2) Bill, Philip Dunne makes a speech raising concerns about the retrospective nature of this Bill and the impact it would have on divorce cases where trusts are set up by the courts for the settlement of assets.Mr. Dunne: I remind the Committee of my entry in the Register of Members' Interests. I am a settlor of a trust, which I set up for my children with assets that I generated from my own endeavours-in other words, they were not inherited by me prior to my becoming a Member of the House.
I am also the beneficiary of a trust and should like to explain why it was set up. My father set it up in order to gift some assets to me, as a result of my asking a question to his adviser about whether I would be able to borrow against those assets for my other activities. So concerned was my father when he heard that he could be making me a gift that I might then seek to leverage on receipt that he put the assets into a trust, precisely in order to protect them. He was not prepared to allow me, even though I was over 25, to use those assets for a purpose other than he had intended.
Dawn Primarolo: Given that the hon. Gentleman does not have control, is the trust subject to inheritance tax?
Mr. Dunne: I am pleased to say that my father survived more than seven years after the gift was made, so it benefits from the potentially exempt transfer regime.
Dawn Primarolo: I am grateful to the hon. Gentleman, who makes my point that changes to trusts are covered either by the spousal exemption or the seven years provision.
Mr. Dunne: I should like now to deal with the deficiencies of the regime, which I am afraid that the Paymaster missed out of her speech. The first has been mentioned-the retrospective nature of the legislation. I intervened in that regard earlier but would like some definition of the numbers of people involved. It is difficult to secure accurate figures, but my understanding is that approximately 70 per cent. of people in this country die without making a will. Out of a population of 60 million, about 18 million make a will. The Law Society believes that about 15 million people have a will, so the legislation will affect all those who currently have an estate worth more than the inheritance tax threshold of £285,000. It will affect all who anticipate that, during the balance of their lifetime, their estate might fall within the inheritance tax net and all who set up a trust within their will. I pointed out earlier that that applies to virtually everyone who has made a will in the last six or seven years and who has children or a previous wife. It will also affect anybody who wishes to leave assets to their children or to grandchildren under the age of 25. Trusts would arise by virtue of the age of the potential beneficiaries.
The estimate by the Society of Trust and Estate Practitioners is of the order of 1 million people. I have examined the basis for that calculation. It arose from a survey STEP undertook of its members immediately after the Budget statement. Only 11 per cent. of members responded, and they indicated that about 830,000 trusts would be affected. Extrapolating that figure to all the solicitors' firms that are members of STEP would produce a figure of around 8 million.
Helen Goodman: The hon. Gentleman is surely not suggesting that half the people who make a will have assets that are over the inheritance tax threshold. That would be ridiculous.
Mr. Dunne: I did not intend to suggest that. I am trying to demonstrate that there is an enormous disparity between the real figure and the figure quoted by the Paymaster General in a rather defensive letter to the newspapers shortly after the Budget, suggesting that the measure would affect tens of thousands of people. There is no doubt that the figure will be substantially larger.
I argue that millions-not 8 million, but some number of millions-of trusts and wills will need to be reviewed and arrangements altered over the transitional period in order that those assets will not fall within the inheritance tax net. That is the point that I was trying to make by citing the much larger number. Clearly, not all will have any prospect of falling within the net, but a very large proportion will.
There are approximately 150,000 divorces every year in Britain. Regrettable though that is, the partners to the divorce will, under present legislation, almost by definition have to enter into a trust when they set up a will in the event of their divorce.
Dawn Primarolo: I am advised that divorcing couples tend to make a clean break. Solicitors who are involved in divorce cases say that trusts are not widely used in those circumstances. Perhaps the hon. Gentleman could elaborate on the facts.
Mr. Dunne: My understanding is that trusts are used by the courts for the settlement of assets in every divorce case that goes through the courts. I accept that that would not necessarily be the case in the event of clean breaks, but it would apply in other cases where significant assets were involved. Those generally go through the courts.
A further category that contributes to the numbers affected are couples who have recently entered into civil partnerships as a result of the legislation that came into effect earlier this year. Many of the new partnerships that have been registered will have taken the trouble to enter into a will, and, where assets are involved, those wills will need to be changed over the transitional period.
Collectively, we are discussing large numbers of people. That undermines the Paymaster General's argument that the measure will affect a small number of people and generate a small amount of revenue.
On the revenue front, I suggest to the Paymaster General, and I should like her to deal with this in her closing remarks, that she has misled the House. She indicated that the revenue gain from the proposal would be about £15 million in the first year. Let me suggest to her why that figure is so woefully wrong. Given the number of trusts and wills that will need to be reviewed and the cost of so doing with professional advice, there will be a significant VAT gain to the Exchequer from the measure. A big-four accountancy practice is currently writing to all its clients, where it is aware that trusts or wills exist, quoting a fee of £295 plus VAT-in total, £347-for the mere exercise of reviewing those people's current trust or will. It also suggests that a further fee will be incurred if people decide to make changes after the Finance Bill has been enacted.
Rob Marris: The hon. Gentleman might suggest to people that rather than going with the big four, they should join a trade union and get a free will.
Mr. Dunne: Unfortunately, I cannot do so, because, as a result of data protection legislation, I do not have the names and addresses of the people to whom the practice has been writing. I am sure that other organisations are willing to offer a cheaper service, but the review charge calculated by the Society of Trust and Estate Practitioners is £341 rather than £347, so anyone who wants to take professional advice must incur a significant fee, which, because it is subject to VAT, will generate substantial revenue to the Chancellor. Some 1 million to 1.5 million such arrangements may need reviewing, which would generate roughly three times the revenue for the Treasury that the Paymaster General has indicated.
