26
Examination of witnesses
Dan Tomlinson MP, Oliver Haydon and Christopher Stewart.
Q97 The Chair: Welcome to this meeting of the Finance Bill Sub-Committee of our Economic Affairs Committee. We are very grateful indeed to Dan Tomlinson, the Exchequer Secretary, for joining us at the conclusion, really, of our inquiry into tax changes which were made at the last Budget. I would just like to emphasise at the start the role of this committee. We all have our individual views about tax policy. I support the fact that we need to raise taxes and that it is perfectly legitimate that increased wealth tax should be part of that. Others may challenge that view, but that is not what we are here to discuss today. What we are looking at is whether the measures proposed are the best way of doing what the Government want to do and how they seem in terms of the efficiency and fairness of what is proposed.
Thank you for the correspondence you have had with us already. Thank you for responding positively on the DOTAS issue which we raised with you and might come back to at the end if we have time. A lot of these questions, of course, relate to the time when you were not a Minister—before you were promoted—so you may think they are a bit unfair. The first question really is on the pension proposals—unused pension pots to be subject to inheritance tax. The Government have basically had three versions so far of how this change might be implemented initially. It was to be the pension funds, then it was to be the personal representatives, and now you have come up with what many of us think is quite a good compromise between the two. But I will just ask about this: you have a problem of unused pension pots that you want to tax. Was the automatic assumption that this should be done through inheritance tax, which is quite a complicated tax in the way that it affects individuals, or were there alternatives considered for taxing unused pensions?
Dan Tomlinson MP: Thank you, Chair, and thank you and other members of the committee for all the important work you have been doing, scrutinising the decisions that the Government have been making, helping us and helping officials, and myself and my predecessor, think through the evidence and the impact and get the detail right on some measures. You mentioned DOTAS, which I am sure we will come back to; that is one of the things that your committee has been considering carefully and where the Government have come forward with a change at the most recent Budget.
This is my first time appearing before any Select Committee in either House, so I am very grateful for you to give me the opportunity to have my first time doing so.
On your specific question, the key objective of the change in policy was to make sure that the incentive to put money into a pension was around people saving for their retirement, and to be able to draw down on the assets that they had accumulated during their lifetime in their retirement; and to make sure that, not least after the pension freedoms that were introduced by previous Governments, it was not the case that pensions were becoming the place that people turned to plan their taxes and their tax affairs so that they could pass on a maximal amount to whoever they might wish to pass their estate on to after they died.
In the end, really, if that is your policy objective or one of the objectives that you are trying to achieve, inheritance tax is the most appropriate place to look. There are different ideas that are out there about how you could approach taxing pensions within inheritance tax, which maybe members will want to ask me about and we can discuss later. But given that broad objective, inheritance tax was only ever really the main option on the table.
Chair, just before I finish my first answer, I say that I have got Oliver and Chris here, who are both fantastic officials who I may bring in at various points if there are any points of detail that escape my memory.
The Chair: They might answer my supplementary, which is basically: if the Government thought that inheritance tax was the best way of doing this, why did not the Government launch some kind of consultation before they announced the policy as to how this could best be done?
Dan Tomlinson MP: The officials may want to come in; they were in the room at the time. My broad understanding of the correct and reasonable approach when it comes to consultations and tax changes is that, yes, sometimes it is appropriate to do so, and it is helpful to do so on the broad principle, not least if it is a principle that had recently been unearthed internally within government. But in this situation, there was common consensus that there was a growing issue—an issue that had emerged, particularly, as I say, after the pension freedoms that were introduced. In the Budget, we have just announced things other areas; for example, there is a common consensus that we should at least consider changing the taxation of electric vehicles; we are consulting on the detail of that, but we are not consulting on the principle and the policy intent. That is scored—it is in the Budget scorecard, and we are going ahead with it. It is the same on the high-value council tax surcharge, for example.
In this and in lots of other areas, sometimes it is appropriate to do a consultation before you move ahead at all, but often, particularly in tax policy, given the uncertainty that can be created if a Government announce an intention and then have a blank sheet of paper for their consultation, that can cause maybe more difficulties than it might reduce the number of problems. I do not know whether Chris or Oliver have got anything to add.
Oliver Haydon: All I would add on this is that we did quite a significant consultation on how, as you have alluded to, the Government considered views on the lead option. As a result of that consultation, we have gone for the alternative option. That is actually evidence of the process working reasonably well in terms of decision on the principle and then consultation on how to do it, which we listened to people’s comments on.
Q98 Baroness Bowles of Berkhamsted: I was just curious. It is backtracking a bit—and I understand entirely the major concern about people squirrelling large sums away in pensions, getting tax relief on it when it was far more than they really realistically needed as a pension, and therefore it was a nice way of avoiding inheritance tax. But if that is the case, what about other options, such as re-establishment of a cap on putting in really large sums, so the people who were using it in egregious ways could not do that? Because of the way it works—it starts with anything that is left over—you have some issues with those that are caught at the bottom end. Why is not there a kind of threshold at which it starts to operate? There are, if you like, hard-luck cases that are not these big earners—those dying young. What thought went around that?
Dan Tomlinson MP: One of the main objectives when you are trying to think about your tax policy is that you treat different forms of either income or assets in the most similar way that you reasonably can. At the Budget, for example, on income, we have increased by 2p the rates of taxation on property and dividends on the interest from savings, in order that there is a smaller gap between different forms of income. Here, if there is some sort of threshold or some other way of designing it other than the simple way that the Government put forward at the last Budget, you still may end up with an incentive for people to put their money into pension assets over any other form. It is right that, across property, cash, investments, business or pensions, the tax treatment is the same—and ultimately to bring it together, looking at the exemptions, reliefs, nil-rate bands, et cetera. Personal representatives can look across all of them and, both for the individual in terms of their incentives about where they put their money, but also for the personal representative, there is a simplicity to the approach that the Government have gone for, which is that different assets are not being treated differently.
Q99 Lord Leigh of Hurley: I ought to declare that my SSAS defined contribution pension is, or was, the single largest asset I have, in part because I put money in there thinking that it would be exempt from IHT. When you were deliberating on the choice, were representations made from tax officials that this could be regarded as retrospective taxation? It was not that you said, “Hereon in”; you said, “Accumulated pensions to date will be subject to inheritance tax that was not previously the case”.
Dan Tomlinson MP: I strongly do not think that this is a retrospective taxation because it will be implemented and effective only from the date on which we have said it will come into force—in this case, 6 April 2027. I accept that people may have been working on a different assumption and may now be taxed differently in future than they had expected, but this is not retrospective. It is happening in the future; it is not coming into place until 2027. That is the same for the other inheritance tax changes that we are going to talk about later.
It is always difficult. We have seen some of the challenges of trying to make some changes in this space, but, in the end, the broader objective for the Government of raising revenue in a fair way is achieved by policies such as this one and the others that we will discuss later. I do not know whether anyone wants to add anything on that.
