Clause 213 - Trusts with vulnerable beneficiary

Finance Bill – in a Public Bill Committee am 4:00 pm ar 18 Mehefin 2013.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Question proposed, That the clause stand part of the Bill.

Photo of Sir David Amess Sir David Amess Ceidwadwyr, Southend West

With this it will be convenient to discuss the following:

Government amendments 110 to 124.

That schedule 42 be the Forty-second schedule to the Bill.

Photo of Sajid Javid Sajid Javid The Economic Secretary to the Treasury

Clause 213 and schedule 42 update the tax code for trusts with vulnerable beneficiaries in two main ways. First, they ensure that the special look-through tax treatment for such trusts remains properly targeted as DLA is replaced by the new PIP. Secondly, they simplify the rules more generally by aligning conditions on how trustees can use the income and capital of the trust.

By way of background, trusts can be a sensible way to provide financial support for a vulnerable person, in particular for someone unable to manage money. Beneficial tax treatment is given to such vulnerable beneficiary trusts under which, in essence, the tax liabilities are calculated as though they had arisen on the beneficiary rather than on the trustees.

Under long-standing rules, trusts qualifying for that treatment have included those set up for certain disabled persons: those who cannot manage their affairs because  of a mental disorder; those in receipt of attendance allowance; and those in receipt of the higher or middle rate care component of DLA. From 8 April 2013, however, the new PIP began to replace DLA for those of working age—those aged from 16 to 64—and so a new definition is required.

The provisions introduced by clause 213 and schedule 42 are designed to ensure that the special tax rules for those trusts remain properly targeted. Schedule 42 will extend eligibility to those trusts where the beneficiary receives the new PIP by virtue of entitlement to the daily living component at either the standard or the enhanced rate. We are also giving access where the beneficiary receives the AFIP or constant attendance allowance instead of one of the other qualifying welfare benefits. That will ensure that eligibility remains objective and straightforward in most cases and that, as far as possible, welfare reform changes do not limit which trusts can qualify.

Schedule 42 also changes the conditions that limit how the trust income and capital can be applied. Those conditions currently vary across taxes. In some cases, the trustees’ discretionary powers are restricted so that capital is applied for the benefit of the vulnerable person; in others, up to half the capital can be applied for the benefit of another person. That difference in approach can be confusing, and it defeats the purpose of having special rules for trusts with a vulnerable beneficiary if significant sums can be applied for the benefit of someone else.

We have therefore decided that the rules should be harmonised so that the trust property is applied for the benefit of the vulnerable person. We have listened to what we were told about the need to have some flexibility, and we have decided that 3% of the trust fund, up to the maximum of £3,000, may be used each year for beneficiaries other than the vulnerable person. To ensure we can update that provision in the future, we have taken a power to amend the limit by Treasury order. We also recognise the potential impact of the changes on existing trusts and wills. We are therefore ensuring that the transitional rules being introduced avoid the need for existing trust deeds and wills to be rewritten.

Let me turn briefly to Government amendments 110 to 124, which make detailed technical changes to ensure the legislation works as intended. Amendments 115, 117, 122 and 123 expand the definition of “disabled person” to include all those who obtain constant attendance allowance, including those who obtain it by way of an increase in disablement pension.

Amendments 110 to 114 and 118 to 121 expand the definition of “disabled person” to include individuals who would be entitled to receive a qualifying welfare benefit were it not for their being in a publicly funded institution, such as a hospital, or abroad.

Amendment 116 ensures that harmonisation of the way in which the trust income and capital can be used is comprehensive, by applying to interest-in-possession trusts in the inheritance tax code.

Amendment 124 ensures that grandfathered rights under the commencement rules are preserved where a codicil to a will, or a new will, is made that continues provision that a qualifying vulnerable beneficiary trust be established.

In conclusion, the proposed changes are fair, they ensure that the special look-through tax treatment for such trusts remains properly targeted and they simplify the rules more generally.

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Treasury)

As the Minister outlined, clause 213, like clauses 12, 70, 188 and 199, has been introduced in part following the introduction of the personal independence payment and the armed forces independence payment, which replace the disability living allowance.

As Committee members will know, a vulnerable beneficiary trust is established for a beneficiary who is either a person with a disability or someone under 18 who has lost a parent through death. Special tax rules rightly exist for the trustees of qualifying vulnerable beneficiary trusts, enabling them to claim relief on income tax, capital gains tax and, in some cases, inheritance tax.

However, as the Minister explained, the existing definition of “vulnerable beneficiary” for tax purposes relies in part on whether the beneficiary is in receipt of the higher or middle rate of the care component of the DLA. Therefore, following consultation, the clause introduces schedule 24 to amend the definition of a disabled person to include those in receipt of PIP or AFIP.

Clause 213 seeks to harmonise the capital and income rules. The tax information and impact note suggests that secondary legislation will, as the Minister outlined, confirm that the amount trustees will be able to apply without having to prove that it is for the vulnerable beneficiary’s benefit will be the lower of £3,000 or 3% of the trust fund each year.

A number of concerns have been expressed about the measures, and I would be grateful if the Minister addressed them in his response. In particular, the Institute of Chartered Accountants in England and Wales is disappointed that the Government did not take the opportunity

“for a complete review of the vulnerable beneficiary regime”.

Will the Minister outline why the Government have chosen to take that rather limited approach, rather than the complete review for which many people, particularly tax specialists, have been calling?

