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Column 950has been a less than dramatic take-up of PEPs, but does he accept that one reason for the relatively low figures is simply the administrative problems that many City firms have had in introducing them? Therefore, does he accept that the proposals in the Finance Bill are to be more than welcomed and should lead to a dramatic increase in their acceptability?
Mr. Smith : There are, as the hon. Gentleman will know, no proposals in the Finance Bill this year, because it does not cover PEPs. There are proposals in the regulations that we are debating which, to a certain extent, ease the administration of the PEP schemes. On some of those I have little quarrel with the Government, but on some of them I do, and I shall deal with those in a moment. One reason for the relatively low take-up of PEPs by first-time investors is that the capital gains tax advantages which apply to PEPs are only of any use to investors who have already used up their £5,000 capital gains tax-free allowance. For many small savers, certainly virtually all first-time perchasers of equities, such a proviso does not exist.
The Chancellor announced a number of changes in his Budget this year which are enshrined in the regulations. Let me briefly outline those changes. First, the annual contribution limit goes up by a substantial amount, from £3,000 to £4,800. Secondly, the allocation to unit trusts or to investment trusts goes up by an even more substantial percentage from within that overall total--£540 before to £2,400 now.
Thirdly, the form of contribution changes. Before, all contributions to PEPs had to be in cash. Now, under these regulations, they can be either in cash or in new issue shares.
Fourthly, the minimum holding period which was, under the previous regulations, one year, is now abolished. Fifthly, the cash holding rules which used to provide for a figure of £300 after the first year, has also been abolished.
Those changes represented an attempt on the part of the Chancellor to revive a scheme that was flagging before the Budget, and a number of commentators in the immediate aftermath of the Budget noted precisely that. The Financial Times on 18 March headed its article :
"PEPs are given the kiss of life."
The Times on the same day headed its article :
"Personal equity plans pepped up thanks to Chancellor's tinkering."
Before coming to the criticisms that my hon. Friends and I have of a number of aspects of the regulations, I have two questions for the Financial Secretary. The first relates to the fifth report of the Select Committee on Statutory Instruments. That Committee found that the wording of regulation 5(1) was unclear. It requested a memorandum from the Department on the subject. That memorandum was forthcoming, after which the Select Committee concluded :
"The Committee feels that although the intention of the Regulations is sensible, the drafting is not and that the provision can certainly be read as requiring a plan manager to carry out all transactions at the price he could obtain for the investments, namely the bid price."
Will the Government amend regulation 5(1) to clarify the meaning, in accordance with the advice of that Committee?
My second question relates to the press release issued by the Inland Revenue on 3 May, in which it announced that it would be relaxing the 75 per cent. United Kingdom
Column 951equity requirement for unit trusts and investment trusts. This issue has been causing concern to many in the equities industry, especially in Scotland, in relation to investment trusts. My attention had already been drawn to the subject by my hon. Friend the Member for Edinburgh, Central (Mr. Darling). Will the Government introduce the further regulations in due course, and, if so, when? When we see the contents of those regulations we will know whether to express doubts about the proposed relaxation.
We have three main criticisms of the regulations. The first concerns the inclusion of new privatisation shares in PEP portfolios. The Financial Secretary wrote on 26 April to my hon. Friend the Member for Cardiff, West (Mr. Morgan) and I fear that his letter was somewhat disingenuous on the subject. He said that it had always been possible in theory within personal equity plans to include privatised issues of shares. But under the processes of privatisation--the need to bid for shares and the uncertainty over the allocation that one will receive--the inclusion of such portfolios of shares within PEPs was difficult to arrange.
The regulations before us make it easier to include privatised issues within a portfolio. They enable an application to be made, and however great the allocation turns out to be--provided the overall ceiling is not exceeded--that can then be included within the PEP portfolio. That is unacceptable to us. Tax relief will effectively be given both on dividend income and on capital gains income, especially if the £5,000 threshold has already been exceeded, when purchasing privatisation shares. It is nothing more than a bribe to encourage a greater take-up of privatisation issues.
