catch benefits reserved to the donor and not those reserved to his spouse and"
under new section 102A(3) of the 1986 Act
"in order for a right to be significant, it must entitle or enable the donor himself to occupy the property. This has the consequence that if the lease of the property is granted to the spouse of the donor alone, then, as the right, interest or arrangement in respect of the lease does not entitle the donor to occupy, it can only be significant if it can be said to 'enable' the donor to occupy."
It is not clear what "enable" means. It could be argued that the donor lives in the house only on the sufferance of his spouse who, if she changes her mind, could throw him out at any time. Therefore, as he has no right to occupy the house, there is no attached interest and the clause will not affect the judgment that inheritance tax is not payable. It will be interesting to hear whether the Government agree with the professional view that the loophole will not be closed and inheritance tax will continue to be avoided.
A number of commentators have raised concerns about the provisions as they affect gifts involving an undivided share in land. When the provisions for gifts with reservation were debated in 1986, the late Sir Brandon Rhys-Williams obtained assurances from the Minister, which are worth quoting.
Mr. Geraint Davies (Croydon, Central): Is it not the case that if a man dies, his legacy goes straight to his wife, which does not incur inheritance tax, and then to his sons or daughters, which does incur inheritance tax? Surely passing the freehold to the spouse has no effect.
Mr. Whittingdale: The hon. Gentleman does not understand how the scheme works. I have every sympathy with him--I got there only after considerable time and with the need to put a number of wet towels around my head. The freehold is passed to the children, where inheritance tax is payable, but the leasehold is retained by the person living in the house. The intention of clause 92 is to prevent the donor of the freehold from retaining the right to live in the house while ensuring that children do not avoid heritance tax. The professional adviser's point is that if the freehold was given to the children but the leasehold interest went to the spouse, so that the donor had neither the freehold nor the interest, the scheme to avoid IHT might still apply. It is the freehold passing to the children that is relevant. This is an accountant's view of how it might be possible to get around the provisions. We shall be interested to hear the Paymaster General's opinion on that.
We seek clarification on gifts that involve an undivided share in land. My right hon. Friend the Member for Cities of London and Westminster (Mr. Brooke), who was the Minister when this matter was originally debated, said in response to Sir Brandon Rhys-Williams:
"it may be that my hon. Friend's intention concerns the common case where someone gives away an individual share in land, typically a house, which is then occupied by all the joint owners including the donor. For example, elderly parents may make unconditional gifts of undivided shares in their house to their children and the parents and the children occupy the property as their family home, each owner bearing his or her share of the running costs. In those circumstances, the parents' occupation or enjoyment of part of the house that they have given away is in return for similar enjoyment of the children of the other part of the property. Thus the donors' occupation is for a full consideration.
Accordingly--
this is important--
"I assure my hon. Friend that the gift with reservation rules will not be applied to an unconditional gift of an undivided share in land merely because the property is occupied by all the joint owners or tenants in common, including the donor."--[Official Report, Standing Committee G, 10 June 1986; c. 425.]
That assurance has been relied on ever since. However, the clause will apply a new set of rules covering gifts of an undivided share of land, which will supersede the statement that was made when the original provisions were debated. Several commentators have asked the Paymaster General to say whether the assurance given in 1986 will still apply under the clause. We hope that she will confirm that.
We do not oppose the clause's main thrust, but we have one or two concerns that we would like the Paymaster General to address.
Mr. Nick St. Aubyn (Guildford): I support the points made by my hon. Friend the Member for Maldon and East Chelmsford (Mr. Whittingdale). Apparently, hardened civil servants were crying into their cups over the lenient way in which the Government approached inheritance tax this year. We hope that the results of last week's election, which were so disastrous for Labour Members, will not force them into an old Labour bunker, from which they will use old-fashioned socialism to attack all forms of capital. Instead, they should realise that, if we are to have a modern economy, such taxes should be treated with greater leniency and understanding.
As we shall discover when we debate stamp duty, all capital taxes are capricious, and this one is no exception. I want to highlight the point made in the Inland Revenue's notes on the clause, which state that the gift with reservation rules
"also apply to the case where the donor actually receives some benefit, say under some informal arrangement with the donee."
I would like the Paymaster General to comment on two contrasting cases. First, let us imagine an old lady who owns a house that is worth £800,000 and an attached cottage that is worth £200,000. She gives the house to her daughter's family and moves into the cottage. Upon her death seven years later, the family inherit the cottage. Will the Paymaster General confirm that, in such a circumstance, no inheritance tax would be payable--that the first gift would be outside the period for potentially exempt transfers, and that the second gift would be under the threshold at which inheritance tax applies?
Let us imagine a second house next door that is worth £1 million, but which has no annexe.
Ms Sally Keeble (Northampton, North): Will the hon. Gentleman give way?
Mr. St. Aubyn: Just a minute. Let us imagine that the old lady who owns the house gives it in its entirety to her daughter, but continues to live in an upstairs room and share one or two other rooms with her daughter's family, until she dies seven years later. Will the Paymaster General confirm that, in such a circumstance, inheritance tax of £300,000 will be payable on the transfer of that property when the old lady dies? Under the gift with reservation rules, the transfer would be deemed to have been made at the time of the old lady's death, even though it was transferred seven years earlier.
Why should the first family, who do not get on very well with the old lady, who consequently moves next door, escape inheritance tax, but the second family, who get on so well with the old lady that they are happy to share a house with her, suffer a tax bill of £300,000?
Ms Keeble: Given the hon. Gentleman's scathing remarks about the Labour party's lack of understanding of the public, does he understand that the average property in constituencies such as mine is worth £60,000? In such constituencies, properties that are worth £200,000 and £1 million do not enter into the equation.
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