Q100 Baroness Fairhead: I want to talk a bit more about the shift from PSAs to PRs and the shift of responsibility. Looking back a little, when the Government decides to move from PSAs to PRs—to something based on personal representatives—what assessment was made of the additional administrative and legal impact on the PRs, in particular the lay personal representatives? How did that assessment then shape this policy? This is particularly important because I can understand how PSAs are a clear, identifiable body, but PRs are so disparate; they probably do not even know that they are going to be PRs in some cases. How could you do a consultation with them? I am trying to understand what you took in and, as a result, what you changed.
Dan Tomlinson MP: I will give an initial answer then see whether Chris wants to come in. You are right that the Government changed their view after doing some extensive engagement on who should be responsible for this, and there is now the shift from PSAs to personal representatives.
The first thing to note is that the vast majority of estates do not pay any inheritance tax; less than 10% of them do. The burden there will be similar to what it is at the moment, which is that you should get in touch with all the different people who manage the different assets in the estate. Lots of personal representatives should have been writing to the people who own the funds and been in touch with them anyway; they would have to be doing that in order, in the end, to disburse the funds to the relevant beneficiaries. Now they just have to make sure that they are asking in that correspondence, “Can you tell me what is in the fund? How much is it?”
In lots of cases, personal representatives end up having to administer the estate; my officials sent the committee 10 examples of different ways in which this might happen. In lots of cases, it will be as simple as writing to the pension scheme, asking how much is in the relevant pension scheme, getting confirmation of that and then, using the guidance that exists—we will be making sure that we update the guidance—and the tools that are available in particular to help lay personal representatives, making a relatively quick and pain-free calculation of what IHT needs to be paid. It will then be about paying it either from existing assets in the estate separate from pensions or, if needed, from the pension scheme itself.
Of course, there are going to be cases that are complicated. If people have complicated financial arrangements, with assets of lots of different sizes and in lots of different places, and they are over the threshold and are liable for inheritance tax, someone with a complicated set-up will end up there. Yes, there would be more of a burden on the personal representative in that case, but we are confident that, in the vast majority of cases, this should not be a notably significant increase in the burden. They will already be corresponding with the pension schemes; they will now have to make sure that they have got it right, because they will be liable for inheritance tax on it. Chris knows more about this than me, but we have guidance and tools available to support those personal representatives. We have been looking at those as well, have we not?
Christopher Stewart: Indeed. I would just emphasise the point that the Exchequer Secretary made, in terms of PRs already being responsible for administering the estate. This is something that we understand better than we understood the PSA-led model on which we consulted at the Autumn Budget, because it is building on an existing process. In terms of representations that we received, I should say that, as part of the consultation we did last winter, we heard from a lot of personal representatives and pension scheme administrators, so we built up a good understanding of what alternatives might look like.
Baroness Fairhead: Are you satisfied that it was a balanced conversation between the personal representatives and the PSAs? I just look at the scale of PSAs versus PRs—lay PRs in particular.
Christopher Stewart: I take the point that it may be more difficult for lay PRs to be heard in these consultations. We spoke to groups such as the Chartered Institute of Taxation and the Low Incomes Tax Reform Group in advance of making these changes, so we did hear some views from lay PRs, if you like.
Following the change that we announced on Legislation Day, we had the chance over the summer to consult on the change that we made and the new process, which puts PRs more at the centre of this. This gave us the benefit of being able to talk to the legal industry and better understand PRs’ responsibilities, which led to some of the changes that were announced two weeks ago.
I emphasise again the Exchequer Secretary’s point: lots of different pieces of guidance exist already. There are tools that HMRC makes available to personal representatives who are not professionals to try to help them to administer estates effectively. We will be updating all of those in the light of these changes to make that as easy as possible. We also want to work with third-sector organisations to make sure that guidance is available not just from HMRC but from others to help personal representatives do this.
We would also like pension scheme administrators to provide some guidance to, for example, the beneficiaries of pensions, who are also going to have to think about inheritance tax in this new context. We are really trying to facilitate the process as much as we can and to make it as easy as possible, recognising that, for some personal representatives, this might be the first time they have dealt with this; they might also be grieving a loved one at the same time. We want to try to make it as easy as possible for them to get the position right.
Baroness Fairhead: Can I follow up on that a little? Do you acknowledge that the burden on lay PRs in particular will be significantly higher with both IHT and now pensions? In terms of the specifics on pensions, the average number of pensions that people have is, I am told, somewhere between six and eight. You have the issue of who has access to the assets of the pensions and, at the moment, the PRs do not. Then you have a whole issue of liquidity when you have illiquid assets inside the pension, including how you deal with that. We had some fantastic evidence; I remember Baroness Altmann showing us all the steps a PR would have to take, and that was not necessarily in a complicated pension arrangement.
Given that, I would like you to say how you would address each of those issues: the number of pensions; if they do not find out about it; the liquidity issue; and the ownership issue. What did you think about them? Then you have a penalty of 8% after six months of payment on something, and you may not even know what the scale is. What did you think about in terms of safeguards and fairness to protect those personal representatives, in particular lay representatives?
Christopher Stewart: I do not mind starting off. As I said, it is building on this existing process. You are right that there will potentially be multiple new assets that the personal representative would have to identify, establish the value of and gather more information on. I think that there will be an increased burden on them.
I am trying to work through a couple of the points. You mentioned access to the pension, and I know that that is something that a lot of the witnesses that you heard from raised concerns about—a lot of the personal representatives’ representatives. The changes that we made at the Autumn Budget to the process will allow personal representatives to exert more control over the pension, recognising that they will be liable for that inheritance tax due on the pension. They will now be able to direct pension scheme administrators to hold back some funds within the pension in order then in future, when they are told that there is an IHT liability, to pay those amounts directly to HMRC. That is something that through the technical consultation over the summer and through the sessions you had we heard loud and clear from the personal representatives and made changes to the process to allow them to—
Baroness Fairhead: Before you go on to the next point, can I just pressure you on that? You are a lay representative, the family is in mourning, and you are saying, “I’m not going to give you 50%”. The PSA says that it cannot pay out because the PR has not sorted it. That is going to be a very unpleasant situation if you are a close friend or member of the family, as the lay PR.
Christopher Stewart: I would hope in most circumstances that personal representatives and the family would communicate with each other and work together. If the personal representative chose not to ask the scheme administrator to withhold those funds, the scheme administrator could release the pension assets. It would only be when the personal representative thought that inheritance tax might be due and wanted to protect their ability to use the assets in the pension to pay the inheritance tax, that they would ask the scheme to withhold those funds. In most scenarios, I would hope that the personal representatives and beneficiaries would often be members of the same family working together on the position.
I appreciate that there may be some scenarios where this does happen and a pension beneficiary would like to get access to the assets in the pension but are unable to do so because the personal representative has asked them to withhold those funds. We want to avoid that being the default; we have included in the legislation that that can only happen where they have a reason to believe that inheritance tax will be due. I should also say that, in that scenario, they would not be able to withhold payments to exempt beneficiaries like spouses or civil partners. If a type of benefit is not subject to inheritance tax, such as death-in-service payments, they would not be able to withhold those—and they would be able to pay out up to 50% of the assets that are subject to inheritance tax. We are hoping that, in trying to give personal representatives more control over the pension, we are not causing a delay for all beneficiaries. We want beneficiaries to be able to access the pension as they can now, aside from in the circumstances where the inheritance tax is going to be due. We are trying to strike a balance between giving the personal representatives control while also not holding up the beneficiaries’ benefits unnecessarily.