A scrutiny of the performance of privatisation shares in the period since their original issue can be instructive. I put aside the oil and gas industries, which have performed particularly badly because of the impact of the world fuel market, and also British Petroleum, which was affected equally dramatically by the rather gauche timing of the flotation. However, the price of Rolls-Royce shares in April 1987 was 170p but six months later was 136p. The Trustee Savings bank share price on its flotation in September 1986 was 100p, but six months later was 86 p. When the British Airports Authority was floated in July 1987, its share price was 100p, but six months later was 109p. None of them could be described as performing particularly well.
The potential purchaser of a water or electricity share will enjoy not just a knockdown price--we can be certain that the Government will ensure that-- but tax bonuses as well.
Mr. Ian Taylor : I find it increasingly difficult to follow the hon. Gentleman's line of argument. If the Treasury offered those shares at such a knockdown price, why is it that their prices have fallen further? Is it not the case rather than the Treasury negotiated an extremely good deal, in a variety of market conditions, that was also good for the British taxpayer?
Mr. Smith : The hon. Gentleman should have allowed me to develop my argument. In privatisation issues, we have consistently seen an initial under-valuation and a subsequent considerable increase over a short period, but then a downward trend over a longer period.
Column 952how can the hon. Gentleman maintain his argument that the public get a very bad deal when they invest in privatisation issues?
Mr. Smith : The pattern has been one of initial gains, but in the longer term a number of privatisation issues--not all, because British Telecom, for example, has done very nicely for the people who originally purchased its shares--have not presented such a good picture.
It must also be remembered that the tax relief available under PEPs will be given at the expense of all other taxpayers. The public, who own water and electricity at present, will themselves pay for stripping their own assets ; the owners will pay for the disposal of what they now own. It is like paying a burglar a subsidy to raid one's own home. I am sure that there will be some aggressive marketing of PEP packages as part of the forthcoming privatisation issues. The inclusion of those shares within personal equity plans, with all the tax advantages that go with them, is something that we cannot possibly accept.
Mr. James Paice (Cambridgeshire, South-East) : If the hon. Gentleman is so anxious that privatisation shares should not be part of PEPs, can he explain why such shares should be considered to be in a separate class from any other investment? If an investor wants to buy shares, he must take the rough with the smooth, and we are giving him tax relief through PEPs on that basis. Why should he be disadvantaged through buying a particular set of shares?
Mr. Smith : Privatisation shares should be regarded differently precisely beause they are public assets being sold to private investors. I do not believe that the public, through their taxes, should subsidise that disposal.
We are very concerned about two further issues. The first is the removal of the one-year rule. The concept of the mature portfolio, which was part of the original thinking behind PEPs, has gone with this change, which could mean a substantial immediate tax-free capital gain from a new share issue, whether privatised or not. Management fees will, of course, place a limit on the benefit to be gained, but the removal of the one-year rule nevertheless offers scope for large-scale wheeling and dealing in shares, to the detriment of the Exchequer and hence of all taxpayers.
Mr. Tim Smith (Beaconsfield) rose--
Mr. Smith : I will not give way to the hon. Gentleman. Time is limited, and I know that a number of hon. Members want to speak. Our other worry is that preferential treatment will be given to equities as compared to other forms of saving. We were told in advance that the Budget would be one for the saver, but the only action that the Chancellor took was to make generous provision in the regulations for equity purchase. Of course we must encourage saving : the Government ought to be all too well aware that personal savings appear to be at an all-time low. But where were the measures in the Budget to stimulate building society investment and sort out some of the inequitable rules relating to building society interest? Where were the provisions to establish regionally based schemes for the more effective financing of industry? Where were the provisions to assist the friendly societies? The preference for equities that the regulations are building into the tax system is, in our view, neither sensible nor just.
Column 953For all those reasons, we believe that the Government must go back to the drawing board. The economy as a whole, and ordinary people wanting to save and invest, deserve better than these regulations. 10.38 pm
The Financial Secretary to the Treasury (Mr. Norman Lamont) : I welcome the opportunity of a debate on the changes announced in personal equity plans. I must say that I marvel at the boldness of the Opposition's promise to vote against the regulations, and I am delighted that they are going to do so.
