Amendments 1 to 7 will make technical changes to clause 175, which introduces provisions by which an individual who is or has been married to or who is or has been in a civil partnership with someone who is domiciled in the UK can elect to be treated as UK domiciled for inheritance tax purposes. The Minister has set out in detail the reasons for the changes and the expected impact.
I have one additional question. The impact note that was published with the amendments states that there will be a negligible impact in this year, but that in future years there is expected to be a £5 million negative impact on the Exchequer. Will the Minister clarify how and why that negative impact will be realised?
Amendments 35 to 51 will alter schedule 34 and clause 174 on the treatment of liabilities for inheritance tax purposes. Understandably, the Minister focused on those proposals for the majority of his remarks, because they have been the subject of significant concern from a number of quarters. As he explained, the clause was drafted in response to avoidance schemes and arrangements that sought to exploit the inheritance tax rules that allow for a deduction for liabilities owed by the deceased against the value of an estate, regardless of whether the debt is paid after death.
HMRC has outlined some of those arrangements. Some involve contrived debts that are subsequently not repaid, so there is no real reduction in the value of the estate. Others involve loans that are used to acquire assets that are not chargeable to inheritance tax or which qualify for a relief so that the value of the estate is doubly reduced. The policy intention of the measure is to remove the tax advantage that such schemes and arrangements seek to achieve through the exploitation of that loophole. Obviously, that is an aim that the Opposition support.
The impact assessment shows a net positive return to the Exchequer of £5 million in 2013-14, rising to £20 million in 2014-15, then falling and remaining steady at £15 million after 2017-18. It is obvious why the impact will be lower in 2013-14, but it would be helpful if the Minister would clarify why the return is expected to peak at £20 million and peter down to £15 million on an ongoing basis. Presumably, individuals who are aware of the changes will, as executors, adjust their tax planning behaviour, but it would be interesting to understand why we expect that increase in 2014-15, and why the return will continue at £15 million on an ongoing basis. Is that return expected to continue indefinitely in terms of tax protected by the Exchequer?
A number of concerns about this measure were raised in Committee, and also expressed by several external organisations that the Minister mentioned. Most notably, there is concern that the new rules are too broad and may unintentionally catch genuine existing arrangements, rather than solely avoidance behaviour. It is welcome that amendments 35 to 51 seek to focus the new rules more tightly, and clarify the legislation where appropriate to minimise the impact on those with innocent arrangements. Despite the amendments, there are still a number of concerns about clause 174 and schedule 34. I have already asked the Minister whether he is confident that those concerns have been addressed, because even despite the amendments, concerns continued to be raised. It would be helpful if the Minister would provide comfort to the House, members of the public and tax professionals who are concerned about the clause.
The key concern expressed by the Chartered Institute of Taxation relates to debts that are not discharged from the estate of a deceased person. New provisions in clause 174 appear to mean that if a debt has not been discharged directly out of an estate, it will not be deductible for inheritance tax purposes. For example, if the deceased’s estate contains a house subject to a
mortgage, the mortgage debt might be repaid from the proceeds of an insurance policy, payable directly to the beneficiary. Although a spouse or civil partner would not be subject to inheritance tax under such circumstances, a cohabitee or orphan child would be. Alternatively, if there is no insurance to pay off the mortgage, the beneficiary might take on the mortgage debt. In either case, as liability will not have been discharged directly out of the estate, which is a requirement of the new provision, it appears that it will not therefore be deductable.
I understand that HMRC intends to deal with such scenarios in its guidance, but it would be helpful for the Minister to clarify the position in his response. The Chartered Institute of Taxation previously expressed concerns that the measures are “profoundly anti-business” and do “not recognise economic realities”. Indeed, it went so far as to state
“we can hardly think of a more counter-productive measure than to deny relief for lending related to business.”
I am sure the Government will want to respond to that strong concern, given current economic conditions and their stated desire to stimulate economic growth. I am sure it is not their intention to enact measures that could be counter-intuitive to that desire.
The Government’s amendments mean that new rules on liabilities incurred to acquire a relievable property will apply to loans taken out or varied on or after 6 April 2013. That is important because of the retroactive nature of schedule 34, which has been criticised given the significant implications for business loans taken out many years ago and secured against a person’s house.
The Chartered Institute of Taxation continues to be concerned that the amendments do not provide adequate protection for small businesses. If a business loan was taken out many years ago but is varied after 6 April 2013, the transitional protection offered by the amendments falls away. That could trap small business owners into existing loans, or hinder anyone whose loan comes to an end, where the bank wants to alter the terms, or if the individual wants to refinance. Ultimately, the Chartered Institute of Taxation fears that that could result in people facing an unenviable choice between selling the family home and selling their business if the business owner dies. I would be grateful to hear the Minister’s comments on those concerns.
To return briefly to my comments on amendments 1 to 7, the impact assessment states that the proposed changes could impact on small businesses. There has been no consultation with small firms or any other groups, so perhaps the Minister will confirm that both sets of changes will not have the detrimental impact on small businesses and business lending that many tax professionals are concerned about.