Baroness Fairhead: But if the PR gets it wrong, they are liable, and if it takes too long to find out the pensions, they are also liable. Are there any safeguards or safe harbours you are thinking about?
Christopher Stewart: So there is another change that we announced at the Autumn Budget. If a personal representative does not identify a pension asset—say, several years later, for whatever reason, a pension asset comes to light—we introduced a change at the Autumn Budget recognising that that could happen. As you alluded to, many people have lots of different pension pots that may be of small values. Personal representatives, once they have administered the estate to the best of their knowledge and having carried out reasonable steps, will be able to apply to HMRC for something that we call clearance, which will effectively clear the personal representative of being liable for any future pension that is uncovered. That was something that we heard quite firmly from the personal representatives: after administering the estate properly they did not want, years later, to be told that they are now liable for an asset that they were unable to find at the time when the individual died.
Baroness Fairhead: And clearance will be achieved quickly?
Christopher Stewart: Yes—I think that HMRC replies within 15 days, and within more than 80% of cases we reply to clearance requests.
Dan Tomlinson MP: I and the Government acknowledge that, particularly in cases where people have a complicated financial situation with many different pension pots—I think that this is what you are pressing me to own up to, and I am really happy to—the personal representative is going to have to deal with them and be in touch, making sure that they know what is in the pension pots and that they are working to make sure that the correct amount of inheritance tax is paid.
As Chris has outlined, we have come forward in the Budget with these changes that we think will provide more security to the personal representatives, in terms of them being allowed to have control over the pension scheme and saying that they must withhold up to 50% of the assets. That does not mean the assets that go to the spouse—that can be passed directly—but there is also the change to allow them to agree with HMRC that they have taken reasonable steps to make sure that they found all the pension pots and they have been in touch. That was something that we heard—that people were concerned that they would work hard and try to make sure that they had covered all the bases, and then a few years later a pension pot would emerge from nowhere and HMRC would take steps. We are now in a place where we should make sure that the tax that is collected is due, but it will not be that they will be liable for anything, or that a reasonable step was not taken.
Lord Altrincham: Just to follow up on Baroness Fairhead’s question on personal representatives, we have heard that some professional firms are already withdrawing from the personal representative market, which would increase pressure on lay PRs. What assurance can you give that the Budget changes will not further discourage firms from acting as PRs? I am focusing on the firms rather than on the individuals.
Dan Tomlinson MP: At the official level, there have been lots of conversations with professional personal representatives. In part, that is where some of the changes that came forward in the Budget a couple of weeks ago are looking to. I know that there have been conversations after the Budget too, and I as a Minister will be looking out to make sure that, in the conversations that officials are having, and in the representations that the representatives are making, we are confident that we have got to a place that can work and is a reasonable place.
The changes that we have come forward with should make a big difference there—and I expect that, particularly for the professional PRs, this is now a change that should be manageable. Yes, there will be more burden in some cases, but they should be able to manage the affairs of the estate. As I said at the beginning, lots of these personal representatives will have been in touch with the pension schemes in any case; now they must make sure that they are doing so to collect all the relevant information.
Q101 Lord Pitkeathley of Camden Town: Can I ask a bit about the regulations and the sharing of them? When do you expect to publish regulations governing information-sharing arrangements between PSAs and PRs? How will you ensure that PSAs have sufficient time to adapt their existing process and systems to comply with them?
Dan Tomlinson MP: We are hoping to publish the regulations for technical consultation in spring of next year. These changes were first announced at the Budget last year—then it will still be a further year until they come into place on 6 April 2027. So we are confident that there will be sufficient time there for people, and we will publish the regulations in spring next year.
Lord Pitkeathley of Camden Town: Spring being a concept.
Dan Tomlinson MP: Yes, sometimes the seasons in Whitehall can be quite flexible.
Q102 Baroness Bowles of Berkhamsted: I go back to the point that the Chair made in his introduction—that we are looking not at policy but at efficiency and fairness. We have heard that there are inconsistencies in the treatment of various different pension benefits under the new rules, and different schemes, dependent in particular on the types DC and DB—but also on whether a member was active or retired. So there is no across-the-piece comparability. Given the Government’s stated aim of achieving consistent treatment of similar assets, what is the policy justification for those differences?
Dan Tomlinson MP: My understanding is that officials have written to the committee on this point. Maybe Chris might want to come in on the points that he has already written in on. Broadly, it is the case that this policy has evened out a big inconsistency. Whether your scheme is a defined benefit or a defined contribution scheme, these changes apply equally to them—and now we are in a place where there is a level playing field between the type of scheme that you have and your incentive to use it as a way in which to plan your tax affairs so that you do not end up paying IHT on certain assets. Broadly, with some very limited exceptions—for example, death-in-service benefits or joint life annuities—we are treating pensions of whatever form in the same way as IHT.
Christopher Stewart: I think that covers it. DB and DC schemes pay out slightly different benefits, because they are a slightly different type of scheme—but we have tried to make the inheritance tax treatment align between them as closely as possible.
Baroness Bowles of Berkhamsted: I find it quite difficult to see how they are aligned. I accept that it comes around partly because of the structures. Would there be more things that one could do around the beneficiary side of things? One thing that particularly concerns me is orphan children and the disabled. You would probably find that under most defined benefit schemes there are clauses that provide for those, but the only way in which you could provide for them in a defined contribution scheme is to hope that, if something happens to you as the breadwinner, something is left for that generation. Not everybody is lucky enough to have a spouse, and there are instances where there are calamities and both spouses are killed and so on. Are the Government looking at those things? It is something that strikes me as definitely overlooked; it might be a minority thing, but it is still very important socially.
Dan Tomlinson MP: The key thing is that in the inheritance tax system you still have the reliefs and allowances that allow people to pass on up to £1 million without taxation. Obviously, it depends whether you own a property, and so on. For those cases where people get behind someone who needs financial support, they will not be paying any inheritance tax up to the first £1 million—then, above it, all we are doing is bringing the treatment of pensions in line with the treatment of other assets.
You are right that within the defined benefit schemes there are sometimes sub-parts of that which can allow money to be passed on. That is one small corner. The Government’s view is that that bit of the defined benefit scheme is not there primarily for tax planning reasons.
Baroness Bowles of Berkhamsted: I do not think that providing for your disabled orphaned child is—
Dan Tomlinson MP: Well, exactly—that is why we are saying that the Government do not have intentions to come forward and change that bit of defined benefit schemes.