As the hon. Member for Islington, South and Finsbury (Mr. Smith) has said, PEPs were first introduced in the 1986 Budget, and despite some pessimistic articles in the financial press, they have played a successful part in achieving our objective of reversing the long-term decline in individual shareholding. Whereas, 10 years ago, only 7 per cent. of the adult population held shares, the figure is now 20 per cent.--one in five of the population--pushing hard to reach a level similar to that in the United States. We regard that as a tremendous achievement, on which we want to build.
In the first year of the scheme, 270,000 schemes were started. As the hon. Gentleman said, in 1988, only 120,000 schemes were taken out. That was a setback, but considering that there had been the biggest correction to the stock market since 1929, it was not all that surprising or disappointing.
I take issue with the Opposition's conviction that we are providing tax relief only for wealthy existing shareholders. The hon. Gentleman chose to quote a stockbroker. I quote a plan manager not from the City of London but from the Bradford and Bingley building society, who found that most investors had never owned shares before, that a majority were women, that semi-skilled and unskilled workers bought more PEPs than managers and professionals, and that most invested well below the maximum possible.
Nevertheless, it was clear from discussions at the end of last year that a number of managers wanted changes in the administration of the scheme and felt that some requirements were unnecessary and added to the cost of administration. Unit trust groups keen to market the idea found that it was uneconomical to offer unit trust--only PEPs with a limit of £540 a year. That is why we introduced changes increasing the overall limit to £4,800 and substantially increasing the annual limit on a unit or investment trust to £2,400. The philosophy behind those changes was that we had increased the overall limit for direct investment in shares, that unit and investment trusts were a good way to get into the market and that we wanted a total limit that was economic for plan managers.
At the same time, we thought it only right to require that unit and investment trusts should invest mostly in United Kingdom equities. I know that that has created disappointment in some quarters, but that was the original requirement of the scheme for direct investment, and it would have been inconsistent not to apply it to unit trusts and investment trusts.
As the hon. Member for Islington, South and Finsbury said, in future, investors may subscribe to a new public issue of shares, and then transfer them into a PEP. As my
Column 954hon. Friend the Member for Cambridgeshire, South-East (Mr. Paice) asked in an intervention, why not? We want to help not only privatisation new issues but all new issues, and it is right that they should be allowed in PEPs. Finally, we simplified the administration in a number of ways, so that it will no longer be necessary to take out a new plan each year. I believe that the administrative changes that we have introduced, in addition to the changes in the aggregate amounts that may be invested, will do a tremendous amount to boost the popularity of the scheme.
"specially designed to encourage smaller savers, and particularly those who may never previously have invested in equities in their lives."--[ Official Report, 18 March 1986 ; Vol. 94, c. 178.] Will the Minister contradict the findings of the Institute of Fiscal Studies that only one third of those investing in PEPs were first-time investors in equities?
Mr. Lamont : Learned though the Institute of Fiscal Studies is on tax matters, I am not quite sure that its opinion should be considered better than that of PEP managers at the Bradford and Bingley building society who are actually promoting the scheme, know who their customers are and have stated that in their part of the market many investors are new, first-time investors.
Although the hon. Member for Islington, South and Finsbury tried to assert the contrary, I stress that the tax relief does benefit small investors. The income tax relief can certainly benefit those paying the basic rate of tax. For example, someone with £4,800 invested and paying the basic rate of income tax would save about £60 a year, based on a return of 5 per cent. producing dividends of £240 a year. We notice that a number of plan managers are marketing high-income plans and investing PEPs in shares offering high yields. That will be of special importance and attraction to the small investor. As regulations now make it possible for investment trusts to offer capital and income shares in a PEP, the attraction to small investors will increase further.
The Budget changes have caught the imagination and enthusiasm of plan managers and investors. The largest plan manager, Lloyd's, has taken £12 million of new investment since the Budget. A number of firms that had stopped offering PEPs have announced that they will return to the market--such as Framlington, Fidelity and Barclayshare. A number of new plan managers have entered the market offering a range of new products. I welcome the new mood of confidence, which shows that the changes have been welcomed and will be a considerable success.
