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I share the view of my right hon. Friend the Member for Tonbridge and Malling (Sir J. Stanley) that the old PEP rule on the proportion that goes into unit trusts is a
Column 965bureaucratic and undesirable element of restriction that my right hon. Friend the Financial Secretary should look at.
The old PEP was hampered by excessive bureaucracy and, perhaps, a half- hearted approach. Listening to the Opposition Members who have spoken, I wondered why they oppose the PEPs and have bothered with this prayer. They are wrong about them on one count--no doubt my right hon. Friend will tell them they are wrong on many others, too. They are wrong to think that PEPs are attractive only to people who have used up their existing £5,000 tax exemption on the capital gains tax. The person buying a PEP for the first time who does not own shares has a tremendous incentive to buy one the next year--and the next--and to stay in the system until he accumulates a substantial benefit. That is a major incentive.
My right hon. Friend was undoubtedly right to say that the average tax benefit from the dividends will be about £60 a year. I agree that that is not exactly exciting for most people, including those on average earnings or below. But that is not the incentive ; the incentive is to get into the stock exchange system and stay there until the day comes when a person has built up a large portfolio. The hon. Member for Islington, South and Finsbury (Mr. Smith) must make up his mind. Perhaps the Labour party's policy review will help him to do so. Everything that he said about PEPs amounted to an advertisement for them and I should have thought that he would welcome them for that reason. The Opposition say that they believe in a share-owning democracy ; if so, they should consider PEPs, and the changes to them, marvellous. Either they should make up their minds whether they favour share-owning, or they know what they really think about it and are not telling us, in which case they are lying through their teeth-- [Interruption.] I said, "Either, or."
I must tell the hon. Member for Islington, South and Finsbury, who is a nice bloke--I like him-- [Interruption.] that when it comes to the next election, and the hon. Gentleman and his hon. Friends start talking about share ownership and a share-owning democracy, he will have to make it absolutely clear whether he means to leave our shares with us or to take them off us by re-nationalisation and taking away all the rights that we are now acquiring. If he chooses the latter course, he will find it about as popular as taking away our nuclear deterrent, and the people will not vote for it.
I offer my right hon. Friend this thought : we have spent a lot of time considering incentives to the purchasers of PEPs, but we need to think about incentives for the banks, building societies and others who will take on the management of these funds on our behalf. I had to persuade the nice young ladies at the branch of Lloyds in Victoria street to sell me a PEP. They had never heard of it. Having heard my right hon. Friend's Budget speech, I decided that a PEP would be nice to have. A few days later Lloyds took full-page advertisements in the press, telling us that we must buy our PEPs immediately and sign our cheques by 4 pm on the last Friday in March. If not, we could not obtain the current plant.
I marched in, clutching my copy of the advertisement in one hand and cheque book in the other. No one at the branch of Lloyds knew anything about PEPs. They managed to find me a leaflet, and I read through the details
Column 966of the old scheme, which were all wrong. I told the staff that everything had changed ; they said that it had not. The young lady brought her supervisor to see me--also, marvellous to relate, a woman--and she insisted also that the details had not changed. I said to the girl, "Here's my cheque. I want a receipt now, with the date-stamp on it." Three weeks later I received a stereotyped letter from a minion in Lloyds bank stating that I now possessed a PEP. I have done the bank the honour of giving it my hard-earned £3,000, and I reckon that it should be keener to take our money off us. Somewhere along the line, if the PEP is to be what I hope--the easy way into the stock exchange for the first-time buyer and for people who have no experience of the stock exchange--the people who are managing and selling the schemes had better pull their socks up and do the selling. They should make it easier and more attractive for unskilled northern women like me to go into the banks and get PEPs. I commend what my right hon. Friend is doing. I look forward to the PEP being an even greater success in future.
Mr. Tim Smith (Beaconsfield) : When my hon. Friend the Member for Derbyshire, South (Mrs. Currie) approached the sign of the black horse and got into the bank, she discovered that it was the listening bank and she was able to advise it on PEPs. I hope that it gets its act together soon.
