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Mr. Baron: I wish to return to the potential for an increase in the break-up of homes. Has any assessment been made of whether the new clause will have any tangible effect on the tendency to break up or disperse family units, or certainly family homes, as the Government would have to pick up the cost of that?

Dawn Primarolo: Again, I remind the hon. Gentleman that we are dealing with plans, which are at an early stage, to provide lifetime protection from any inheritance tax on those estates.

I understand that such plans are made considerably in advance of any discussion or requirement regarding the vulnerabilities that might exist in the household in future. The proposals are long planned and for the lifetime, as I have suggested. They are an attempt to remove from inheritance tax rather than a response to specific circumstances. The measure on specific avoidance by married couples is narrow. It is sensible and it is fair to taxpayers who comply with their obligations. That is the aim of the new clause and I commend it to the House.

Question put and agreed to.

Clause read a Second time, and added to the Bill.

New Clause 1

Tax Credits for Individual Savings Accounts and Personal Equity Plans

'.—Section 76(1)(a) of the Finance Act 1998 (c. 36) shall cease to have effect.'.—[Mr. Stephen O'Brien.]

Brought up, and read the First time.

Mr. Stephen O'Brien: I beg to move, That the clause be read a Second time.

1 Jul 2003 : Column 210

This year's Red Book stated:

"Individual Savings Accounts . . . are the Government's primary vehicle for tax-advantaged saving outside pensions."

However, the Finance Bill contains no provisions to prevent the 10 per cent. tax credit for individual savings account and personal equity plan dividends from being removed after April 2004. As we well know, the removal of the dividend tax credit for pensions—worth £5 billion a year in tax—has resulted in typical personal pension savers retiring on half what they would have received only five years ago.

It was not surprising that the director general of the PEP and ISA Managers Association and the director general of the Investment Management Association wrote to the Chancellor of the Exchequer on 4 June. The letter said:

"We were highly disappointed that there was no announcement in the Budget that the 10 per cent. dividend tax credit for stocks and shares ISAs would be extended beyond April 2004.


Our research, which we have shared with the Financial Secretary, among consumers and ISA providers clearly demonstrates that abolishing the dividend tax credit will significantly discourage, rather than encourage, equity based savings through ISAs. In the present investment climate, this is precisely the wrong incentive to be giving people needing to build their long-term savings."

The letter continues:

"In excess of 12 million ISA and PEP account holders will be disadvantaged, not to mention those potential savers that have already been dissuaded by the looming abolition of the tax credit, as ISAs will, according to the FSA, lose their tax-free status in 2004."

The letter urges the Government, at this late stage, to consider approving new clause 1 and says that it is important

"to extend the life of the tax credit and thereby the sustainability of Stocks and Shares ISAs for other than high rate tax payers."

I shall illustrate why we find ourselves in such an extraordinary situation. The Government are long on rhetoric by saying, "For the many, not for the few", but they are deliberately taking action to avoid prolonging an important tax credit with the intended effect—they cannot pretend that it is unintentional—of preferring the few higher rate taxpayers rather than the many, despite the fact that there is such a blight on all income groups' savings.

A PIMA press release was published on the same date as the letter and said:

"However, this figure of 12 million"—

people—

"is not taking into account the number of potential savers that have already been dissuaded . . . Recent evidence shows that stocks and shares ISA Subscriptions have slumped by 40 per cent. in April 2003 compared to the same period last year, in spite of a surge in investment in bonds.


By removing the tax credit, PIMA research has shown that the Chancellor will significantly discourage rather than encourage, equity based savings through ISAs."

Mr. Tony Vine-Lott, the director general of PIMA, said:

"PIMA will continue to lobby for this recommendation throughout the passage of the Finance Bill. 12 million accounts is a significant amount and the Chancellor needs to recognise that the removal of the tax credit will do more harm than good for consumers and the savings industry alike".

1 Jul 2003 : Column 211

2.45 pm

I have examined carefully the representations that we received, which happens with all representations received by the Opposition. It is important for those who observe our proceedings to have the opportunity to submit representations and for them to be reflected. I have given the comments careful thought. As hon. Members will note from the amendment paper, I, like several of my colleagues, have a registered interest, which I put on the record. It is no surprise that many of us hold PEPs and ISAs as part of our best efforts to save during our earning lifetime. We try to be responsible so that we will not be dependent on the state when we are no longer in a position to earn.