We have received representations from the investment trusts about the new rule that from April 1990 unit or investment trusts must be 75 per cent. invested in shares that qualify for direct investment in a PEP. I gave the explanation for that change and believe that it is a reasonable requirement, given the greatly increased opportunities for trusts. We obviously do not wish to harm existing investment trusts within the original limit of £750, which used to be the alternative to a full plan. Some of those investment trusts did not meet the 75 per cent.
Column 955requirement. We did not wish to harm the investment trusts that marketed their product under the old regime by suddenly imposing a new rule on them.
We therefore announced that it will be possible to continue to invest £750 in a unit or investment trust that does not meet the 75 per cent. United Kingdom requirement. It will be an alternative to investing up to £2,400 with the 75 per cent. restriction. We announced that unquoted shares in a unit or investment trust portfolio may count towards the 75 per cent. requirement, which will especially help those who specialise in venture capital.
Mr. Alan Beith (Berwick-upon-Tweed) : Will not the Financial Secretary have increasing difficulties squaring the United Kingdom equity limitation with movement to free capital in Europe? Will it not increasingly be regarded as discriminatory for non-United Kingdom shares to be singled out in this way?
The hon. Member for Islington, South and Finsbury referred to the comments by the Select Committee on Statutory Instruments about the drafting of the regulations, which of course I take seriously. It is a relatively minor point, but we shall consider making a drafting change.
The hon. Member for Islington, South and Finsbury asked whether we shall amend regulations to deal with the other changes that we have made. The answer is yes, and we shall be doing so well in advance of the April 1990 start date for the new 75 per cent. content and the other aspects of the regulations.
Mr. Roger Knapman (Stroud) : Will my right hon. Friend deal with the allegation that the Government are having to bribe investors on privatisation issues? I spent most of January and February on the Committee considering the Water Bill listening to the hon. Member for Copeland (Dr. Cunningham) suggesting that we are giving away assets. I therefore cannot follow why it is necessary to bribe investors.
The hon. Gentleman is living in something of a dream world. He claims that there are people making vast capital gains on the stock market and privatisation issues, yet in the next breath he says that all the privatisation issues have been an enormous flop. I was interested to note that his speech corresponded with the press release he distributed this afternoon. He regarded the fact that we were removing the one-year rule as an enormous gift to our friends in the City, and said that getting rid of the rule would allow substantial tax-free capital gains for all those who
"wheel and deal in shares".
The hon. Gentleman is obviously not aware that it has always been possible to sell shares with a PEP either in the first year or subsequently. I assume that he objects to the fact that in future the proceeds need not be kept in the plan
Column 956for a full 12 months. That is true, but tax relief in a PEP continues to grow the longer people keep their investments in the plan. We got rid of the 12-month rule simply because it was a wholly unnecessary and bureaucratic imposition on plan managers. The average amount invested in a PEP is £1,700. If the hon. Gentleman believes that there are geniuses around who can invest £1,700 in any year, walk away with huge tax-free sums and live happily ever after, he is living in an unreal world. The hon. Gentleman has muttered many incantations from the book of common prejudice, but he has not given us a serious analysis of PEPs tonight.
The Opposition are terrified about ownership. A few weeks ago, in an article in The Independent , the hon. Member for Birkenhead (Mr. Field) described how, when he was canvassing, people came up to him in his constituency. As they owned a handful of British Telecom shares, they talked to him as though they were relatives of the Duke of Westminster. What a terrifying development!
The Labour party is terrified of ownership, because it will make people independent. Worse than that, ownership will make the Labour party's own policies utenable. What was it that forced Labour to change its policies on housing? It was ownership in housing. What forced it recently to change its industrial policy on social ownership and nationalisation? It is now committed only to taking back into public ownership British Telecom and water. What is the reason for that? Privatisation and wider share ownership have brought about that change. When water is privatised, Labour will have to retreat from its promise to renationalise it as well if it wishes to have a slight chance of being elected again. The trouble is that Labour Members are half-converted. They are not fully converted to the post- Socialist society, but they should become full converts and follow the logic of their own doubts and quandaries.
