Finance Bill

Lindsay Hoyle Excerpts

Tuesday 2nd July 2013 Commons Chamber

[Catherine McKinnell]

I thank the Minister for his comprehensive account of new clause 7 and for responding to our queries. As he has said, the Government want to introduce a number of new clauses and amendments to the Bill. Could you clarify, Mr Deputy Speaker, whether we are dealing with just new clause 7 at this stage, or are we taking any other amendments?

[Mr Deputy Speaker (Mr Lindsay Hoyle)]

Just new clause 7.

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[Harriett Baldwin (West Worcestershire) (Con)]

Is it appropriate, Mr Deputy Speaker, that I now speak to amendments 52 and 53, tabled in my name?

[Mr Deputy Speaker]

No.

Question put and agreed to.

New clause 7 read a Second time, and added to the Bill.



Clause 175

Election to be treated as domiciled in the United Kingdom

[Mr Gauke]

I beg to move amendment 1, page 105, leave out lines 4 to 13 and insert—

‘(3) Condition A is that, at any time on or after 6 April 2013 and during the period of 7 years ending with the date on which the election is made, the person had a spouse or civil partner who was domiciled in the United Kingdom.

(4) Condition B is that a person (“the deceased”) dies and, at any time on or after 6 April 2013 and within the period of 7 years ending with the date of death, the deceased was—

(a) domiciled in the United Kingdom, and

(b) the spouse or civil partner of the person who would, by virtue of the election, be treated as domiciled in the United Kingdom.’.

[Mr Deputy Speaker (Mr Lindsay Hoyle)]

With this it will be convenient to discuss Government amendments 2 to 7 and 35 to 51.

[Mr Gauke]

These Government amendments make important changes to the UK’s inheritance tax rules.

Amendments 1 to 7 will bring in greater flexibility and provide more individuals with the option to elect to be treated as UK domiciled for the purposes of inheritance tax. They demonstrate the Government’s willingness to listen to the views of external interested parties and act where there is a principled case for change.

Amendments 35 to 51 are being made as a result of comments by interested parties. They clarify the technical interpretation of the legislation and change the commencement provisions with respect to certain liabilities.

Let me turn first to amendments 1 to 7 to clause 175. The clause reforms the inheritance tax treatment of transfers between UK-domiciled individuals and their non-UK-domiciled spouses or civil partners. The changes allow individuals who are not domiciled in the United Kingdom but who have a UK-domiciled spouse or civil partner to elect to be treated as domiciled in the UK for the purposes of inheritance tax.

The amendments are being made following comments from two key interested parties—the Chartered Institute of Taxation and the London Society of Chartered Accountants—about how the Finance Bill as drafted amends the inheritance tax treatment of spouses and civil partners not domiciled in the UK. Their further representations since the publication of the Bill in March have helped us understand the concerns raised in more detail. Considering the points raised has taken time, but the amendments will resolve these issues.

The clause as drafted stipulates that a person must be non-UK-domiciled and married at the time they make an election. Consequently, a person who has recently become UK domiciled would not be able to make a retrospective election that would cover a period when he or she had been non-domiciled. Effectively, they are trapped if they are not aware of the possible IHT consequences at the point just before they become UK domiciled—for example, if they decide to remain in the UK indefinitely after having children here. This might be especially harsh in situations where the original UK-domiciled spouse dies suddenly having made potentially exempt transfers to the surviving spouse.

Similarly, the Bill as drafted requires a person to remain married to, or in a civil partnership with, the UK-domiciled spouse or civil partner throughout the “relevant period” preceding the election, which can be up to seven years. Therefore, in circumstances where the marriage or civil partnership has been dissolved and the person is a non-domiciled individual, they are prevented from making an election retrospectively and hence prevented from gaining access to spousal relief for the period when they were married in return for their overseas assets being brought into IHT. That was not the intention of the policy.

Amendments 1 to 7 remove the condition that a person must be non-UK-domiciled at the time of making an election. They also remove the requirement that the person making the election is married or in a civil partnership with the UK-domiciled individual throughout the relevant period. The amended clause stipulates instead that they were married or in civil partnership at any time during the relevant period.

As a result of these amendments, individuals who are domiciled in the UK but who were previously domiciled elsewhere will be able to make a retrospective election. Similarly, the amendments will also enable individuals previously married or in a civil partnership to make a retrospective election following divorce or dissolution. This will ensure that changes in domicile or marriage status do not restrict the ability of individuals to elect to be within the UK inheritance tax system.

Amendment 1 simply removes a sub-paragraph that is no longer required as a consequence of amendments 2 to 6, while amendment 7 provides clarity that the provision for revoking an election applies only to the person who made the election and not to that person’s personal representatives.