Baroness Bowles of Berkhamsted: Yes, but you have not done a comparable exemption available under defined contribution. There is already a big schism between the generosity of defined benefit schemes, particularly in the public sector, and everybody else in the private sector. If you want to provide for the worst cases and for people who already have disabled children, the only way you could do it was to have sufficient left over for after you have gone. That is available under defined benefit; it is not available under defined contribution. I know that you do not have the answer as such as to how it could be done—but is that something that you could consider looking at? It is quite a serious omission to say that people can have £1 million and that will look after them. You should do some research on how much it costs to look after children—orphans; if there is nobody else to look after them and they are seriously disabled, that will not last very long.
Christopher Stewart: I would just make the point that dependants’ scheme pensions, which are not going to be subject to inheritance tax, are the sort of thing that you are alluding to that is typically paid from a DB pension scheme that will not be in scope of inheritance tax. A defined contribution scheme can choose to pay a dependants’ scheme pension, although it is less common and typically done from defined benefit schemes. In defined contribution schemes, what is more common is that an individual on retirement would purchase a joint life annuity—so an annuity would pay out to them or, in the event of their death, to another person. That will be carved out of inheritance tax as well.
With the dependants’ scheme pension, which is typically paid from a DB scheme, and with joint life annuities, which you can purchase through a DC scheme, we are trying to align the treatment of those two. The other point that I would just make is that there is no pot of money, so to speak, in a defined benefit pension scheme, in the same way that there is in a defined contribution scheme—but where a defined benefit pension scheme pays out a lump sum death benefit, which is comparable to a pot of money, we will subject that to inheritance tax.
What we have been trying to achieve is recognising that the starting point for DB and DC is quite different. We are trying to apply a consistent treatment despite that starting point being a bit different in terms of the benefits that they pay out.
Q103 Baroness Fairhead: Can I follow up a little bit on the fairness and equity between the two types of pensions, and on the potential impact you have on another stated government policy about encouraging people to invest for their retirement? On the issue of fairness, you have made some changes; it has been described to me as a little less unfair. As I understand it with the DC—I may be wrong, but maybe Chris can tell me—if you pay a lump sum and actually claim your lump sum before you die, so you pull it out of your DC and just get the tax on the flows, that would encourage a lot of people, who may think that they are coming to the end of their lives, to pull out. Therefore, that is against government policy. I am just trying to understand how you would balance the fairness of the two schemes and how you balance it with encouraging people to contribute more, because this policy may get them to contribute less and to pull out what is already in.
Dan Tomlinson MP: We want people to contribute to pension schemes for their retirement. That is stated government policy, and we are really clear about it. We have £70 billion of tax reliefs that go into the system to support people to save for their retirement. What we are looking at here is the extent to which reforms that the Government can put forward will reduce the incentive for people not to save into a pension for their retirement but to save into a pension to reduce their ultimate inheritance tax liability.
That is the thrust of the reform; it is the thing that we are trying to make fairer to raise revenue in a fair and sustainable way and support the public finances more broadly. There is still a massive incentive to save into a pension. Of course you can make use of the freedoms that exist as well—that is people’s choice. But I do not think that it is a reasonable conclusion to draw that we are making it less advantageous for people to save into a pension for their retirement. Yes, we are reducing the extent to which you can save into a pension to be able to pass down more funds without paying inheritance tax—that is less advantageous now. But we are not seeking to reduce incentives to save into pensions.
Christopher Stewart: I just add that the income tax reliefs for contributions to and investment growth within a pension are unchanged by this measure, at just over £78 billion in 2023-24. The Government are trying to incentivise savings into pensions, as alluded to.
Lord Leigh of Hurley: And those figures take into account the compounder effect of inheritance tax and income tax when money comes out of defined contribution schemes, as opposed to defined benefit?
Christopher Stewart: That figure is the gross amount of relief that you get on the way in—it is not the amount that you are charged in tax on the way out. Withdrawals from defined benefit schemes are subject to income tax in the same way as withdrawals from defined contribution schemes—so there is parity in terms of the income tax treatment between the two currently.
Lord Leigh of Hurley: But if you are offered a choice between the two, you are now going to suffer an extra 40% on getting hold of the money that you need to generate the pension as a future, or inheritance to your children, be it disabled children or other dependants.
Dan Tomlinson MP: Yes, you will be charged at 40% above the relevant reliefs, allowances and exemptions in the same way in which people are charged for property, cash and other forms of financial assets. This is just equalising the treatment.
Lord Leigh of Hurley: How can that not be a disincentive to people putting money into a pension?
Oliver Haydon: I was going to say that if, hypothetically, you did not put that money in a pension and, as you said, just held on to it as cash or bought another asset, that itself is also subject to IHT at 40%. So if you save in a different way, as you are saying, it ensures neutral treatment between pensions and non-pension assets.
The Chair: We have got to move on to agricultural business in a moment.
Q104 Lord Pitkeathley of Camden Town: My question is about awareness and preparation. What plans do the Government have to increase public awareness of the reforms and how do they intend to support lay personal representatives in understanding what they will need to do in practice?
Dan Tomlinson MP: Our sense is that there is a reasonable level of awareness about the changes. It is something for me to go and think about regarding further work that could be done between now and April 2027, so that people can be more aware of them. In the end, there is a challenge in that lots of people who may end up being lay personal representatives and have to deal with the challenge that comes when there is a bereavement in their lives will probably not be thinking about this until that moment comes. Even if the Government were to spend money on an information awareness campaign or some such, lots of people probably would not even engage with that campaign until the moment came. Where we are focusing our efforts is making sure that the guidance, support and online tools are there for people when they need them, and that that is as clear as it can be.
The Chair: Let us move on to the agriculture and business relief.
Q105 Lord Altrincham: Our first question is on valuations. The reforms to APR and BPR are likely to increase the importance of business and land valuations. What assessment have you made of the capacity of the professional valuation community, and what steps will you take to support a consistent and timely approach to valuations by HMRC?
Dan Tomlinson MP: At the moment, agricultural or business assets in an estate will need to be valued at death in any case, even if they are exempt—both because HMRC needs to know and because, in some cases, it will be relevant for capital gains tax purposes because assets are rebased at the moment that they are passed on or at death. There is already out there lots of guidance and support for people to be able to do that and to know the rules on how to value these assets. There are also people doing the valuing in line with the guidance. There is a limited number of cases where people are already paying inheritance tax on these assets—for example, if they have had them only for less than two years. The guidance is there at the moment. In a limited number of cases it is used, but it is already out there in the public domain.
Q106 Lord Leigh of Hurley: We had some concerns about, first, specialist agricultural valuers who were saying they did not have the capacity to do the work, and secondly, business valuers, who were saying the HMRC’s practice is to value the business the day before death. In many cases, the business is dependent upon the owner and, therefore, the inheritance tax will be based on a much higher value than the business is worth in terms of trying to realise that business, because they are going to be forced to sell it to pay inheritance tax. We are going to a situation whereby people are having to sell businesses when someone dies, which had not previously been the case, and even then possibly having to put cash into the estate to find the value to pay the probate. Has some thought gone into those circumstances?
