Inheritance Tax: Cohabiting Siblings

Baroness Penn Excerpts

Tuesday 20th June 2023 Lords Chamber

[Lord Lexden]

To ask His Majesty’s Government what plans they have, if any, to make transfers of property between long-term cohabiting siblings exempt from inheritance tax.

[The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)]

My Lords, the long-standing inheritance tax assumption for wealth transfers between spouses and civil partners reflects the formal legal obligations that marriages and civil partnerships necessarily entail. While the Government understand the issue, there are no plans to exempt transfers of property between long-term cohabiting siblings.

[Lord Lexden (Con)]

My Lords, the Government say that two people who have shared a jointly owned home for years must be in a legal relationship if inheritance tax is to be deferred when they are parted by death. I remind the Government that they blocked my Private Member’s Bill to open up civil partnerships to siblings after its Second Reading, where it gained wide support across the House. This would have enabled siblings to establish legal relationships and solve the problem. Why on earth should the postponement of tax on the death of the first of two people united in a loving association for years require sexual activity between them? Why should the survivor of a chaste relationship have to face the agony of selling the family home on the death of a loved partner to pay an inheritance tax bill? Have this Government no compassion?

[Baroness Penn (Con)]

My Lords, it is important to set this Question in context. Each individual has a nil rate band of £325,000. Two cohabiting siblings who jointly own a house may have an inheritance tax liability only when the value of the house exceeds £650,000—well in excess of both the average UK house price and the average London house price. There are also circumstances in which inheritance tax can be paid over a period of time, giving the beneficiaries time to adjust to changed circumstances. That facility would enable people in those circumstances to remain in their home, which I believe is the concern at the heart of my noble friend’s Question.

[Lord Pannick (CB)]

My Lords, I declare an interest in that I acted for the two Misses Burden, who unsuccessfully challenged this policy in the European court in 2008. This is not a question of law but a question of fairness. How can it be fair for two elderly sisters who have lived together for the whole of their lives, jointly own their property and have each made wills leaving the property to each other on the death of the first to be denied a tax benefit enjoyed by married couples and civil partners who may have a far less committed, developed and permanent relationship, or does fairness not count in the implementation of the tax system?

[Baroness Penn (Con)]

My Lords, the Government have attempted to draw up a system that is fair but recognises the unique status of marriage and civil partnerships. As I pointed out to your Lordships’ House, very few estates fall subject to inheritance tax, and we have put in place processes to ensure that those who live in the same house, for example, are able to meet their obligations over time, to lessen the impact of inheritance tax.

[Lord Palmer of Childs Hill (LD)]

My Lords, one can leave all above £325,000 to your spouse, your civil partner, a charity or a community amateur sports club. Can the Minister explain how siblings are less important than a community amateur sports club?

[Baroness Penn (Con)]

My Lords, I do not think that is the rationale behind the approach. The rationale in distinguishing between marriage and civil partnership and other relationships is the unique legal status and the unique legal and financial obligations that people enter into in that regard. As the noble Lord, Lord Pannick, referred to, this question was also referred to the courts, which found in the Government’s favour.

[Baroness Browning (Con)]

Does my noble friend accept that the Treasury seems to regard inheritance tax as locked into the Ovaltine family of the 1950s with 2.4 children? As my noble friend Lord Lexden’s Question indicates, it is about time that it took a long look at how inheritance tax works for families that do not have 2.4 children. Can I add to the sibling argument, and I declare a personal interest, the parents who take responsibility for disabled adult children for all of their lifetime, where the amount of money that can be passed on during an adult’s lifetime is severely limited on the assumption that lawyers—looking round the Chamber now, there are lots of grins around me—will be able to manage the trusts for that money after the parent has died? The parents want to do what is right for their children during their lifetime.

[Baroness Penn (Con)]

My Lords, I am happy to look at the specific circumstance that my noble friend raises. I do not think the Government have an old-fashioned view of how families are formed in modern times; that is why the benefits of being able to pass on inheritance, if you are married, is also extended to those who are civilly partnered.