My hon. Friend the Member for Stroud (Mr. Knapman) asked about the tax reliefs being made available for privatisations and new issues. I have already said that tax relief is being made available for all new issues. It is not necessary for us to give tax relief to make privatisation issues a success, as our record in getting issues away in the companies we have privatised demonstrates clearly. If Opposition Members believe that the privatisation of water depends on tax relief, that shows how little they have learnt. I have not the slightest doubt that there will be tremendous interest in the privatisation of water. Our changes will enlarge the scope of PEPs. They are designed not specifically for privatisation, but to improve the product of PEPs.
The Opposition have the wrong idea about PEPs and they have a wholly wrong idea about how valuable the tax relief is. Some of them have shown that they do not even understand how the tax relief works ; they are under the impression that one receives tax relief simply for investing. That is not true ; there is no subsidy for investing and no front-end relief--which is a criticism that some of my hon. Friends have made in the past. In the short term, there is no saving for investors ; they have to obtain the dividends and capital gains first. One has to be a long-term investor to benefit from the tax reliefs. The idea that the tax relief on dividends--on £1,700--is absolutely to the rich shows that, despite all their efforts to catch up with the changes in the world and to change their policies, Labour Members are still miles and miles away from reality.
Column 957Personal equity plans are playing an important part in widening and deepening individual share ownership. I believe that the changes that we have made will give them a tremendous boost, and I am utterly confident of their success.
Column 95910.55 pm
Mr. A. J. Beith (Berwick-upon-Tweed) : The Minister will know that I have been a critic of the PEP scheme from the start--but entirely from the standpoint of someone who thinks that it is the basis of a very good idea and that its essential purpose is right. I would argue that the Minister is only half converted to the objective of wider share ownership or he would develop the PEP scheme further. Two excellent objectives form the basis of the PEP scheme. The first--increasing saving--is of immediate economic importance. There are overriding reasons why we should seek to attract more saving at present. It is one of the instruments that we could put into the Chancellor's golf bag to add to his one-club interest rate policy. The second purpose of the PEP scheme is not merely to deepen but to widen share ownership. Although the widening of share ownership made significant progress with the privatisation issues, it seems to have stopped at around the 20 per cent. mark and at a point where most of the new shareholders hold only one or two stocks. A real widening of share ownership would result in a large proportion of the population having a direct stake in the ownership of individual British companies and a direct involvement in their success. That objective is still to be attained, and I hope that the Minister will address himself to it.
PEPs have not gone far enough to help in meeting that objective, for two reasons. One reason is dealt with to a large extent in the present proposals--to date, the high management costs of the scheme have been a disincentive even to offering and marketing PEPs and must have played a part in the very low take-up rate in the past year. I welcome the improvements that the Government are making, which remove a whole lot of unnecessary limitations on the way in which a PEP scheme is operated.
The other main reason why the scheme is not fulfilling its purpose is that the reliefs available under it have been mainly advantageous to those who have sufficient capital gains tax opportunities to benefit from it--those who have exhausted their other sources of relief. It is not a real advantage to those who come nowhere near to using up their capital gains tax limit. No new investor is likely to need the extra capital gains tax relief. It is the investor who has used up his £5,000 worth of capital gains tax relief who is the primary beneficiary. Other investors have only the tax relief on their dividends which, in any stock market investment, must be only a small part of the investor's expectation of reward.
The Minister came right to the point when he said that he had been criticised--he has certainly been criticised by my party--for not considering the possibiity of a front-ended form of relief for the PEP scheme. The changes that the Government are making will lead to an increased take-up of PEPs--because of the reduction in management costs, the changes in the total investment limit and the time limit. The marketing of PEP mortgages will take off rapidly and they will be widely used by those who are aware of their tax advantages and likely to benefit from them. But the PEP scheme will still not be attracting the large numbers of people whom we want to induce to save and whom we want to own British industry. Although there are arguments in favour of the unit trust aspect of the proposal, that will also probably dilute the extent to which the scheme introduces people to ownership of shares in
Column 960individual companies. Therefore, we should examine the scheme again to see whether we can still fulfil that objective at the same time. It remains my view that the most likely way of achieving that real widening is to offer a form of front-end relief as a supplement to the PEP scheme--perhaps a secondary scheme--a scheme alongside it, or an alternative scheme. Unless the Treasury does that, we will find from the PEP scheme, in the Chancellor's words, not a widening but a deepening of share ownership. That is a much more limited objective. The Minister should look at the original objectives.