Dan Tomlinson MP: The big picture thought that has gone in here is that, compared to all other assets, if you have business or agricultural assets, you have a much higher threshold beyond which you end up being liable for inheritance tax, because you have the £1 million threshold. Then your tax rate is half the rate for others. Of course, there will be a limited number of cases, particularly on the agricultural property side, whereby people will have to release those assets in order to be able to fund the inheritance tax liability. But in lots and lots of these cases, the statistics that the Government have published show this to be the case. On the agricultural side, CenTax did some good work on this. It also published, in relation to business, the percentage of estates that would have to use business property to pay liabilities.
Oliver Haydon: The report was just for agriculture. Broadly similar principles apply, we should think.
Dan Tomlinson MP: Yes, lots of people are able to pay the liability out of non-agricultural and non-business assets. That is the broad approach. Yes, we are aware that that could be the case but that is why we have set the threshold higher and the rate lower.
Lord Leigh of Hurley: Thank you for that. It is an area I know very well. I suspect there are tens of thousands of businesses with a value greater than £1 million the day before death, which will be reduced the day after death. It would be helpful for an impact assessment to look at what that is and what steps might be taken to ameliorate the situation, to avoid a forced sale of a business, which cannot be in anyone’s interest.
Oliver Haydon: I am going to go back to what the Exchequer Secretary said, which was that all business assets have to be valued at current market value in going through the process of HMRC around achieving probate, et cetera. So that is not a new issue. Also, it is not that unusual for there to be businesses that do not qualify for business property relief or for the current 50% rate of business property relief. I am not sure that that is a new issue following the reforms because estates are required to provide an accurate market value of the business currently.
Lord Leigh of Hurley: We are on parallel tracks here. What I was asking is: how many businesses will suffer from having to pay BPR and are worth over £1 million, whose value drops because of the death of the proprietor and, therefore, there is not the cash in the system to pay?
Oliver Haydon: What I am saying is that we do not necessarily recognise that there is this significant effect on businesses. There is a standard way in which to value a business that is unchanged by these reforms. I guess your question is: do you think there is an unconsidered fact that the current way in which businesses are valued is not appropriate for what they are subsequently, because of this effect?
Lord Leigh of Hurley: It has not mattered for CGT because it is just a number that is only relevant in a subsequent sale, which could be decades off. But it is very relevant for this purpose because it affects the amount of cash the estate has to pay out, which invariably the estate will not have because, for most families, the single largest asset by a long way will be the family business.
Oliver Haydon: The standard provisions that exist for the reforms overall apply in those circumstances, such as the ability to pay in instalments, in the event that you do not realise the asset interest-free, for example. If you are talking about general points on liquidity and availability, the general points that Exchequer Secretary said apply to businesses in the same way as they would do for farming businesses.
Lord Leigh of Hurley: Sorry, to underline the whole point, the question is: how much assessment has been done on the size of the issue?
Oliver Haydon: Do you mean the size of the issue specifically about undervaluation or overvaluation of businesses?
Lord Leigh of Hurley: It is about the inability of estates to find the cash to pay for the IHT due, now that the BPR is in place?
Oliver Haydon: Our view is that many estates will have assets that are not the business asset. Obviously, it is possible to raise money from the business. Conceivably, in some circumstances, it is possible to pay in instalments over 10 years.
These are general flexibilities that exist within the policy to allow for liquidity. It seeks to strike a balance, recognising that the reason why business property relief exists in the first place is because of these liquidity concerns. It is about recognising that the policy is there to achieve a balance between that and importance of people inheriting high-value assets to pay some inheritance tax.
Lord Leigh of Hurley: I will leave my question once I have repeated it for a third time. Can you make an impact assessment of how many estates this affects and what the likely damage to ongoing businesses might be?
Dan Tomlinson MP: What I can do is take your question away. We have been debating in the other place the number of estates that will be affected on the APR side. The numbers are really detailed around the percentage of estates that will have to pay and will be able to pay from their existing non-agricultural assets, as well as, if they do have to pay from their agricultural assets, the percentage or size of that payment relative to the size of the estate. My understanding is that we will have those numbers for business property as well.
Let me take that one away; to the extent that it is possible, we will revert to you on that point.
The Chair: Lots of witnesses have said to us that businesses were valued on book values.
Dan Tomlinson MP: We were talking about that. Do you want to come in on book values?
Oliver Haydon: Yes. The basic story here is that the long-standing position has been that personal representatives must provide the market value for all of these assets. One reference in an older version of HMRC’s guidance said that there was no need to adjust the book value in cases where a business attracted the 100% rate of relief. However, that was never the law; that was just a point in the guidance, which has since been corrected.
I know that you have had Dr Summers come in front of the committee. He has done detailed analysis of this; he came to the conclusion that there was no major issue nor any evidence of a systemic undervaluation of business assets because they had been using the book value based on this reference in the guidance. That seems reasonable to us. It is a minor issue with some previous guidance; it has never been the legal position.
Baroness Fairhead: Can I ask that, when you take that question away, you also think of the unintended consequences that that might have? Say a business is overvalued on date of death. The business owner knows that that is going to happen, so he or she puts some money aside to pay for it; that money does not then get invested in the business, so it affects and has an impact on the business climate as well. I think that that should be part of your assessment, if you are thinking about doing one.
Dan Tomlinson MP: In the round, when the Government announced the policy at the last Budget, there was consideration of the reforms’ impact on both businesses and those with agricultural assets; that was published at the time in a tax impact information note. Of course, at the time when the decision was made, as is the case with all taxes—all tax policies are kept under review—we had considered the impact on business and on those who own agricultural assets.
In the end, that is why we came to the position we did, with the higher allowance and the lower rate. It is reasonable for there to be different treatment within the inheritance tax system for these assets, due to the points that you and your colleagues are getting to. We think that this is a reasonable position and a position that balances the need to raise revenue in a fair way with doing so from those who have the largest number of assets. It did not feel right or sustainable to continue with a position where hundreds of millions of pounds of relief was going to those with the very largest estates, businesses and assets.
The Chair: Can we move on to the conflict of evidence around the impact of these changes, particularly in the agricultural sector? Who is going to ask about that?
Q107 Baroness Bowles of Berkhamsted: That is my question. Before I ask it, I would like to make a comment.
I did not see you appearing to be very receptive to the point that, when a key person dies, the business is worth less. How much do you think Tesla is worth without Elon Musk? How much they are paying him to prevent that happening—not his death, but his departure? That is a real thing. Along with other adjustments that may be valued at day after death, an absent key person would be a relevant thing for you to think on in due course. That is more of a comment than a question because I think that it is a real thing.
Stakeholders have questioned, both before us and in the media, the robustness and transparency of the statistics and impact assessments in terms of understanding the APR and BPR reforms. We have already probed this a bit but why there has been a lack of confidence in the published analysis, do you think? Do you consider that there should or could have been earlier engagement with farmers and representative bodies, which could have helped ensure a greater level of trust in the Government’s use of statistics? We have already probed that slightly but you might say, “You’re right and we’re wrong”, or, “They’re wrong”.
