Finance Bill

It is a pleasure to follow the right hon. Member for Birkenhead (Mr. Field), who spoke in his typically understated fashion but with great passion and strength of conviction. Everyone in the House will have listened to him very carefully. Before I talk about new clause 1, I want to make brief mention of two other amendments in the group. Amendment 40 in my name is a fairly technical proposal about settlor-interested trusts, and I shall not detain the House long with it. The nature of the trust and the interest that the settlor has in it mean that both the trust and the settlor are liable to pay income tax on the trust's income. The trust pays the tax at the higher rate, which is currently 40 per cent. but which will rise to 50 per cent. if the Government's plans go through. In contrast, the settlor pays at his highest marginal rate—that is, the 20 or 40 per cent. that obtains at the moment, or the 50 per cent. that the Government propose. However, the problem is that there appears to be double taxation of that income. HMRC provides a credit to the settlor for the total tax paid by the trustees. That offsets exactly the tax due for higher rate taxpayers but, where the offset is not exact because the settlor is a basic rate taxpayer or has unused allowance, the settlor is obliged to pay any excess over to the trust. Before the trust regime was changed in 2006, the credit that I have described was provided as of right. Following the Finance Act 2006, it is now a concession and there is no obligation on HMRC to continue to provide it in the future. Therefore, the relief could be withdrawn at any time, and the first part of amendment 40 would ensure that it remained available. I do not think that the Government ever intended to create this uncertainty in the first place and the first part of the amendment would put the legislation on a proper footing by making sure that the concession had the force of statute. The second part of amendment 40 clarifies that, if a credit is given, a settlor cannot also claim tax liability from the trustees. At present, that can happen when trustees have still to pay the income tax due on trust income when the settlor files an income tax return. In those circumstances, there is nothing to credit from, so the settlor has to pay up and then claim back the sum directly back from the trust. It is difficult to explain how the trust eventually resolves its liabilities and I shall not go into fine detail now, but I believe that the amendment would solve that problem too. Although amendment 40 addresses a gap in the trust law that is three-years-old, the changes proposed in clause 6 to the trust's rate of tax have made the issue more pressing. The trust rate paid by the trustees and the marginal rate paid by the settlor are likely to differ when the Bill comes into effect next year. Most settlors will not earn enough income to pay income tax at the additional rate, so the onus will be on the trustees to make the settlor repay the difference under the current legislation. It is therefore all the more important to ensure that a settlor can rely upon HMRC's concession in order to meet these payments. That is best achieved by providing a statutory basis for the concession.