The changes announced in the Budget offer an outstanding marketing opportunity for financial advisers of all kinds. When I listened to the Budget statement I concluded that this was one of the most exciting series of changes made for a long time. The changes in personal equity plans offer people for the first time a real opportunity to build up a tax-free equity portfolio.
The right hon. Member for Llanelli (Mr. Davies) talked about encouraging savings. I do not believe that that is the object of the scheme. It is to encourage investment in equities, which is a different proposition. There is plenty of encouragement for savings with interest rates at their present levels. Building societies do not have a problem, and savings are rising.
The purpose of the scheme is to encourage people to put their money into direct savings in equities, investment trusts and unit trusts. We can make a direct comparison between the tax advantages of putting money into an occupational pension scheme, where it is locked up for a long time but where all the dividends and capital gains are tax-free, and personal equity plans.
I agree with the hon. Member for Berwick-upon-Tweed (Mr. Beith) that there will be a big change in this area of the savings market. When people take out a mortgage, they will not go for an institutional way of paying it back through a life policy where the money is locked up. They will put their money into personal equity plans on a regular basis. Over a period of years, as anyone who looks at the tables for unit trusts will see, there will be a rapid accumulation in the value of their investment. They will find that they are in a position to pay off their mortgage much earlier than they might otherwise have been. They will have considerable flexibility which is not available under present arrangements. That is why the scheme is so exciting. It is not for a month, for six months or even for a year, as the hon. Member for Islington, South and Finsbury (Mr. Smith)
Column 967thinks ; it is for a long period to encourage long-term savings in the equity market. That is what it will do. With modest monthly payments, people can accumulate considerable capital. It is the next step to a property-owning democracy. The Government have been successful in achieving a high percentage of home ownership. The next stage in giving people more security and independence is to give them the opportunity to build up a reasonable amount of equity capital. I welcome the changes, which will be significant in the long run. Opposition Members do not know how to react to all this, or whether to welcome it. We saw that in the speech of the hon. Member for Islington, South and Finsbury from the Front Bench. I think that they will see that there will be considerable benefits and that many new investors will come into this area of the savings market. I have two detailed comments. First, on the vexed question of the 75 per cent. limit which will apply to unit trusts and investment trusts, I understand why the Treasury wants to introduce a limit. It is right that, primarily, people should be encouraged to invest in United Kingdom equities, but there is the difficulty to which my right hon. Friend the Member for Tonbridge and Malling (Sir J. Stanley) drew attention--that many United Kingdom companies invest heavily overseas. For example, Hanson plc has about 50 per cent. investment in the United Kingdom and 50 per cent. in the United States. If I chose to invest all my PEP in Hanson shares, I would get full relief even though half the money is going to overseas investment. We can probably think of examples, such as BAT Industries plc, where the proportion of overseas investment is even higher. I could invest in plantation or other companies, where investment is completely overseas. My right hon. Friend might review the limit. A 50 per cent. limit might be more reasonable.
On my second point I am not too sure of my facts, but I want to ask whether, under the scheme, one is confined to investing in quoted shares. If so, is there any reason why the scheme should not be extended to unquoted shares? Is there any reason why all equity investment should not be eligible? I shall be grateful for an answer to that question. It may not be unreasonable to allow people to invest in unquoted investment, more risky though that may be. At the end of the day, the changes encourage more people to put more of their money into equity investment. The Government have been successful in increasing share ownership. Literally millions of people are now investors, and with these changes, encouraging people to put their privatisation shares into the schemes, we shall see PEPs take off over the next 12 or 24 months.
Mr. Chris Smith : The hon. Member for Derbyshire, South (Mrs. Currie) has obviously spotted the fact that my reselection comes later this year and has decided to do me the greatest possible damage by being nice about me. However, I am grateful for her comments, if not for the general content of what she had to say about PEPs. The hon. Member for Beaconsfield (Mr. Smith) said that there was plenty of encouragement for savings at the moment through the movement in interest rates. That is broadly true, but it is worth noting in passing that the rates generally available for savers through financial institutions such as building societies have gone up proportionately less than the rates that are charged to borrowers as a result
Column 968of the increase in the base rate. There are important questions to be asked about where the difference between those two movements in rates has gone, but that is for another debate.