Also, what kind of follow-on look back will you be doing? The proof of the pudding is in the eating, and some of this is going to come along eventually. What arrangements are there for seeing, when this has been going for a couple of years, who is right and who is wrong? Will you be open to adjustment as things come to light?
Dan Tomlinson MP: I cannot speak to why individual stakeholders or groups did not want to acknowledge or accept the veracity of the Government’s figures. I am sure that you have spoken to them but it is worth emphasising that, often, the Government will publish costings and make decisions based on best reasonable assumptions. In terms of this policy on the changes to APR and BPR, the data that was published was detailed a few weeks after the Budget in the Chancellor’s letter to the Treasury Select Committee—information was published on the day of the Autumn Budget last year—and was from actual claims to HMRC. This is the point that the Government have been making over and over again: these are actual claims that people have made when they have had to submit to HMRC that they are eligible for the APR and BPR relief as it exists now.
It is worth noting, as a side point, that, at the moment—even though I take the point that some of these assets are not sold for a very long time or, indeed, are never sold—the incentive in the system is to say that your asset is worth more, because that minimises any future CGT liability. That is what is going into the system at the moment. The data is from 2022, I think—Ollie might be able to confirm that—because of the lag that exists in the system.
On CenTax, I know that you have had Dr Summers before the committee. CenTax uses that same data. It is entirely independent from government and is well respected as an economic statistics research outfit. It concluded—I have read its report, as I am sure many of your Lordships have; I know that many Members in the other place have done so—that, broadly, our numbers were right. It came out in almost the exact same position as us, in terms of the number of estates that would be affected by these changes.
As the Minister responsible for tax, I have been in the odd position where stakeholders have said, “Look at the CenTax report and the ideas in it. We trust them, and we like CenTax. However, we don’t trust the fact that it has got to the same numbers as you, and we still don’t believe your numbers”. People have gotten themselves into an odd position where they are supporting CenTax on the one hand but, on the other hand, are quietly not acknowledging that it came to the same position as the Government on the number of estates affected.
Baroness Bowles of Berkhamsted: So do you think that this overestimation of value, which comes from historic claims—in order, perhaps, to reduce future capital gains tax—has fed through into the figures of both sides?
Dan Tomlinson MP: I will ask Ollie to come in in a second, because he was in the Treasury last year when some of this contestation of the figures was happening; he may have first-hand, rich experience of that.
One of the things that has happened is that, in the figures the Government published—in the traditional way in which figures on the impact of policies are published, which is on an annual basis—around 520 additional estates would have been liable for some tax on their agricultural assets. That number has now fallen to the high 300s—around 370 or 375—as a result of some of the changes that were made at the Budget on the spousal transfer, which your Lordships may want to ask me about later, and changes in the underlying economic assumptions. That number is an annual number. My understanding is that some of the other numbers out there have been grouped over a much longer period of time—two or three decades, say. That might be part of the differences in the figures as well.
Ollie, is there more that you could add?
Oliver Haydon: I do not have that much to add. I agree that that is one reason. Another reason is that, when you talk about who is affected by this policy, there will obviously be a broader group of people who are thinking about whether they are impacted but who will not actually be impacted. It depends a bit on some of the terminology used. We are clear in our statistics that we are talking about people who will pay more inheritance tax as a result of this policy.
One other thing that I would bring out, which speaks to our numbers being cautious, is the fact that our costing—that is, the amount we think this will bring in, in terms of Exchequer revenue—assumes a range of behavioural responses. Say people take action to reduce their IHT liability over the coming years. In line with the standard approach that the OBR takes to come up with a costing, even if it is relatively uncertain because of lots of variables, it has to make judgments and wants to be central, whereas the numbers we put out on the number of estates affected is just, as the Secretary of State said, looking back to 2021-22—the most recent year for which we have data available—and projecting it forward, say, statically. If no one did anything differently, how many more estates would pay? How many estates would pay more inheritance tax as a result of these changes?
In a sense, that should potentially be seen as an upper bound, because we would expect there to be some behaviour. In fact, when it is thinking about the costing, which has to be central, the OBR adjusts the yield downward, but we have not done that for the number of estates affected because the methodology would be quite complicated. We want to be as transparent as we can about where that number is from because it is rooted in real-world estate tax data.
Dan Tomlinson MP: Can I come back on a separate component of your question? As with all taxes, we will obviously keep these tax changes under review.
The challenge with the data is that, in the same way as has just been outlined, the analysis informing this policy was from the early 2020s. On the lag in the system, in terms of when people have to report, they have 12 months to send the relevant form to HMRC for it to get into our system. This means that our current estimate is that the analysis on the 2026-27 tax year will not be able to happen until 2029; it is the same lag going backwards as it is going forwards. However, in the usual way, the Government will want to make sure that they are looking at and understanding the impact of the policy. I am sure that many of the stakeholders to whom you have spoken, as well as others, will be keen for us to see that impact.
Q108 The Chair: My impression, from the debate in my native county of Cumberland, is that the concession that has been made in the Budget is dismissed as trivial—although, according to your letter, it reduces the number of people affected by 30% or something, through the transferability of the allowance. Most of the anger is directed at the problem of elderly small farmers who have not had the opportunity to do any tax planning and are now too old to do it. Does that reflect your own views? Do you think that there is anything legitimate in that?
Dan Tomlinson MP: I would not say that the change announced in the Budget—the change to allow the unused £1 million allowance to be transferred between spouses—was a trivial change. I would disagree with that. It is an important reflection of the listening that we have done over recent months. Many stakeholders have raised it as an important change. Of course, the broad thrust of the policy is still there—the policy remains what it was at the previous Budget, in terms of the rates and the allowance—but, for those affected, this is a meaningful change. Primarily, it is about simplicity for those who would otherwise have had to have a more complicated way of passing on their assets if they were in a couple; I do not need to go into the detail of that.
Let me clarify something. In terms of the reduction from, I believe, 520 to 375—I may be out by five or 10 there; forgive me if I am—around half of that is due to the policy change. The other half is due to the change in the underlying economic determinants. It is a routine thing, when costings are redone, to look at the underlying views on the value of the assets, the rate of inflation and the economy; I can set that out in more detail if it would be of interest to the committee, but that is the broad thrust. I would not want you or other Members to think that the specific change announced in the Budget led to that full reduction.
You made a second point, which I have not come to; it has fallen out.
The Chair: It was about the elderly farmers who have not had a chance to do any tax planning; they have not thought about it because they never thought that they would be subject to inheritance tax. There is a perceived unfairness in that.
Dan Tomlinson MP: This goes back to the point that was being made earlier on the business property side. One of the reasons why Governments rarely make changes to inheritance tax in this direction is that it is a difficult thing to do; in my role, I am personally aware of that. Members in both Houses will have had representations made to them and will know people who will be affected by these changes. That is why we have thought really carefully about the changes; it is also why we have maintained things and not gone back to the pre-1992 position.
We think that we have got the balance right in terms of both the higher allowance and the lower rate. These changes will be more difficult for those who are older; there is no point pretending that that is not the case. That is why it is important to think carefully about changes in this area at both the political level and the official level. We have been doing a lot of that in coming forward with these changes at the Budget this year. Other than my knowledge of the diligence of the previous Exchequer Secretary to the Treasury, I cannot speak to the effort that would have gone into making sure that it got the balance right when it first announced these changes.