Let me now turn to amendments 35 to 51 to schedule 34. Clause 174 and schedule 34 reform the inheritance tax treatment of outstanding liabilities. They introduce new conditions and restrictions on when a liability can be deducted from the value of an estate.

The current rules allow almost all outstanding liabilities at death to reduce the value of an estate, irrespective of how the borrowed moneys have been used, or whether the loan is repaid following the death. That creates opportunities for avoidance and can lead to decisions and arrangements being made purely for tax reasons. A range of contrived arrangements and avoidance schemes on the market seek to exploit the current rules. The number of those is expected to grow as other avoidance routes are closed off.

There is an inconsistency in how the current rules treat liabilities that are used to acquire assets that qualify for relief, but that are secured against different types of assets. That creates an advantageous tax position and distorts decision making by encouraging individuals to secure business loans against their personal property where there may be no need to do so. The Government believe that the tax system should neither encourage nor penalise the choice of one form of security over another.

Clause 174 and schedule 34 address those opportunities for avoidance and inconsistency in three ways. First, deductions will be disallowed where the loan has been used to acquire excluded property—that is, property which is excluded from the charge to inheritance tax. Secondly, where the loan has been used to acquire relievable property—that is, property which qualifies for a relief—the relief will be allowed against the net value of the property after deducting the loan. Thirdly, the loan will generally be allowable as a deduction only if it has been repaid from assets in the estate.

The Government are making those changes to improve the integrity and fairness of the inheritance tax system, close avoidance opportunities and remove the inconsistency in the treatment of loans.

Following the publication of the Finance Bill in March, Her Majesty’s Revenue and Customs has received comments from representative bodies, practitioners and individuals that have highlighted sections of the legislation that could be clarified. Interested parties have also expressed concern that the new provisions will apply retrospectively where individuals have secured business loans on their non-business property for commercial reasons, rather than for avoidance purposes, before the changes were announced. Those individuals would face a higher IHT bill if they died before the debt was repaid.

Amendments 35 to 49 clarify the interpretation of the legislation to ensure that it works as intended, and address some of the technical issues identified in feedback. If a loan has been used to acquire excluded property, which later becomes chargeable to IHT, amendment 37 will allow the deduction for the liability. Conversely, if chargeable property subsequently becomes excluded property, the amendment will deny the deduction.

Where a loan has been used to acquire relievable property and that property is given away before death, amendments 41 and 42 will ensure that the liability is not deducted again against other types of property if it has already been taken into account. Amendment 45 will widen the meaning of “estate” to allow the liability to be repaid from property that is usually treated as being outside a person’s estate for IHT purposes, such as foreign property that is owned by an individual who is not domiciled in the UK. Where a loan has not been repaid and the deduction is disallowed, amendment 47 will make it clear that the liability will not reduce the amount that would be eligible for the inheritance tax exemption for transfers between spouses or civil partners.

The Government recognise that some lenders may require security in the form of personal assets and that individuals who have secured existing loans against their personal property to finance business investment may not be able to restructure the loan or unwind the arrangements. Amendments 50 and 51 will therefore amend the commencement date so that the new rules dealing with liabilities incurred to acquire relievable property will apply only to new loans taken out on or after 6 April 2013. That will mean that someone who took out a business loan in the past secured against their other assets will not be affected by the new provisions.

The commencement date for the other provisions in schedule 34 will remain unchanged as the date of Royal Assent. Those provisions will apply to other liabilities, irrespective of when they were incurred.

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[Mr Deputy Speaker (Mr Lindsay Hoyle)]

Order. We are wandering away from the amendment, and I know the hon. Lady just wanted to make a point on the amendment.

[Catherine McKinnell]

My point relates specifically to the amendment, Mr Deputy Speaker. Many businesses that manage to obtain funding are often required to provide their home as security. If this provision has a detrimental impact on small businesses and puts family homes in jeopardy, will the Government keep it under review?

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[Mr Deputy Speaker]

With this it will be convenient to discuss Government amendments 9 to 16.

[Mr Gauke]

Clause 14 and schedule 2 provide a wide-ranging simplification of the four tax advantaged employee share schemes, following recommendations by the Office of Tax Simplification. The Government are introducing amendments 8 to 16 to provide further clarity on the rules that apply where company events involving “general offers” take place. When clause 14 was discussed in Committee, we highlighted some of the improvements that we are making to simplify the tax advantaged employee share schemes, and I shall provide hon. Members with some background on the specific provisions relating to these amendments.

Current legislation allows employees affected by certain company events, such as takeovers, to exchange their original scheme shares or options for shares or options in the acquiring company. The schedule also creates new rights for participants to realise scheme shares or exercise options without tax liability in the event of a cash takeover of their company.