Mr. John Redwood (Wokingham) : Given the hon. Gentleman's party's conviction about wider share ownership, does he agree that privatisation has been the main means of widening share ownership in this country? Therefore, his party should accept that as the most likely way of continuing the share ownership revolution.
Mr. Beith : It is a means of widening share ownership, but it has fundamental disadvantages, one of which is that it has transferred monopolies from the public sector to the private sector without changing their monopolistic character. We had that experience with British Gas. We are experiencing it with the electricity industry--a badly conceived privatisation, the details of which it would be out of order for me to go into now.
There are good arguments for taking some industries out of the public sector, particularly if the income generated by doing so is reinvested in other parts of the economy. One of the Government's failings is that they see the gains from privatisation as something out of which to make a Budget surplus to be used on current expenditure, rather than as a means of reinvesting in the economy. There is no gainsaying that one of the consequences of privatisation has been the widening of share ownership. It would be ridiculous to deny that. But I want to see it go much further. I want to see wider ownership of shares in British manufacturing industry, which has never been in public ownership and which therefore cannot be reached by that means.
The advantages of front-end tax reliefs are that they would prove a more immediate attraction to people who have not previously contemplated saving at all or putting their savings into industry. They would apply directly to those who have no prospect of using up capital gains tax relief and, therefore, do not regard that relief as a particularly important incentive.
If the Government are serious about widening share ownership to a larger number of people and also making it a means of increasing savings, they must change or extend the character of the PEP scheme. For those reasons, I am critical of some of the things that the Government have not done. My criticisms are not because of hostility to the scheme's objectives ; in its modified form it can at least play some part.
Sir John Stanley (Tonbridge and Malling) : I welcome the Opposition's decision to initiate this debate, if only to demonstrate that the Labour party has not changed one whit, judging by the speech of the hon. Member for Islington, South and Finsbury (Mr. Smith) about privatisation issues. I found his remarks quite extraordinary. Just as members of the Labour party were
Column 961conspicuous in queueing up for the benefits of privatisation when council houses were offered for sale, so I have every confidence that they will queue up to take advantage of privatisation issues to put them into the PEP mark 2. They will be surprised if Opposition Members vote against the regulations.
I welcome the PEP mark 2. As my right hon. Friend was frank enough to admit, the PEP mark 1 did not completely fulfil our expectations. I recognise that the stock market crash in 1987 certainly was a factor in that, but it was not the only factor, and the PEP mark 1 was undoubtedly too complex and restrictive. There was too great an element of Inland Revenue nannying. Certainly, several fund managers--probably the great majority--found that it simply was not an economic proposition for them to run PEP schemes because of the administrative costs involved compared with the relatively small volume. PEP mark 2 is certainly an improvement.
I ask my right hon. Friend to consider two further changes that would remove two restrictions.
My right hon. Friend announced on 3 May in an answer to my hon. Friend the Member for Newbury (Mr. McNair-Wilson) that PEP mark 3 is around the corner, and he has confirmed that tonight. That being so, I hope that he will give consideration to the matters to which I wish to draw attention, especially the two that came within regulation 6(3)--the 50 per cent. and 75 per cent. rules. The 50 per cent. rule prevents an individual investor from investing more than half of his annual PEP investment in investment trusts and unit trusts. The rule is unnecessary, anomalous and pretty undesirable. If it is possible for someone to put 100 per cent. of his annual investment into ordinary shares, why should he be restricted to only 50 per cent. of his investment for unit trusts and investment trusts?
My right hon. Friend has made some welcome changes for investment trusts and he has referred to the benefits of widening the changes to embrace split level trusts and the attraction of high-income trusts for first-time investors. If unit and investment trusts are a good investment medium for first-time investors, and they are, surely we should not place a 50 per cent. limit on that form of investment. I think that my right hon. Friend will be the first to agree that many first-time investors who go to their independent financial advisers with only £1,000 or £2,000 to invest will be advised by those advisers to put their money into investment trusts or unit trusts so that they may enjoy a reasonable spread of investment without incurring high initial purchase changes, which is the result of putting penny packets of investment into ordinary shares. As the regulations are drafted, I believe that they will run contrary to the advice that independent financial advisers will give to those who come to them, especially if they are first-time investors or those of relatively modest means.
