Finance Bill

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Chris Grayling: I would be as interested as my hon. Friend to hear the Government's response to those issues. I suspect that they see an opportunity to levy another stealth tax, and so to provide a valuable source of revenue by bringing more estates into inheritance tax year by year. Even if house price rises slow down in the future, they are likely to continue to rise over time in line with at least average earnings. Therefore, if the threshold on inheritance tax continues to increase year on year at a rate less than the rise in average earnings, by definition, more and more estates will be brought into inheritance tax every year.

Pensions are only one aspect of the matter. The Government are completely missing another, which is the payment for residential, care and nursing homes in old age. Levying increasing levels of inheritance tax is likely to end up costing the Government money. If they tell the average family in many parts of the south-east, where such sums will be inherited from parents, that they must look at inheritance tax planning to ensure that they do not pay a large chunk of their parents' wealth to the tax man, those families will try to reduce the size of their parents' estate while they are still alive. That may well mean giving away the principal property. It may mean giving the maximum allowable under law, year by year.

People will have to make a judgment. If they have elderly parents in nursing homes, they do not know whether they will be there for only a year or two. The average time spent in a nursing home is as little as 18 months, but many residents live there for much longer. If the Government encourage people to run down their wealth to save inheritance tax, there is a risk that people who spend longer in nursing homes will have to have the bill for their care picked up because they no longer have the money to pay it themselves.

I do not think that the Government have fully thought through the implications of the measure. They regard it as a cash cow, but they miss the obvious point that it could contribute to a solution to the pensions issue. They miss the fact that they may end up picking up the bill themselves when elderly parents are in nursing homes for several years.

Why is inheritance tax levied at 0 per cent. or 40 per cent? To the best of my knowledge, it is the highest marginal rate of tax in the tax system. I can think of no other example in which there is a jump of greater than 40 per cent. Why on earth is a single rate set at the highest rate of income tax? Why do we not have a more graduated rate if the Government want to levy the tax fairly?

Mr. Bercow: My hon. Friend makes a powerful point in any case, but does he agree that it would be even stronger if it were to transpire that many of those liable to inheritance tax and obliged to pay it at the rate to which he referred did not pay higher rate tax on their normal incomes? I do not have the figures with me to know whether that is true.

Chris Grayling: I thank my hon. Friend for that important point. Moreover, some of those who inherit properties from elderly parents may be entering or

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approaching retirement, so may not be on a substantial income.

Although the Government will see the measure as a logical annual progression, they should tell the Committee what they plan to do with inheritance tax in the future and give full consideration to a proper review of the role of the tax and the contribution that it could make to some key issues.

Mr. Burnett: I should like to make one or two other points about the impact of inheritance tax, on not only the economy of the country but the social aspects of people's lives, especially given the significant rise in asset values. That rise far exceeds the lower limit provided for in clause 115 and other lower limits.

Before I entered the House, I was an adviser on taxation matters to individuals. Even five years ago, I detected an unhappy state of affairs within families. Significant pressure was put on older people to make potentially exempt transfers—far too early and of the wrong assets. I refer particularly to people's main residences. I have always taken the view that people should own and control their main residence, if possible until the day they die. They need that for their independence. These days, pressure is exerted on older people to make gifts of equitable interests, of their main residence or of the entirety of their main residence in order to start the seven-year period running. It can be corrosive of family relations if individuals are constantly being persuaded to make such gifts. The elderly should not be put under that pressure and they should retain their independence. It is an unhappy state of affairs, and brothers and sisters can fall out as well as parents and children. I hope that the Minister will let us have an idea of the Government's philosophy and their intentions with regard to the tax. How do they see it evolving and what will its future be?

Mr. Luff: I should declare an interest. I have a modest terraced property in addition to my main residence. I rent it on an assured tenancy and have, therefore, known income from it. Without taking away from the comments of my hon. Friends, I want to defend the Minister. She proposes an increase in the threshold above the rate of inflation. It is only a modest one, but it is there and I would not want her to demolish my hon. Friends' arguments, with which I entirely agree, by claiming to be over-indexing. That would not be an adequate response to the powerful points made.