A representation that we received said that because

"the Government have promised to abolish the 10 per cent. tax credit that ISAs receive on dividend distributions . . . investment in Equity ISAs will only be attractive to higher rate taxpayers."

Perhaps the easiest way to explain the situation is to go through an example. Like always, it would be easier to use a slide-show presentation while dealing with figures, but as I cannot do that, I shall have a go at outlining my point.

Let us consider a basic rate taxpayer who receives a cash dividend from a company—outside an ISA—of £90. Under the current rules, which are familiar to most people, a notional tax credit of a ninth—£10—is added, which gives a notional gross dividend of £100. The situation is exactly the same for a higher rate taxpayer: £90 plus £10 equals £100. The basic rate taxpayer is taxed at 10 per cent., which means that there is a 10 per cent. deduction. The £10 tax credit is deducted from that, which effectively means that there is no tax liability. The cash dividend was £90, there was a notional tax credit of £10 and £10 of tax was deducted, so we return to a situation of no tax and £90 cash.

The situation is different for a higher rate taxpayer. After receiving a notional gross dividend of £100 made up of a cash dividend of £90 and a notional tax credit of £10, a higher rate taxpayer pays tax at a rate of 32.5 per cent. Therefore, he or she is liable to £32.50 of tax on the £100. The £10 tax credit is taken off that—although it is notional, it is removed—so the tax liability on a higher rate taxpayer is £22.50, meaning that the cash receipt is not the £90 received by a basic rate taxpayer, but £67.50.

Why is that important? In a basic rate taxpayer's equity or stocks and shares ISA, a cash dividend of £90 attracts a notional tax credit of £10, which adds up to £100. Of course, there would be a cash equivalent of £90. The situation is exactly the same as before: there is £90 real cash and lots of 10 per cents. flow all over the place for the purposes of the tax regime, meaning that basic rate taxpayers end up with £90 in their hands. A higher rate taxpayer also ends up with £90.

Let us consider what will happen after 2004 when the notional tax credit is removed from equity ISAs. The basic rate taxpayer would receive £90 cash but not receive the tax credit, and thus end up with £90 rather than £100, which was the case with the notional tax credit. The tax position would be reduced to £90, yet the cash outside an ISA would also be £90. What is the incentive for the basic rate taxpayer if the measure is removed? A higher rate taxpayer would end up with £90, nevertheless, versus £67.50. So there is a huge incentive for a higher rate taxpayer to remain in the scheme given

1 Jul 2003 : Column 212

that instead of receiving £67.50 outside an equity ISA, they will receive £90, whereas the removal of the £10 notional tax credit gives the basic rate taxpayer no incentive whatsoever. Unsurprisingly, the higher rate taxpayer will benefit. Why should the basic rate taxpayer, for whom the scheme has been an important part of their thinking and activity in terms of saving and the incentive to save, be penalised?

Mr. Djanogly: Surely the purpose of products such as ISAs is to get lower rate taxpayers into investments.

Mr. O'Brien: I am grateful to my hon. Friend for making that point and I have data to illustrate it. Sadly, I have become used to Ministers not wanting to hear the facts from us, but they should want to hear them from those whose evidence is less partisan. Every citizen of this country, not just the members of so-called middle England, have a right to think that the Government are trying to help them to save and to be responsible for themselves. Instead of that, however, we have a demeaning and individual-defying attempt to thrust everyone into dependency on the state by means-testing. The Government want people to be thankful for what they are doing rather than realising that they are getting in the way of their lives and freedoms.

When the Government unveiled ISAs in 1997, the then Paymaster General spoke of a tax system for savings that was

"to benefit the many, and not just the few".

The equity ISA tax credit does benefit the many, not the few, which is the point of the argument about seeking to retain the 10 per cent. The new clause is important because it would remove the scrapping of the tax credit, which gives a significant incentive for basic rate taxpayers to save and has proved extremely popular among that target group. ISAs are a well-known tax-free product which has become a familiar feature in the savings marketplace. Increasing the tax levels will increase confusion and may increase financial exclusion among the public.