Two points that arose in this debate are worth highlighting. First, there appears to be a clash of opinion between the two sides of the Chamber about the overall profile of investors in PEPs. Opposition Members have the evidence from financial journalists, from the Institute of Fiscal Studies and from the general feeling among the financial institutions in the PEP market, the overwhelming impression from which is that relatively few first -time investors are now taking advantage of PEPs, that on the whole PEPs are taken out by richer investors and that much PEP investment is the repackaging of existing portfolios.
From Conversative Members we have the impressions of one branch of the Bradford and Bingley building society ; or perhaps one region of it. I would tend to believe the Institute of Fiscal Studies and other financial institutions before I believe the impression that the Financial Secretary was trying to give.
The other point that is worth re-emphasising is a simple point of principle. For all the talk of popular capitalism, ownership and so on that we have had from Conservative Members tonight, the fact remains that the inclusion of privatised issues within PEPs in effect gives a tax relief which is ultimately expenditure by the Exchequer, because it is income forgone. It is giving Exchequer subsidies to those who purchase public assets.
Bitterly opposed as Labour Members are to the sale of those public assets, we cannot possibly accept that it is right, on top of the disposal of those public assets, to assist their disposal by means of a tax subsidy-- expenditure from the Exchequer, which is paid for by the generality of taxpayers.
Mr. Norman Lamont : My right hon. Friend the Member for Tonbridge and Malling (Sir J. Stanley) raised two points. The first was about what he called the 50 per cent. rule. There is not actually a 50 per cent. rule. Somebody investing in unit trusts or investment trusts can invest all his portfolio in unit or investment trusts. I think that my right hon. Friend was referring to the fact that the £2,400 is half the limit. Regulation 6(3) is concerned only with somebody who has first invested in shares and then wants to switch to unit trusts. There is also the point, which my right hon. Friend may have been making, that £2,400 is half the limit that may be invested in shares directly.
As I explained at the beginning of the debate, our original concept was designed to encourage direct ownership in individual shares, although we also allowed some investment in unit and investment trusts. We have increased that considerably, to a level that is more economic from the point of view of plan managers, but we still want to maintain the idea of direct investment in individual shares with the investor actually following the company. So we are trying to do both--to have a generous amount for unit and investment trusts and a higher amount for direct investment.
My right hon. Friend the Member for Tonbridge and Malling also referred to the 75 per cent. rule, as did my hon. Friend the Member for Beaconsfield (Mr. Smith).
Column 969The point was made--which, after many representations from the unit and investment trusts, has become a familiar one--that there are many British companies with assets throughout the world and that there is a degree of artificiality at the margin in saying that a company which is quoted and registered in London is necessarily a United Kingdom company, even if its activities are spread internationally. Most hon. Members will agree that it would be odd if we gave a tax relief for people to invest largely overseas. It is difficult to distinguish one company from another and try to look at the underlying assets, whereas with a collective investment vehicle one can do that easily. But it would be odd to give tax relief for, say, M & G Japan.
Sir John Stanley : Will my right hon. Friend explain how it is meant to work in a situation where an individual plan holder invests in an investment trust that is just more than 75 per cent. invested in the United Kingdom? The board of directors of the investment trust is bound by the Companies Act to do its best by its shareholders. Let us assume that it is an international investment trust and it decides that it should switch a proportion of its investments out of the United Kingdom into companies overseas, and it falls below the 75 per cent. level. The plan holders will no longer be in a qualifying investment trust. What will happen to such plan holders?
Mr. Lamont : For an investment trust to qualify to be part of a PEP, it must satisfy the 75 per cent. requirement, and it will be able to be in a plan only if that is one of its investment objectives. The directors of the company will know that when they decide whether they wish to put their investment trust into a PEP.
