Examination of Witnesses (Questions 80-99)
INLAND REVENUE
15 DECEMBER 2004
Q80 Mr Curry: It comes from the big numbers
in fact.
Mr Gray: Yes.
Q81 Mr Curry: So in terms of efficiency
(we are all in the age of Gershon and James and all that) then
an increase in the threshold would be a productive return on capital?
Mr Gray: It depends what type
of case you are hypothesising and whether there was a reduction
in overall taxation of that amount. A counter factor would be
the alternative place where the tax would be greater.
Q82 Mr Curry: But the point I am making—and
it is not a hostile point to you—is here is a tax where
in a sense the poorer you are, within the brackets of poverty
described by this tax, the more likely you are to pay it and the
wealthier you are the less likely you are to pay it because all
sorts of schemes which are listed here—and I am grateful
to Sir John for the extremely helpful reference to those schemes—the
more likely you are to be able to devise the means to avoid the
tax and it is unusual, is it not, to find a tax which is in that
position?
Mr Gray: I do not think it is
an unusual tax. Most taxes have their distinctive characteristics.
This is a tax, which as the Report brings out, is effectively
borne by approximately 5% of people who die.
Q83 Mr Curry: But 5% of everybody who
dies and some will die below threshold? Or is it 5% of those who
die and leave estates above the threshold?
Mr Gray: No, 5% of those who die.
There are roughly 600,000 bereavements a year and we are talking
somewhere around the 20,000 or 30,000 mark.
Q84 Mr Curry: One of the eternal truths
of tax law appears to be that if you create a much simpler tax
structure and reduce the incentives to avoid, and even if you
reduce the level, your total tax take might go up. We have experiences,
do we not, of taxes where the yield has increased because people
have said it is not worth all the fuss of trying to avoid it,
it is a more reasonable tax?
Mr Gray: Designing any tax system
involves those rather subtle tradeoffs.
Q85 Mr Curry: There is a whole set of
documents and suggestions that have come forward to transform
Inheritance Tax to an annual tax on property and that sort of
thing, on the grounds that that would be more transparent and
easier to collect than what we have now.
Mr Gray: There certainly have
been quite a number of suggestions put forward. I do not think
I am the right person, if I might say so, to address those.
Mr Curry: I appreciate that.
Mr Williams: You do not have to answer
policy questions.
Mr Curry: It is not policy. I am anxious
that the Government should get the best value for money.
Mr Williams: I understand your motives;
I am just trying to protect them in case they feel obliged to
answer you.
Q86 Mr Curry: Undeclared gifts. Had I,
let's say, a Louis XV cabinet come into my possession, which would
be worth a bob or two, and I said to my daughter one weekend,
"Would you like to put that in the back of the van and take
it home?" you would not know a thing about that, would you,
because you are not going to check through my insurance to see
whether or not that is insured and whether she has put it on her
insurance or anything else, are you?
Mr Gray: It rather depends what
our compliance—
Q87 Mr Allan: —He will now!
Mr Gray: If you have given us
warning we may very well take advantage.
Mr Leigh-Pemberton: The short
answer is yes we would if the case suggested that it was sensible
to do that. If we see a case—and it is one of the recommendations
in the Report that we do this more systematically—where
there is a very valuable home and the contents we are told are
worth tuppence h'penny, the investigator in us asks some questions
and one of the documents we may well look at is insurance documentation,
recognising that insurance value is not the same as the market
value.
Q88 Mr Williams: May I take it that when
you leave here you will immediately open a Curry file?
Mr Gray: I could not possibly
comment!
Q89 Mr Curry: I have no present intention
of dying but I shall try to make sure that when I do it provides
as little interest to you as possible!
Mr Gray: In the very unhappy event
of your dying in less than seven years, Mr Curry, had you done
such a thing, it is possible, but it depends on our risk profiling
at that point when we are considering which cases to press for
compliance.
Q90 Mr Curry: The key issue is this graph
on Page 20 about the Inheritance Tax threshold and the trend upwards.
It is obviously sensible to try and die in a house price slump,
is it not?
Mr Gray: From this point of view,
yes.
Q91 Mr Curry: It is bad luck really for
everybody concerned if you hit the top of the housing market.
This graph ends in 2003 or a little before it so there might well
have been a peak when the average London house price exceeded
the tax threshold.
Mr Gray: We do not have the data.
Q92 Mr Curry: At least it is plausible?
Mr Gray: It is plausible. We all
know these indices move around and there has been a suggestion
they are moving in the other direction. Whether they have crossed
or not we do not really know.