Q109 Lord Leigh of Hurley: We know that this is going to raise very small sums of money in the scheme of things. However, although everyone in the country is aware of the damage to farmers and the agricultural business relief, we do not think, from the representations we have heard, that people really understand the effect of BPR. This £1 million exemption is for a micro-business; these are not small businesses, and they are certainly not medium-sized businesses. Will the Government put more resource into ensuring that people are aware both that this is ahead of them and that they will be paying taxes that they would probably have not put into their planning otherwise?
Dan Tomlinson MP: On this measure—the change to APR and BPR—I take the point that APR, in particular, has been one of the most discussed measures from the 2024 Budget. Compared to other tax changes, that awareness is relatively high.
I would also say, from the correspondence that I know Members of Parliament—including me in my role as Exchequer Secretary—receive, that people in the business community are aware of these changes and know that they are coming. Lots of questions and views about them are being sent in to us. I hope that the various organisations that represent and work with either businesses or farmers will continue to make sure that people are aware of the change that will come in from next year.
I would also expect that, in the coming weeks, as the final Bill makes its way through the House of Commons, there will be continued discussion and people will become even more aware of these changes.
Lord Leigh of Hurley: As you earlier alluded to, the thing is, human psychology is just not to think about it because it is only on your death, and on your death it is not your problem but a societal problem.
Can I raise a separate point on this area, which is the interaction between APR, BPR and IHT on pensions? There is a situation whereby if one owns a business personally, 50% BPR is still available. If the business is owned in the pension fund, which Government were encouraging with the SIPPs and SSAS, there is not BPR. This seems to us to be a strange situation and not particularly fair. What was the rationale behind going that way? Is there further thought going into it?
Dan Tomlinson MP: I may see if Ollie or Chris want to come in on that specific point. Broadly, the rationale is that the Government should be neutral in terms of the investment decisions made by the pension funds and pension schemes as to whether or not they had decided to invest in business, agriculture or other assets, and that having a distinction at the pension level would not be the right place to do it. Yes, we are doing so for those who directly own businesses or agricultural assets. They have a higher threshold and a lower rate. But, in line with some of the discussion that we were having earlier, the objective here is to make treatment of pensions both regardless.
I know that we have discussed some of the wrinkles—whether they are defined benefit or defined contribution—but we are also neutral in terms of the assets that they would invest in. It is worth thinking about that: if there were to be a specific exemption or treatment for investment in business or agriculture, again you would get back to some of the original position. Yes, there may be wider benefits if it were more economically efficient for those businesses or agricultural assets to be invested in than others, which I will not come to a view on, but if you were to be in that position, you would again open up a potential route that people would go down if they wanted to reduce their liabilities as a result and use pensions not primarily to fund their retirement but for other tax-planning purposes. I do not know whether Chris has anything to add.
Christopher Stewart: No, just that is a long-standing policy position that the nature of the assets held within a pension scheme is not relevant. It is the rights to the pension that the member or their beneficiaries have the right to, rather than the underlying assets held in the scheme.
Lord Leigh of Hurley: So, a person is no better off by putting an asset into a pension fund. It seems that they are significantly worse off if historically they have done that, because that does not attract BPR.
Dan Tomlinson MP: They are affected in the same way as anyone who has a pension scheme, regardless of where it is invested. At the moment, if you have your assets in a pension, you are not liable for inheritance tax from 2027. You will be then, in the same way as other assets. What we are trying to do is end up in a position whereby we are neutral in terms of the assets that are being invested in. I go back to the point I was making before; I am not going to repeat myself. We are making sure that we are treating assets in a neutral way and that people have the incentive to save for retirement but not for other reasons. That is the prime position.
The Chair: Can we move on to the liquidity questions?
Q110 Lord Pitkeathley of Camden Town: In light of all the additional steps now required, are you confident that the six-month deadline for payment remains appropriate, given the interaction with probate timescales, valuation processes and the potential liquidity constraints in estates?
Dan Tomlinson MP: This is really important. I may ask Chris or Ollie to come in on the detail as the policy experts on this but, for Ministers and the Government, I feel reassured that we have a whole range of different avenues in place for those who need to make payments. People have the option to put a payment on account and they can use the direct payment scheme, which is being able to access the liquid funds that are in the estate—going through the bank to ask it to make the payment, for example, if there are the funds in bank accounts. If the estate is primarily made up of assets that are not liquid, then you can pay in instalments. We are going to make that available with a pensions direct payment scheme, too. In the most extreme circumstances, you can take a grant on credit. I do not know whether Chris or Ollie want to come in and go into the detail.
Oliver Haydon: In terms of the six-month issue, which was alluded to in a previous question, it is important to be clear that there is no penalty for not filing after six months. It is just that at that point interest accrues on the eventual liability. It is not like submitting your self-assessment return late.
Lord Altrincham: Why is that not a penalty? It is quite an economic penalty. Why, in Treasury-speak, is that not a penalty?
Oliver Haydon: I guess there are some things for which HMRC charges penalties in addition to interest. In this case, there is no penalty. What happens from that point is that interest accrues at the standard HMRC rate of 8%, which is related to base rate but is more than that, obviously. That is not designed to be punitive but to represent the fact that there is an incentive for HMRC to be paid, and the period of time for when you have not paid HMRC the amount is a kind of recompense. I do not want to get into a semantic debate around what a penalty is but that is different from a penalty. As the Exchequer Secretary said, if you want to get around that, separate from the liquidity issue, you can, at any point ahead of the six-month period, make a payment on account, which, even if you have not determined the eventual liability, that will offset. So, if you make a payment on account that exceeds the eventual size of what you owe from that point, which could be the full amount on the estate or the amount for a first payment, if you are paying instalments, you are not accruing interest. If there is an administrative delay in finalising everything, that is still an option available to you if you have liquidity. As the Exchequer Secretary said, there is a range of options for getting liquidity, including the avenues he mentioned.
Lord Altrincham: This is an important point because we are creating more complexity and 8% gives the Government a good incentive to make this process more complex and longer. They have a strong economic interest in delay. At that rate, we might expect, from a fairness point of view, the Government to be fairly agile in ensuring that we do not add more complexity at 8%, which is economically a fairly punitive rate, as you know.
Dan Tomlinson MP: First, on the point about penalty, within all other aspects of our tax system—corporation tax and income tax self-assessment—there are the interest payments that accrue when payments are made late, but there are also late filing and late payment penalties, which are not applied here. That is why we are not saying it is a penalty, in the sense that that does not apply here. It is just the same rate of interest on other payments made late in other parts of the tax system.