I ask my right hon. Friend to consider again the 75 per cent. rule. I suggest that it, too, is highly anomalous. As I understand it, the intention behind the regulations is to produce some form of direct imperative to invest in the United Kingdom. As my right hon. Friend knows, however, the ordinary shares that can be part of any PEP portfolio can include a huge range of United Kingdom-quoted companies. Many of those companies, not least oil
Column 962companies, natural resource companies and internatonal conglomerates, have the majority of their assets and earnings outside the United Kingdom. As the regulations are drafted, it would be possible to construct a PEP where the entire investment was placed in United Kingdom quoted companies which had 75 per cent. or more of their assets and earnings outside the United Kingdom. However, when one came to invest in a unit trust or investment trust that had 74 per cent. of its investments inside the United Kingdom, the regulations would debar the investment. I suggest that that is anomalous.
I have some sympathy with the argument advanced by the hon. Member for Berwick-upon-Tweed (Mr. Beith) in an intervention. As the Government have, rightly, been radical enough to abolish exchange controls, and as they are on the brink of entering into a single capital market within the European Community, fiscal nationalism on a pretty small issue seems to be rather unecessary. I hope that my right hon. Friend will examine closely the 75 per cent. rule. The PEP scheme will be much improved if that and the 50 per cent. restriction on unit trusts and investment trusts are abolished.
Mr. Denzil Davies (Llanelli) : We are debating another example of what used to be called social engineering. Perhaps I should be sorry to revert to that phrase, but I see that the Financial Secretary is amused. Social engineering means the use of the tax system to further various political, economic and ideological ends for the purposes and aims of the Government of the day.
This is not a debate on the Finance Bill but it is closely allied to such legislation. Yesterday we debated the use of the tax system to encourage private health care and this afternoon we debated clause 44 of the Finance Bill and the use of the tax system both for the business expansion scheme and to try to encourage the provision of rented accommodation in the private sector. Again, the tax system is apparently to be used to iron out anomalies and to try to revive the private rented sector.
The tax system is now to be used to enable certain individuals to buy shares on the stock exchange and to get tax relief for doing so. Perhaps most Conservative Members were not Members of the House in those days, but some of us-- [Interruption.] Of course it is tax relief
Mr. Davies : If one gets tax relief on dividends from the shares, one is paying no tax-- [Interruption.] Well, perhaps it is not tax relief ; it is tax exemption. I am sorry, I had better be more precise in my language. We are talking about total tax exemption on dividends on the PEP scheme. If the hon. Member for Derbyshire, South (Mrs. Currie) wants to be pedantic, she can be. The policy is to grant tax reliefs.
The Conservative party used to tell us that tax reliefs, tax incentives or tax breaks, as the Americans call them, were justified only because of the high rates of taxation under Labour Governments. The Conservative party said that they were justified then because they ameliorated the harsh tax rates. We can all remember that what used to be called "unearned income" was taxed at 95 or 97 per cent. when the investment income surcharge was applied to it
Column 963-- [Interruption.] I am advised that the rate was 98 per cent. It was argued that because of those rates we must have all these reliefs. However, we were told that once the tax rates came down to reasonable levels there would be no need for the reliefs. We were told that everything would be neutral and that incentives would not be given to either one group or another.