The Low Incomes Tax Reform Group has welcomed the Government’s decision not to limit the definition of “vulnerable beneficiary” to those in receipt of the enhanced rate of the daily living component of PIP, which was the initial proposal in the consultation, but to include anyone in receipt of the daily living component. The group has, however, expressed concern that the definition of “vulnerable beneficiary” has not been framed sufficiently widely to cover all those who need protection:

“Nobody who could benefit from such a trust should be barred from doing so by any inadequacy in the legal definition. In particular, all who are at risk of any form of abuse, exploitation, coercion or persuasion if left to manage their own property should be entitled to the protection a trust can give without suffering a tax disadvantage, and should be capable of being embraced within the definition of ‘vulnerable beneficiary’.”

With that in mind, the LITRG’s response to the Government consultation proposed a three-step approach to defining “vulnerable beneficiary” or “disabled beneficiary.”

I appreciate that the Government’s amendments go some way towards meeting those concerns by making it clear that the definition of “disabled person” includes all those who claim constant attendance allowance or who would be entitled to receive qualifying welfare benefit if they were not in a publicly funded institution or abroad. The Government have obviously declined to take up the LITRG’s three-step proposal, and I would be grateful if the Minister outlined why.

Clause 213 allows trustees to apply small amounts of income and capital, up to the suggested limit of £3,000 a year, without having to prove that it is for the benefit of the vulnerable beneficiary. The LITRG says:

“It is entirely reasonable that…there should be a limit on the extent to which trust capital and income can be used for the benefit of anyone other than the disabled or vulnerable beneficiary. However, the limit proposed…is too inflexible. If, for example, the trustees saw fit to provide necessary accommodation or a break to a carer, they would be unable to do that without breaching the vulnerable trust status. In short, they would be fettered from acting in what they saw as the best interests of the beneficiary by the very rules that seek to protect the interests of that beneficiary.”

The group goes on to say:

“We note that the limit will be set by secondary legislation which we trust HMRC will keep under close review and be prepared to change if the evidence does…show that it should be increased.”

Will the Minister explain the thinking behind the £3,000 and 3% limits? Will he commit to ensuring that HMRC keeps the measure under close review, changing it if it proves contrary to the aims of these tax rules?

Finally, echoing the ICAEW’s concerns, the LITRG has also expressed disappointment that

“a golden opportunity to make more extensive alignments and simplifications to the vulnerable trust regime has been missed.”

Given that that is the remit of the Office of Tax Simplification, the LITRG hopes that the OTS

“may one day get to grips with these complexities and anomalies.”

Will the Minister clarify whether the OTS is indeed looking at or intending to look at that complex area? What proposals are there to do so if that is not already on the agenda?

Photo of Sajid Javid Sajid Javid The Economic Secretary to the Treasury

I thank the hon. Lady for her questions. First, she asked why there is not a wider review of the tax rules in this area. The Government’s priority has been to ensure that the special tax treatment of vulnerable beneficiary trusts remains properly targeted after DLA started to be phased out for those of working age from April 2013. We believe the changes ensure that those who receive the daily living component of the new PIP on either the standard rate or the enhanced rate will continue to benefit.

We think the changes strike the right balance between simplification and acting quickly, and they also ensure that we take the opportunity to harmonise how trustees across the different types of vulnerable beneficiary trusts can use the trust income capital, thereby making it simpler to comply with the rules. I assure the hon. Lady that we will keep that and other aspects of the regime under review. We are more than happy to have further discussions with stakeholders on potential future changes and on how they can be practically achieved.

The hon. Lady also asked how many people would be affected by the policy. Our assessment shows that, including all those who claim the daily living component of PIP, broadly the same number of people can potentially qualify. We anticipate that those most in need of a trust will continue to qualify in the same way as before. If a person does not qualify for the daily living component of the PIP, they may still be able to qualify if they meet one of the other definitions, such as being incapable of managing their own affairs—if they have a mental disorder, for example.

The Government amendments, as the hon. Lady noted, will expand the definition of “vulnerable person” to include those claiming the armed forces independence payment or the constant attendance allowance.

The hon. Lady also asked about the £3,000 or 3% limit. We have put that in place because allowing amounts to be applied to non-vulnerable beneficiaries is justified where there is a consequential benefit to the vulnerable beneficiary. I think we all agree that where there is no benefit to a vulnerable person, allowing such a payment would defeat the whole purpose of having special rules for vulnerable beneficiary trusts and reduce the funds available for the vulnerable beneficiary.

In our discussions with the Society of Trust and Estate Practitioners, an interested party, it said that it is not always clear whether the payment is for the benefit of a vulnerable beneficiary or another individual—to pay for their carer to have a much-needed break, for example—and that there is a need for some flexibility and reform. We received similar feedback from the Low Incomes Tax Reform Group and the Chartered Institute of Taxation.

The 3% restriction is designed to stop relatively large amounts of smaller funds—trusts with funds below £100,000—being paid to non-vulnerable beneficiaries. We think that the £3,000 limit strikes the right balance between the flexibility required and fairness. It will enable small amounts to be spent by trustees without concern that they benefit someone other than the vulnerable beneficiary.

I confirm to the hon. Lady that we will keep that under close review. Having the power to change the limit by order will provide flexibility in the future. We are keen to ensure that the limit is always fair and sensible, and that it works to the advantage of the people whom the trust arrangement is trying to help.

Question put and agreed to.

Clause 213 accordingly ordered to stand part of the Bill.