Just to be clear, I am aware, as the person in this role with responsibility to Parliament for our tax system, that there is a very strong political incentive for me to ensure that I am driving the best performance I can in HMRC—to make sure that the deadlines set at the top, in terms of making sure that HMRC responds to people within 15 working days or whatever the relevant metrics are, are adhered to. I went on a visit to the HMRC office in Liverpool in September when I was up for party conference. I made sure to visit officials, and spoke for an hour or so with the team who work on bereavement. I was talking through their engagement, and the back and forth that they have with people having a difficult time making sure that they hit the deadlines in correspondence. It is incumbent on me to take political responsibility—yes, we are, in some circumstances, going to be adding some complexity—for making sure that HMRC is doing all it can to ensure that people do not have to tip over the six-month period.
Lord Altrincham: So it is not a penalty. But if we reversed the non-penalty, and if you put it the other way round, the estates would be wrapped up pretty quickly. If it was reversed at 8% in favour of the beneficiaries, those estates would be wrapped up pretty quickly.
Baroness Fairhead: On that point, if HMRC takes longer, does the amount of time it takes get deducted from the six months? It seems rather unfair that, if HMRC takes longer and you trip the six-month deadline, you then get the non-penalty but 8%, which is pretty significant.
Christopher Stewart: Once HMRC receives the money, the interest will stop accruing, so it is not—
Baroness Fairhead: No, I am talking about not filing and not replying to letters. You have six months.
Christopher Stewart: The level of repayment interest that HMRC pays—
Baroness Fairhead: When do the six months kick in?
Dan Tomlinson MP: The six months are not affected by the length of time that HMRC takes to reply.
Baroness Fairhead: Why not?
Dan Tomlinson MP: Because we have our targets. Fifteen days is typical, but I imagine that there are other metrics; I am happy to be held to account on those. It is on HMRC to make sure that we reply within that time. We have a good performance in our correspondence; if it would help, I could have a look and send some of those figures over to the committee. I do not think that the added complexity of having the six-month period vary, depending on individual days here and there, would be the right approach. It is reasonable to have a standard approach for all estates.
Baroness Fairhead: Perhaps look at whether six months is an appropriate period. One of the strongest arguments pushed by a lot of the witnesses and contributors is that six months is a very short time, given probate, complexity and HMRC’s response time—and, indeed, its capability to respond, given the increase in burden.
Dan Tomlinson MP: The other thing to note is that the full liability does not have to be paid. People have to make a payment, but it does not have to be the full and accurate amount within the six months; you just have to begin formally the process of paying and engaging with HMRC. You do not have to pay the full and exact amount within the six months.
Baroness Bowles of Berkhamsted: They have 10 years to pay, so you are looking for 10%.
Oliver Haydon: There are two related things here. On that point, in certain circumstances—for example, if you have an asset that is illiquid; a classic example of that would be a house—you can typically pay in instalments over 10 years. If it is an APR or BPR asset, you can pay over 10 years and it is interest-free over that period. That applies to certain assets—potentially, quite a lot of them.
On the point about what you have to pay up front, if you have a reasonable assessment of what you think your eventual IHT liability will be, even if HMRC has not fully processed it or you have not finalised the valuation, thanks to payment on account, you have the option of paying that to HMRC ahead of the six-month period, which will mean that, if the amount you put on account is equal to or exceeds the eventual liability, you do not pay interest. So there is an opportunity to do that if you have the liquidity, and that could run ahead of the finalising of the exact, eventual bill.
Then there is a separate point: you can pay in instalments on many occasions, which means that the amount due on the six-month period will be just the first instalment. That is what will accrue additional interest if it is not paid within the six-month period.
Q111 The Chair: We are coming to the end of the Minister’s time. We should ask him about the general tax principles on which the Government operate. What is your experience so far of the new principles? Why was it thought necessary to change the principles, which had been in existence for quite a long time, and to disband the expert body that was advising the Government at the same time? I find that a bit curious. I would be interested to hear your reactions to that.
Dan Tomlinson MP: Broadly, when it comes to the engagement that we do and the tax policy principles that we have set out, the Government are trying to make sure that we can move to a place where there is a less formulaic, one-size-fits-all approach when it comes to engaging with relevant stakeholders.
That relates partly to timing, which was definitely something we heard about from stakeholders. There is a big challenge on Budget Day in publishing hundreds of consultations all at once. We had got to a place where it had become the cultural norm in Whitehall that all of these tax policy changes and consultations were published at the same time, but the Government have been clear that we do not need to do that. Earlier this year, my predecessor published a range of policy consultations. I am intending, in the new year—potentially around the time of any Spring Statement—to do the same thing so that everything does not have to wait for the Budget.
At the same time, we are trying to engage in a flexible way that works for the moment. To give you an example, at the Budget, we published a call for evidence on changes to the business rates system in order to continue to improve it and to achieve some of the Government’s objectives. That is not an official, formal consultation; both I, as a Minister, and the officials in the team are using it as a means to go out and speak to the relevant stakeholders to get information to inform our future policy changes.
As I mentioned at the start, the Government’s approach is broadly to recognise that, yes, there is no duty to consult on tax policy changes, but we should do so on the relevant bits where it is appropriate. We are in a sensible and proportionate place on this. On eVED—the new charge on electric vehicles—for example, we announced the policy intent and set out clearly the political rationale for the change: drivers of petrol vehicles pay for the wear and tear on the roads through fuel duty but drivers of electric vehicles do not. We now have a lengthy consultation on the detail of precisely how it should work. That is the right approach; doing a consultation when you have just an idea could lead to more uncertainty. Yes, that would be 100% transparent, but, as a Government, you need to come to decisions then make sure that you are making them the best they can be, rather than consulting before you come to a decision.
Q112 The Chair: Can I ask you a final question about the DOTAS rules, which you put in your letter? You say that you are looking at alternatives, but you do not give us any flavour of what they might be. Can you expand on that at all?
Dan Tomlinson MP: Yes. First, I thank this committee for its engagement and work on this. We are not proceeding with that proposed change, following the feedback that we received from the sector. Of the changes that were in the Budget, the one that I think will have a significant impact is the introduction of a universal stop regulation, which will include a new prohibition on promoting avoidance arrangements that have no realistic prospect of success. There will be new criminal offences for those promoters who do not comply. My understanding is that that will also be done through a statutory instrument.[1]
The Chair: That is what Dan Neidle suggested to us when he gave evidence to the committee.
Dan Tomlinson MP: There we go. Dan Neidle is an expert and helpful stakeholder, as this committee and I, as a Minister, have seen. That will achieve some of our aims in going after the remaining promoters of these schemes, but without having consequences on those who are legitimately operating and acting within the rules to support people to make sure that they are paying their tax.
Other changes are coming forward, too. The second one, in which I am particularly interested—I have been glad to work on it with the excellent officials in HMRC and HMT since I was appointed on 1 September—is a promoter action notice, which will require businesses to stop providing goods or services to promoters of tax avoidance when they are used in the promotion of avoidance. That will also be a welcome power—one that I hope this Government will be able to exercise.
The Chair: Does anyone want to make any other points before we close this meeting? No? We are all grateful to you for spending time with us. Thank you for being very open and chatting us through all of these difficult questions. We are proposing to produce a report some time towards the end of January. With that, I declare the meeting closed.
