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THEIR LORDSHIPS' HOUSE takes no part in the passage of tax legislation. Once a Bill is confirmed as a Money Bill, they have virtually no power to amend it, certainly not against Commons' opposition. However, for the past four years the most consistently sensible parliamentary reaction to the Finance Bill process has come from the upper chamber. Since they can't force amendments to the Bill, they try to have persuasive influence by appointing a sub-committee from their Select Committee on Economic Affairs which looks in detail at some of the main issues in the Bill.
Their report for this year has just been published, and one of the topics covered is the change to IHT and trusts. The executive summary concluded that:
' As the Government did not make clear what it was trying to achieve, we remain uncertain whether the policy of neutrality towards trusts has been altered or whether the impact of these changes on ordinary family business needs further consideration and the remedies used to counter avoidance need to be more closely targeted.
'Just as we were going to print a large number of Government amendments were tabled, but again without an explanation of their intent. We believe that the way in which this whole matter has been handled is not the way in which tax changes should be made.'
Asking the questions
One of the key powers of a Select Committee is to require the leading protagonists to attend and answer questions (strictly speaking, Ministers and other members of Parliament cannot be required to attend, but by convention they normally will). The sub-committee heard from industry experts and also from Dave Hartnett on behalf of HMRC. They presumably did not want to 'go nuclear' by requesting that government Ministers give evidence, perhaps feeling that the 'other place' was the right forum to hold them to account. I hope that next year, if there is a similarly contentious issue, they will.
On the IHT changes, the first issue considered in the report (para 135) is whether it would have been possible to have consultation on the changes without 'forestalling' — avoidance in response to the proposed provisions. HMRC and Ministers have used this as the reason for not consulting on IHT, even though they were formulating the policy whilst they were in the middle of a comprehensive (and well-respected) process of consultation on proposed IT and CGT changes. It was trotted out yet again by Mr Hartnett (para 137). However, it was comprehensively demolished by the evidence of the profession. It could have been carried out on the absolute secrecy basis of Chatham House rules, said Alex McDougall. There could have been an advance announcement in the PBR (which would be the starting date for the new provisions), and then consultation, said Robert Maas and John Cullinane. Even at this late stage, said Chas Roy-Chowdhury, Ministers could say that the legislation will take effect from publication of the Finance Bill but after full consultation. Against this, an anecdote from Dave Hartnett about a leading tax practitioner who told him that he would have 'expedited his work in progress' had he known about the changes in advance looks painfully thin, and the committee quite rightly concludes that 'In the absence of evidence to the contrary, we consider that it should have been possible to have found a way to counter forestalling in this instance'.
Death = tax avoidance?
Forestalling might be a genuine concern in the case of lifetime tax planning, but it can scarcely be seen as a realistic possibility for estates on death. John Riches, on behalf of STEP, and Richard Williams and Alan Barr on behalf of the Law Society and Law Society of Scotland respectively made the point that 'people do not die to avoid tax'. Whilst I suppose it might have been necessary to prevent 'retroactive forestalling', if such a thing is possible, by limiting the right to use deeds of variation to rewrite wills for the new provisions, that would have been far preferable to making changes, without warning, which render the wills of many of those who have since died tax-inefficient. Even Mr Hartnett seemed to accept that the forestalling would have affected only trusts set up by lifetime transfers.
The sub-committee professed itself equally perplexed as to the motive for the changes. The report meticulously analyses the practice, so often complained about in this magazine, of hiding important but contentious tax changes in the technical notes of the Budget material. More specifically, they note that even here the changes were shown under 'Duties and other Taxes' and not under the anti-avoidance section, 'Protecting Tax Revenues'. The headline to the section concerned talked of 'aligning' the IHT regime with that for CGT and IT. Yet when the provisions were explained to the House of Commons, they were put forward as anti-avoidance measures.
This is not just a debating point, as the report makes clear in paragraph 153 — it had significant implications for the professional bodies:
'If the main purpose of the changes were anti-avoidance, then, in so far as it was believed that trusts for normal family purposes with no taint of avoidance were also affected, was this as a deliberate act of policy or inadvertent? The representative bodies thought moreover that they were at a disadvantage in framing amendments because they did not know the targets.'
Numbers game
HMRC suggested that only a small number of very wealthy people would be affected by the change. Even if this were true, it is hard to see why it is a justification. However, it seems that this was based on the assumption that 'normal' people review their wills on average once every two years, and so would be able to make the necessary amendments in the ordinary course of their biennial trip to see their solicitor.
Needless to say, the witnesses from the professions poured scorn on this idea, estimating that up to a million wills would need to be redrafted. The only dissenting voice seems to have been from Robert Maas, who thought that this was an exaggeration according to the report, but he, too, agreed that the difference between the HMRC figures and those of the profession was mainly because of the erroneous assumption by HMRC that everyone reviewed their wills regularly.
Don't do it again
The message of the report on this issue is a clear one — don't do it again. Consultation is good, it produces better legislation, and the problems that arise from forestalling can themselves be forestalled with some careful planning. The absence of any clear statement from the government of the intentions behind the statement makes it difficult to say whether there has been any change of policy. There is, however, clear evidence that trusts are often used for good, non-tax, reasons, and 'the question is left open' as to whether the measures taken could have been more carefully targeted. In short, as the report concludes:
'We believe that neither the process of introducing these tax changes with a lack of consultation nor the low-key way in which both the original proposals and these amendments were released is the way in which tax changes should be made.'
I couldn't agree more. But it wasn't the first time that changes have been introduced with no consultation and a misleading spin; and despite their Lordships welcome admonitions, I suspect it will not be the last.
For those struggling with the implications of the trust changes, to IT and CGT as well as IHT, LexisNexis Tolley Professional Training is running a one day 'Taxation of Trusts' workshop in central London on Thursday 13 July. See www.conferencesandtraining.com/taxationoftrusts.