I have referred to the helpful note issued by the two organisations. It says:

"The tax credit encourages investment in stock markets, which ultimately benefits the economy by providing additional capital to industry".

We should not lose sight of that fact. The benefits to the Government are that the

"tax credit encourages people to save money and build up a pool of savings to supplement their pensions."

We could have a wide debate on that, but you would be correct to haul me up for straying down that path, Mr. Deputy Speaker. However, the claim resonates loud and clear not only with my right hon. and hon. Friends, but with Labour Members, too, if only some of them were decent enough to listen to our proceedings. Surely Labour Members recognise that their constituents are hammering on their doors about the attack on pensions. Our constituents are deeply anxious about the lack of security for their futures. How on earth will they cope when they can no longer make up for all the Government's mistakes and the shortfalls in the market when their earning lifetimes are over? I know that all parties are worried about that. It is very important.

1 Jul 2003 : Column 213

The note also says:

"The ISA range is now well established in the public mind. ISAs have increased savings of people on lower incomes. The change proposed by the Chancellor will undermine investors' confidence in ISAs as a tax efficient form of savings and may reverse this savings trend . . . PEPs and ISAs have led the growth of retail funds over the past 10 years"—

I stress, led the growth—

"while investment in mutual funds outside PEPs and ISAs grew from £20.1 billion to £51.1 billion, PEP and ISA funds grew from £3.3 billion to £57.9 billion over the same period."

The Government have urged people to save and to make adequate provision for their retirement. They have tried to make savings products simpler. ISAs are a successful and simple savings product and should be at the centre of their strategy to encourage long-term savings. This is not the time to undermine them.

If the Government stick to their plans, equity ISAs will be disadvantaged compared with other ISAs. When we consider the importance of the composition of any portfolio and spread of risk, it is critical that the equity market is not disadvantaged in that way. We have already experienced the recent challenging and unnecessary pension tax grab by the Chancellor of £5 billion a year, which even on a notional basis amounts to £30 billion when one considers the compounding effect and the application of the stock market price earnings. The untold damage that the Chancellor has done to the stock market needs to be repaired by encouraging confidence in an equity ISA. That would bring people, not least those from the basic rate taxpayer target group, back into the market, which is critical if we are to take a responsible view of futures and pensions. If the proposal succeeds, people will be given an incentive to invest in cash and bonds, not shares, and that might not be the most appropriate investment for people's needs.

We also have to consider whether the Government have been consistent. In their response to the Sandler report—much trumpeted by the Government, although we cannot be sure whether they will get their stakeholder plans off the ground—the Government emphasised the importance of helping ordinary people to save more in the long term. Yet their plans would remove that savings incentive for ordinary basic rate taxpayers, precisely the people they want to target. ISAs and PEPs have been successful in achieving greater penetration of savings in every income group when compared with the penetration of PEPs and TESSAs. From the great founding of the PEPs and TESSA movement under the previous Government, which has been well regarded and understood, ISAs have made an even greater penetration, not least because of the 10 per cent. tax credit, which is critical.

The evidence for that comes from the Government's figures. We have only to refer to column 844W of the Official Report of 3 March 2003 for confirmation of the success of ISAs on building on TESSAs and PEPs in encouraging people in all income groups to save. For example, of those earning under £10,000 a year, one in five have chosen to save in an ISA. Recent research shows that if the tax-free status is withdrawn, the success in increasing the savings habit will be at risk of a dramatic reversal.

1 Jul 2003 : Column 214

Research has been commissioned by the two organisations I mentioned and others. It found the following:

"If the tax-free benefit is reduced or abolished on stocks and shares ISAs, only a third of existing customers would continue to invest in these products. A knock-on effect for the rest of the equity markets could also be expected, as only two-fifths of customers would expect to invest in these commodities. Six in 10 consumers expect to seek alternative, tax-free investments in ISAs, with high interest accounts, pensions and cash ISAs being the likely beneficiaries. Seven people in 10 are of the view that the proposal would be seen as another Government stealth tax."

That is the opinion of independent research on the proposal. The people involved in the research obviously have an interest in terms of the marketplace, but they are rightly worried because they have ensured that the market has been well served and popular. The Government want to strike away that achievement. Unless they reverse their decision, I shall divide the House on the new clause.

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