Earlier this year, a tax tribunal hearing a particular case published a decision on what constitutes a “general offer” for the whole of the ordinary share capital of a company. Following this decision, and a number of requests from taxpayers and advisers, the Government consider it desirable to clarify the scope of what constitutes a “general offer” for the purposes of the provisions. The amendments clarify the position across all four tax advantaged employee share schemes, and confirm the rules as they have been consistently applied by HMRC. Our aim is to remove any uncertainty for advisers and taxpayers, consistent with the general simplification theme of the changes. The amendments, alongside the changes that already form part of the Bill, demonstrate the Government’s commitment to simplifying and clarifying the tax rules where possible.

[The Economic Secretary to the Treasury (Sajid Javid)]

I beg to move amendment 17, page 205, line 7, after ‘(g)’, insert ‘or (4A)’.

[Mr Deputy Speaker (Mr Lindsay Hoyle)]

With this it will be convenient to discuss the following:

Government amendments 18 to 29.

Amendment 52, page 213, line 2, at end insert—

‘(aa) the policy has an annual premium of £3,600 or less.’.

Amendment 53, page 213, line 2, at end insert—

‘(ab) the policy is subject to capital gains tax.’.

[Sajid Javid]

Amendments 17 to 29 make a number of technical changes to schedule 9 and clause 25 to ensure that the qualifying insurance policy regime works as intended. Let me set out some brief background to these changes. The qualifying policy regime was introduced in 1968 to preserve pre-existing tax treatment for traditional moderate value, long-term, regular premium savings policies that contain a significant element of life insurance.

No upper limit was set for the investment premiums that could be paid into a QP, which allowed individuals to obtain unlimited relief from higher rates of income tax. In the 2012 Budget, the Government announced a restriction to the tax relief available for QPs. Clause 25 and schedule 9 introduce an annual premium limit of £3,600 on qualifying life insurance policies. This restriction limits the amount of premiums payable into QPs for an individual to no more than £3,600 in any 12-month period, with effect from 6 April 2013.

This measure supports the Government’s objective of promoting fairness in the tax system by ensuring that tax reliefs for QPs are correctly targeted. Consultation since the Bill was introduced has continued and identified the need for Government amendments to clause 25 to deal with points of detail in 13 areas. None of these represents a change of policy; as I have said, they are technical adjustments to ensure that the rules operate effectively and as intended. The amendments have been discussed with industry representatives and have benefited from the comments received.

Let me briefly explain the amendments in slightly more detail. The purpose of the changes is to provide flexibility to deal with potential future exclusions from the non-assignment rule and potential future exclusions from the circumstances under which beneficiaries must make statements, to extend the period by which an individual must first make a statement and to clarify what information an insurer must provide and obtain from a policy beneficiary and what an insurer must provide to HMRC. In addition, a number of amendments make minor corrections or consequential changes to the more material changes that I have described.

If I may, Mr Deputy Speaker, I will speak to amendments 52 and 53, standing in the name of my hon. Friend the Member for West Worcestershire (Harriett Baldwin), at the end of the debate.

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[Mr Deputy Speaker (Mr Lindsay Hoyle)]

I do not think that we need to worry about that. We should stick to the amendment.

[Cathy Jamieson]

Thank you for that guidance, Mr Deputy Speaker. I had feared that the Exchequer Secretary would jump up and ask a supplementary question about the Opposition’s position on cutting VAT.

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[Jack Dromey]

There was an office block speculator called Harry Hyams. Those were the days when people could build office blocks and not pay rent on them, and they would appreciate two or three times in value every year. That happened against the background of a chronic housing crisis. We rightly protested against that and the incoming Labour Government rightly changed the law for—

[Mr Deputy Speaker (Mr Lindsay Hoyle)]

Order. We are trying to deal with an amendment. Going down memory lane is all very well, Centre Point is very interesting and Mr Mann will always have a response, but I know that Members are desperate to get back to the amendment.

[Jack Dromey]

You are right, of course, Mr Deputy Speaker.

We are here to stand up for the people we represent, and we all see the impact of the housing crisis in our constituencies. I see the impact in the shortage of homes being built in Erdington—56 certified by the National House-Building Council in 2012—and the building worker, one of 79,000, who lost his job, a big man who burst into tears on his front doorstep in Marsh lane and said, “I’ve lost my job three times; I am desperate to provide for my family. I simply can’t cope any longer.” I also see the impact on the homeless families who come to my surgery—on one occasion, they had just been evicted—desperate for a decent home, and the young people in the Orchard project run by the YMCA in my constituency, where numbers of young homeless people double every year.