My hon. Friend the Member for Beaconsfield asked whether PEPs are confined to quoted shares. They are, but my hon. Friend may have noticed that we extended that provision to include the USM as well. We regard the BES as being more suited to encouraging investment in unquoted shares.
The right hon. Member for Llanelli (Mr. Davies) made another engaging speech. He has become the spokesman and interpreter of the new Right on the Opposition Benches. After the Budget, the right hon. Gentleman gave the House a lecture on monetarism, saying that if we were true believers in monetarism we would not have been worried about the surplus but would have cut taxes and let monetary policy take the strain. The right hon. Gentleman has also been lecturing on fiscal neutrality, and has been reading publications by Milton Friedman and the Adam Smith Institute well into the night. The right hon. Gentleman has become very learned on Right-wing theory. However, as my hon. Friend the Member for Derbyshire, South (Mrs. Currie) pointed out, despite all the right hon. Gentleman's education from the Right and the new Right, he does not understand how PEP tax relief works. My hon. Friend the Member for Derbyshire, South made it clear that one does not benefit from tax relief just by the act of investing. She emphasised, as did my hon. Friend the Member for Beaconsfield, that the advantage of PEP tax relief comes only to the person who invests consistently and holds shares for a period of time.
Column 970The right hon. Member for Llanelli stated that the regulations, the changes and the whole concept of PEPs simply complicate the tax system. Perhaps stemming from his misunderstanding of the relief, the right hon. Gentleman overlooks the fact that, because there is total exemption on dividends, one of the beauties of the system, and one of its greatest attractions, is that the investor does not need to have any contact with the Inland Revenue. That is a major advantage, and very different from the scheme proposed by the hon. Member for Berwick-upon- Tweed (Mr. Beith), who yet again suggested tax subsidy for investment ; front-end relief on the Loi Monory model. That would help the richer investor and be open to abuse on a considerable scale, because it would be possible for a person to recycle his investments each year, thus qualifying for relief. They would be able to put existing investments through a plan and qualify for relief just on the basis of their existing investments. That would be much more expensive than the existing form of relief, which is well targeted.
My hon. Friends the Members for Derbyshire, South and for Beaconsfield made the point that the strength of the scheme is that it rewards the long-term investor who sticks with his or her portfolio, and not--as Opposition Members seem to think--short-term speculators. The plan encourages investment in equity markets and encourages people to stay in them for the long term. That is its purpose, and our Budget changes strengthen the scheme and will prove to be very popular.
Question put :
The House divided : Ayes 88, Noes 165.
Division No 195] [11.43pm
Abbott, Ms Diane
Adams, Allen (Paisley N)
Barnes, Harry (Derbyshire NE)
Brown, Gordon (D'mline E)
Brown, Nicholas (Newcastle E)
Buckley, George J.
Campbell-Savours, D. N.
Clark, Dr David (S Shields)
Clarke, Tom (Monklands W)
Clwyd, Mrs Ann
Cook, Robin (Livingston)
Davies, Rt Hon Denzil (Llanelli)
Davis, Terry (B'ham Hodge H'l)
Ewing, Mrs Margaret (Moray)
Godman, Dr Norman A.
Golding, Mrs Llin
Griffiths, Win (Bridgend)
Home Robertson, John
Hughes, John (Coventry NE)
Hughes, Robert (Aberdeen N)
Jones, Barry (Alyn & Deeside)
Jones, Martyn (Clwyd S W)
Kinnock, Rt Hon Neil
McKay, Allen (Barnsley West)
Mahon, Mrs Alice
Marek, Dr John
Marshall, Jim (Leicester S)
Martin, Michael J. (Springburn)
Michie, Bill (Sheffield Heeley)
Moonie, Dr Lewis
Orme, Rt Hon Stanley
Pike, Peter L.
Powell, Ray (Ogmore)
Quin, Ms Joyce
Ross, Ernie (Dundee W)
Smith, C. (Isl'ton & F'bury)
Smith, John P. (Vale of Glam)