[Lord Livermore (Lab)]

At the last Budget, the Government abolished the lifetime limit on tax-free pension savings. In the middle of a cost of living crisis, this giveaway for the very wealthiest cost £1.2 billion and increased the value of a £2 million pension pot by some £250,000. It also opened up an inheritance tax loophole whereby it is now possible to accumulate unlimited sums within a pension fund and pass them on entirely free of inheritance tax. What assessment has the Treasury made of the number of very wealthy individuals who will now use pension funds as a vehicle for inheritance tax planning, and at what additional cost?

[Baroness Penn (Con)]

My Lords, I was disappointed that the party opposite did not support our changes to pensions, which were key for many public sector workers in respect of recruitment and retention for their posts. The primary purpose of a pension is to provide income or funds that individuals can draw on in retirement. If an individual dies before they get to use it for that purpose, we believe their beneficiaries should be able to have those funds, and that is why unspent pension pots do not normally form part of an individual’s estate. As the Chancellor said to the TSC after the Budget 2023, we will keep any changes to the lifetime and annual allowances under consideration and look at the impact.

[Baroness Deech (CB)]

My Lords, I think the Minister is avoiding the issue of principle. Ever since I took an interest some 15 years ago in the case of the Burden sisters, referred to by the noble Lord, Lord Pannick, I have wondered why the financial inheritance benefits of coupling up are confined to sexual relationships, whether it is husband and wife, civil partners or even a deceased person and the person they lived with. What is so special about the sexual relationship, when you might have two sisters who have been committed for much longer, are unable to marry and have undertaken freely to take care of each other? The Government would not even lose in the end, because the inheritance tax is rolled over. Will the Minister please address the issue of principle?

[Baroness Penn (Con)]

My Lords, I do not think that I am not addressing the issue of principle; I am just disagreeing with some noble Lords on the conclusions of that question. The Government’s view is that marriage and civil partnership relationships necessarily entail particular legal and financial obligations to one another for the parties concerned. We think it is right that those obligations are reflected in our inheritance tax system. When it comes to the impact of inheritance tax, however, on people in the circumstances to which the noble Baroness referred, there are several measures in place to ensure that those impacts are minimised. Those include the existence of the nil-rate band, which means that the vast majority of people in this country—fewer than 6% of estates this year are due to fall subject to inheritance tax—do not pay inheritance tax. For those who are affected, there are measures in place to ensure the smoothing of those obligations when they find themselves in circumstances that we have heard about today.

[Lord Forsyth of Drumlean (Con)]

My Lords, following up on that last point, is not the problem that the only people who pay inheritance tax are the middle classes, or people whose only asset is the roof above their heads, whereas very rich people are able to buy farmland and make all kinds of arrangements to avoid inheritance tax? If the Treasury is keen on raising extra revenue, why not abolish inheritance tax and introduce capital gains tax on death, which would provide far more revenue and be far fairer to all concerned?

--- Later in debate ---

[Baroness Penn (Con)]

I have to disagree with my noble friend that the wealthiest do not pay inheritance tax. Statistics from 2019-20 show that tax paid on estates valued at £1 million or more accounted for 82% of total inheritance tax liability for that year. When it comes to reforming inheritance tax and looking at areas such as agricultural property relief and business property relief, we would need to be really careful about considering the impacts of changing that approach on family farms and family businesses before taking forward such changes.

[Lord Watts (Lab)]

My Lords, the Minister said that the Government introduced the pension changes to help GPs to be retained in the National Health Service. However, is it not the case that the majority of the savings will go to rich people rather than GPs?

[Baroness Penn (Con)]

I have to disagree with the noble Lord. The feedback we have had comes not just from the medical profession but from people in many other public service jobs who benefit from defined benefit contribution pension schemes and who have found their annual allowance and the lifetime allowance to be a real barrier to staying on in their work. It was in response to campaigns such as those from the BMA that the Government took action.