The retrospective nature of the legislation raises a more fundamental issue, which is the credibility of the UK as an appropriate place for people with assets to invest or to seek to conduct their business. For many years, it has been an important tenet of tax legislation that retrospective legislation is not encouraged. Because this provision has been introduced with no consultation whatsoever with the industry, it fundamentally undermines this country's long-established reputation for fairness in its taxation dealings. I urge the Paymaster General to consider whether it is worth putting at risk this country's reputation among the wealthy and, in particular, the wealthy from overseas who might want to live here and do business here, by leading such people to think that long-established provisions on tax can be changed without consultation at the drop of a hat on a retrospective basis.
Rob Marris: The measure is not retrospective, although it may change people's expectations. When people of our generation took out mortgages in 1984, we got mortgage interest relief at source, which was later phased out. Our expectation as purchasers was that we would get MIRAS for the 25-year life of the mortgage, but there was no contract with the Government to that effect. The Government changed the position, but the change was not retrospective, although it changed our expectations, and the same is true of this legislation.
Mr. Dunne: I accept that this legislation includes a transitional period over the next two years, but I still argue that many trusts that have existed for decades-centuries in some cases-will be significantly penalised. [Interruption.] The hon. Member for Rhondda (Chris Bryant) is laughing at the notion that trusts have existed for centuries. I have received representations from the Historic Houses Association-I am sure that other hon. Members have received such representations, too-pointing out that one of the reasons why this country has such a strong built cultural heritage, unlike many continental countries where different forms of taxation have existed and trusts, in particular, have not been involved in tax planning, is that trusts have been able to protect assets from one generation to another. That is not, as the hon. Member for Rhondda may think, a tax avoidance measure, but a measure to preserve assets as a whole, so that they continue to be viable, economically efficient assets rather than being split up among a family.
That takes me to my next point: what is the purpose of such trusts? There is a perception among Members on the Government Benches that they are set up purely to evade tax. As I illustrated with my own case, trusts are usually set up to protect assets from individuals who cannot be trusted, or for valid planning reasons, particularly in relation to the increasingly acute problems arising from multiple families as society, sadly, evolves into individuals having more and more multiple families during their lifetime. If the Bill goes through, it will fetter the choices of spouses who are in a position to do so to allocate assets to provide maintenance for children, especially in the case of a second family where there are also children from the first family. I do not think that that is Government's intention. I assume that they have not thought this through, and I urge them to do so.
5.15 pm
I should like to draw attention to one or two deficiencies in the Bill's drafting. I am sure that we will cover them in greater detail in Committee. The argument was made rather hastily following the Budget-by the Paymaster General, I believe, although it may have been by one of her ministerial colleagues-that a specific carve-out for life policies will be written into trust, but nothing in the Bill does that. Will the Paymaster General to put me right on that, either now or when she winds up?
Dawn Primarolo: If the hon. Gentleman will forgive me, we are not discussing the Bill and the clause-I only wish we were-but his party's new clause. I will of course reply to his point at the appropriate time in Committee, and I look forward to doing so.
Mr. Dunne: I look forward to that, too. Given that we are digressing for a moment or two, with your indulgence, Sir Michael-
The Second Deputy Chairman of Ways and Means (Sir Michael Lord): Order. The hon. Gentleman should not pray in aid my indulgence. As has been said, he must address his remarks precisely to the new clause that we are discussing.
Mr. Dunne: I am grateful, Sir Michael.
Several people, including spouses who are elderly or incapacitated by mental infirmity, will not be in a position to vary their trust arrangements or wills over the transitional period, and their estates will therefore suffer inheritance tax unnecessarily. I urge the Paymaster General to address that point specifically.
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OTHER INTERVENTIONS IN THE DEBATE
Mr. Philip Dunne (Ludlow) (Con): I am sure that my hon. Friend is aware that for the past six or seven years every solicitor practising family law who has been asked to draw up a will has recommended to their clients that in the event that they have children or have been divorced, or both, it is in their interests that their will is written into a trust, irrespective of the value of assets in their estate. Moreover, given that average house prices are approaching the point whereby several years hence the majority of estates are likely to fall within the inheritance tax net, we are talking not about the rich but about householders.
Mrs. Villiers: I am grateful to my hon. Friend. For many years, it has been a standard part of more or less every will drafted for a family to include a trust because those arrangements make sense in balancing the different interests of different family members.
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Chris Bryant : I intend to speak briefly because I want to make only two points.
First, although the hon. Member for Chipping Barnet (Mrs. Villiers) sounded reasonable, she exaggerated the need for any changes to the Government's proposals. Indeed, the hon. Member for Ludlow (Mr. Dunne), who perhaps owns property that far exceeds the expectations of any of my constituents, gave the game away when he said that half of all properties in Britain will soon-in a matter of a few years-go over the threshold. Not a single property in the Rhondda sells at £300,000. The idea that 50 per cent. of estates in the next few years will reach £325,000 is extraordinary. The hon. Gentleman's mathematics need to be better because between 94 and 96 per cent. of estates do not reach that threshold today and will not do so with the increases in the threshold that the Bill proposes.
Mr. Dunne: Clearly, I am not familiar with property values in the Rhondda, but I know those in my constituency of Ludlow, where the average property value exceeds £200,000. I understand that the average property value in the south-east of England exceeds £300,000.
Chris Bryant: The hon. Gentleman can speak for his constituency, but I dare to suggest that if he considers the whole country, his statement that 50 per cent. of estates will be valued at more than £325,000 in the next few years is a gross exaggeration.