We have had those tax reductions. Unearned income became known as investment income and the tax on it was no longer any different from the tax on earnings. That is the position today, except that the top tax rate has gone down to 40 per cent. Yet we apparently still need the reliefs and the incentives. Indeed, under this scheme there is no tax at all on dividends--I am correct in that, am I not?--yet there are taxes on earnings at 25 and 40 per cent. We are moving in the opposite direction--we are taxing unearned income in certain categories at a level lower than that at which we tax earnings. That is extraordinary coming from the Conservative party which has preached tax and fiscal neutrality. However, we know what this is really all about. Although a few people at the lower end of the scale will benefit from such schemes, the schemes will most benefit those whom the Prime Minister describes as "our own people". I notice that the hon. Member for Derbyshire, South is agreeing with that. As I have said, no tax will be paid on dividends and no tax will be paid on capital gains. The Financial Secretary told us that that is to encourage savings. I thought that the function of the interest rate system was to encourage savings. I should have thought that interest rates at twice the rate of inflation and the highest in Europe--it is possible to get 13 per cent. today--would encourage savings. I do not see why it is necessary to try to get more. Why be more greedy? Why try to find more tax reliefs and more income from savings?
The scheme is, in fact, a confession that popular capitalism has failed to deliver savings. Popular capitalism--the free market, and no interference in the market whatsoever--has not delivered savings under this Government ; it has delivered spend, spend, spend. That means that we now have to use the tax system and to pay money to institutional managers and to the fund managers in the City to try to ameliorate the failure of popular capitalism to encourage saving. The right hon. Member for Tonbridge and Malling (Sir J. Stanley) talked about the "nannying" of the Inland Revenue. There are 13 pages in these regulations which I read through earlier. They talk of plans, plan managers, plan investments, qualifying individuals, plans managed in accordance with the regulations, planned investors. There are 13 pages of gobbledegook from the Government who told us that the tax system would be simplified, not complicated. We are also debating this week the longest Finance Bill in history.
The Government talked about fiscal neutrality and tax simplicity, but we received neither. A Government who were, apparently, in favour of fiscal neutrality and tax simplicity, have given us less of both. The main reason for that is that the Government want to assist those they choose to help, and they will try to do so through the tax system.
I do not know whether the Government's policy will encourage savings. It will shift savings from one sector of the economy to another. I doubt whether it will generate extra savings, because that depends on the general
Column 964economy. Savings cannot be created overnight. As a result of this system, money will leave building societies and go into the new PEP scheme. I doubt whether it will encourage savings, but it will assist a number of people.
The reason for the scheme and for the Financial Secretary talking about savings is that, over the past few years, the Government have run a slack monetary and fiscal policy. If the Government had practised what they preached about monetary discipline, there would be no need for these schemes to try to encourage savings, because the economy would not be run on that basis. The scheme is a consequence of the Government's failure properly to manage their economy and of the Conservative party's desire to use the tax system to assist its own people. Conservative Members who troop into the Lobby tonight to support the regulations will do so because there is money in it for their own people.
Mrs. Edwina Currie (Derbyshire, South) : May I say how much Conservative Members welcome the various improvements to the PEP. I originally intended to come merely to listen to the debate, but I heard so much guff from the hon. Member for Islington, South and Finsbury (Mr. Smith) and more guff from the hon. Member for Berwick-upon-Tweed (Mr. Beith), and then I heard my right hon. Friend the Financial Secretary speaking with such approbation about the unskilled women of the north of England who are now buying PEPs in such numbers. When I heard this I thought to myself, "My right hon. Friend is talking about me." I am an unskilled woman from the north of England and I have never owned any shares in my life, and on 30 March this year I marched into Lloyds bank in Victoria street and bought a PEP.
I think that PEPs are wonderful, and I would like my right hon. Friend to know that he is absolutely right in what he says about the attractiveness of the PEP scheme to first-time buyers and investors, the person who knows nothing about the stock exchange, does not have a financial adviser, does not read the Financial Times, but wants to get into the stock exchange and the stock market to benefit from the tremendous improvement in the capitalist society over which the Government have presided.
In future, this will be the real value of the PEP. It will be one of the best ways into the system for the first-time buyer. On that basis, the changes that are being prayed against today are very important, much more important than the tax incentives that have been described and which are being derided by the Opposition. They are particularly important as privatisation issues gradually draw to a close. We shall reach the stage when we have privatised everything that stays still long enough. It will then be harder for the public, unless they have some easy access to the system, to buy shares. In any case, why should they be restricted to buying shares merely in old, nationalised industries? It is marvellous that, through the PEP system, they should be able to have access to shares in a much wider range of companies.