Q93 Mr Curry: But it does mean that over
recent years a lot of the people have found themselves within
the threshold through having done absolutely nothing to try and
enhance their wealth, indeed they may well have problems because
they may find themselves asset rich and cash poor because of what
has been happening, but simply because property prices have risen
by higher than the threshold, so lots and lots of small people
in a sense are coming into the net, are they not?
Mr Gray: Well, in relation to
the London house price index, which is obviously the one you are
referring to, there has probably been some increase, yes.
Q94 Mr Curry: And that is probably true
of the South East, the East of England, the South West where there
is lots of pressure on housing. Even Hartlepool is a hot spot,
would you believe, or it used to be.
Mr Gray: Clearly when you get
significant changes in the prices of assets that most people have
then you are liable to have that arithmetic effect, but trends
move in opposite directions at different times.
Q95 Mr Curry: But the threshold does
not?
Mr Gray: That I think is another
policy question.
Mr Curry: Thank you very much.
Q96 Mr Williams: Can I follow up on that.
I have been scribbling earlier on along similar lines. If you
look at that graph you will see that if you take the national
house prices index, at 1988 the average price of a house was 120%
below the Inheritance Tax threshold, if you look at £50,000
to about £110,000. If you look at the London, it was only
50% below, £75,000 to £110,000. Now if you go to the
other end of the graph, as David did, and you look, the non-London
is closer but there is still a gap of 40% of house value before
it reaches the threshold. But, as David rightly said, if you look
then at the London graph, a year ago it was virtually equivalent
to the threshold and most certainly will have passed it in the
last 12 months, so that if you are having problems collecting
tax from 5% of the population, what is going to happen since the
South East will probably broadly reflect London prices, and that
contains 25% of the population of the United Kingdom, is that
you are suddenly going to see a massive mushrooming in the number
of cases that are going to have to be handled, are you not, and
the 5% is going to look like the "good old days" of
the past?
Mr Gray: I think, Mr Williams,
it depends crucially on the future relative movement of those
two indices.
Q97 Mr Williams: I am an accountant so
I would just take the view in the medium term. Since there is
a built-in shortage of housing in the country then there is only
one way house prices can go. I am not going to say in any one
year but the trend is going to inevitably and inexorably continue
to rise above the threshold, so that many, many more people are
going to be paying and going along the lines David wanted to do
(and I must be careful not to get drawn into policy ends meandering).
You talk of the tax's yields but they are becoming increasingly
anomalous. The mega-wealthy are being allowed exemptions and for
an apparently morally justifiable reason you cannot comment on
that, but the result of what is happening is because their houses
are going up in price and they would be dearer anyhow they will
have the escalation of the house values and their houses will
be caught, as will everyone else's, in the 40% tax, but their
other assets are continuing to increase tax free. The consequence
is that in ten years' time or 20 years' time the wealth gap in
this country is actually going to be very much larger but with
a relatively small number of people right at the peak of it, and
that seems to be the inexorable result of the arithmetic. You
have not had a chance to look at the arithmetic and I know you
cannot comment on the system. I just throw that in as a thought.
Can I ask you a completely different question. Offshore trusts
are referred to as a problem area for all of you. How are you
managing to deal with that?
Mr Gray: I think it was one of
the questions that Mr Jenkins wanted to put to me. We have had
a special scheme with a special investment to seek to address
all these schemes. We are conscious that this is a difficult area
where there was scope for us to improve our compliance—which
is why we have dedicated specific resources under the spend-to-save
scheme with the resulting figures that I gave to Mr Jenkins—that
we have generated over £11 million of additional compliance
revenue with another £7.5 million in train.
Mr Williams: Richard wanted to ask a
quick question and then I will give you several questions I would
have asked but for you to take them away and let us have written
answers on them. Richard?
Q98 Mr Allan: We have talked about Sharia
mortgages and properties in the Report. I could not find an answer.
Is there an answer? Have you got any definitive guidance on properties
which have Sharia law mortgages on them? I think it is referred
to in Box 18 on Page 29.
Mr Gray: Just a general answer
we are not finding this as an area of difficulty at this stage.
Q99 Mr Allan: It is not a problem?
Mr Gray: But it is obviously something
we are keeping an eye on.
Mr Leigh-Pemberton: We do get
some questions on it, not very many which we deal with through
the help line because there is not a standard arrangement so we
need to know what the precise details are and then we give guidance
over the telephone. That is the best way.
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