The housing market is in the process of change. My hon. Friend the Member for Epsom and Ewell (Chris Grayling) made the potent point, which the Minister should address in her concluding remarks, that over time the housing market tends to increase by the rate of earnings growth, not that of the retail price index. Now that the value of their residences is the principal component in most people's estates, the logic is to index inheritance tax in line with earnings and not with the retail price index. That important point is made more powerful by the fact that more people are now buying houses to rent—buy-to-rent mortgages are common—because they are fearful of their pension provision. That is inflating house prices by more, in a secular way, than has been the case in the past. We

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shall see house prices rising by more than average earnings for the next few years as people seek to protect their pension provisions. I see that my hon. Friend the Member for Buckingham is frowning. Many of my friends in London believe that the property market in London is so hot because a number of people are buying flats to rent out to give them a capital gain that will help them in their old age.

It would be right to resist indexing by 18 per cent. this year because the Halifax says that the market has risen by 18 per cent. this year. The Economist of 15 June tells us that the major threat to the Labour Government is the future house price correction. It says that a house price correction

    ''is on its way and the Government won't like it any more than homeowners will.''

There is a strong case for considering a new, strategic, approach to inheritance tax. The Minister should consider two modest proposals before the next Finance Bill: one is the proposal to index in line with earnings rather than with inflation; and the other is to exempt the principal private residents from taxation altogether. Those alternative proposals would address the problem that the Financial Secretary faces. However, I urge her not to rely on the fact that she is over-indexed in terms of the proposal.

6.15 pm

Mr. Edward Davey (Kingston and Surbiton): With the leave of the Committee, I would like to make a few brief comments, even though I was not here at the start of the debate. While I have been here, it has been interesting. I have strong concerns about how inheritance tax bites, not only in London and the south-east but across the country. Increasingly, people who cannot afford good tax planners pay inheritance tax.

Inheritance tax is increasingly a random or lottery tax, paid for by people who die young in accidents or car crashes and have not thought about tax planning. They leave young families without resources because the taxman has grabbed some of them. Alternately, the taxman hits people on relatively modest incomes who happen to have stayed in a property for many years, the value of which has increased substantially. However, such people never thought that they would need to make provision for tax planning or did not have the income to afford it.

Although substantial sums of inheritance tax revenue come from wealthy people, increasingly that is not the case. Large proportions of inheritance tax revenue come from people on relatively modest incomes, which is a major change from when the tax and its predecessors were introduced. They were aimed at trying to put a tax base on the super wealthy. Now that is not the case, so the need to reconsider the rationale behind the tax grows year by year.

I urge the Government to consider inheritance tax in terms of an overview of capital taxes. The distinction that I would make between it and, say, capital gains tax is that although CGT has economic distortive effects, it is important in terms of underpinning the strength and integrity of the income tax system. Without a CGT system, it would

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be easy for people to convert income into capital gain and escape income tax. Inheritance tax does not play that role at all. There is no economic reason for it, as it does not impinge on other aspects of the revenue-raising devices in the Exchequer's armoury.

Therefore, the Government must consider seriously a reform of capital taxes, to see whether they could radically restructure inheritance tax and even—dare I say it?—abolish it. At the same time, they must ensure that some of the revenue that would be lost from that reform was clawed back elsewhere. Although the Financial Secretary will probably say that the public finances are in robust health, I am not suggesting that we can have across-the-board tax cuts and abolish inheritance tax without looking for other sources to raise that revenue. Before Back-Bench Labour Members rush off to the Library to tot up the Liberal Democrat tax proposals in Committee, I should say that that is not my position.

The Financial Secretary and her colleagues should consider that idea, although she will clearly not do so today. As the hon. Member for Epsom and Ewell said, there are many knock-on effects on the pension sector, the care sector and industry in general. When I talk to business men and tax advisers—my hon. Friend the Member for Torridge and West Devon was one in a former life—about inheritance tax, they tell me that they spend huge amounts of time planning for the tax, at huge private sector cost. No doubt there is public sector cost on the other side of the equation. However, there is little gain to the Exchequer. In terms of compliance costs alone, there is a case for having another look at the tax.

I conclude by congratulating the Government. They are raising the allowance above RPI: a modest step in the right direction. However, it is time to look again at the tax, which has been given to us by history, but does not apply in the modern world.

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