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Mr. Quentin Davies (Grantham and Stamford) (Con): This has been a very interesting debate so far, and I want to make three points and to ask a question. Sir Alan, you have allowed the debate to range over the philosophy of inheritance tax—very judiciously, if I may say so—because it is important for the public that we have the opportunity to discuss such matters in the Chamber and this is the obvious opportunity to do so.

Perhaps I can start by saying that my personal view of inheritance tax—a view for which I argued, with no success whatsoever, when I was shadow Paymaster General in the shadow Administration in the 1997 Parliament—is that we should reduce the rate of
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inheritance tax to 10 per cent. That would put out of business the whole industry of providing ways to avoid inheritance tax by structuring and persuading people to give away their property, they hope, more than seven years before they die and would stop people leaving the country to shelter their assets from inheritance tax. Instead, we would make this country something of a haven for people with assets to shelter from inheritance tax or estate duty, or whatever may exist in their own countries. There would be a major Laffer curve effect, and we would reduce the marginal rate from 40 to 10 per cent. We certainly would not reduce the revenue by anything like that amount; the revenue might even increase. That is my own view of how to deal with the problem, but I have so far failed to persuade my hon. Friends, let alone anyone else, that that is the way forward. Perhaps, one day, we shall make progress along those lines.

Helen Goodman: Can the hon. Gentleman explain how the Laffer curve could possibly affect the revenue from inheritance tax? One can understand how it could affect work incentives and the take from income tax, but how could it possibly affect the revenue from inheritance tax?

Mr. Davies: I do not think that the hon. Lady was listening because I tried to explain how that would happen. First, to avoid inheritance tax quite honourably, sensibly and rationally, a considerable number of people try to give their money away to their children more than seven years before they expect that they might be in danger of dying. Clearly, that is a loss to the Revenue. Clearly, there is an element of gambling about it, but I do not think that people would do that if the rate were only 10 per cent., because of the considerable disadvantages and considerable risks; not least that their children may marry the wrong person, so half the money would go to someone else. There are all sorts of risk of that kind, so people would not go in for those schemes as much as they do currently.

Secondly, people are sometimes influenced in their choice of country of residence by the inheritance tax regime. If we have a 40 per cent. regime in this country, people will not come here with large assets and those with substantial assets will tend to move away. I am explaining this at some length because the hon. Lady obviously did not follow the argument when I presented it in slightly more summarised form a few minutes ago, but it is a serious argument and I suggest that she think about it.

The Laffer curve effect means that one reduces the rate of a tax and, as a result, induces behavioural changes. As a result of that, the revenue from the tax rises. That is what I was arguing—I think reasonably—we could achieve through reducing the rate of inheritance tax. I make that point today because I have tried to make it before in private conversation and got nowhere. Perhaps someone who is listening will pick the idea up and it will eventually get somewhere.

My second point is for the hon. Member for Rhondda (Chris Bryant), who has unfortunately just left the Chamber. He used an extraordinarily bad argument and I am sorry that he is not present. I think that, if he thinks about it, he will confess that it was a bad argument. He said that very few people in his constituency—and, of
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course, a considerable minority in the country as a whole—have assets that approach the inheritance tax threshold or ever think of setting up a trust in the course of their lives. That is irrespective of the connection between the two things; there may be good arguments, which have nothing whatever to do with inheritance tax, for setting up trusts.

It is perfectly true that the great majority of our fellow citizens do not find themselves in danger of paying IHT or thinking about trusts. However, the hon. Gentleman then suggested that it did not matter if we were making a bad law, because it would affect only a minority of people. That is a bad principle for any legislature to operate on and I would be very sorry indeed if anybody in the British House of Commons thought, on reflection, that that was a sensible way for us to work in this legislature.

Any injustice or perversity is to be avoided and to be regretted if it happens. We must hope, in all our deliberations and decisions, to improve the rationality and fairness of the corpus of law in this country and not to detract from them. If there are problems with the Government's Bill and if it would increase unfairness and perversity, we should reject the proposals, and we should do that irrespective of the number of people who might be sufferers from that irrationality or unfairness. That is a general point of principle.

My third point is that the Government owe us some explanation of their agenda. We have not heard one so far in the debate. They clearly have an agenda—reflected in the Bill—to have a go at trusts. There was an interesting discussion between the Paymaster General and my hon. Friend the Member for South-West Hertfordshire (Mr. Gauke) about the extent to which the proposals in the Bill would remove the exemption from inheritance tax, which the right hon. Lady tells us the Government intend to maintain, in the case of inter-spouse transfers on death—that is to say, inheritance by one spouse from another—in the event that that transfer or inheritance takes places by means of a trust. I cannot see any rational reason at all for saying, "Well, we think that it is a good idea to have an exemption from inheritance tax for spouses, but not if the spouses, for whatever reason, have arranged their affairs so that transfer takes place on death by means of a trust or so that the assets pass into a trust on death." We need to know why the Government want to make such a change and if it is a change that they intend to make, as opposed to an effect that they did not anticipate when they drafted the Bill.

Irrespective of that point, which is a matter for debate between my hon. Friend the Member for Chipping Barnet and the Paymaster General, there are many other areas where the Bill indisputably, and without any apparent reason, attacks trusts in one way or another, or makes the result of people setting up a trust a damaging and perverse one, which it otherwise would not be. For example, the Bill would ensure that the beneficiaries of accumulation and maintenance trusts would have to come into full title of the assets, and could dispose of them without any restriction, when they were 18 years old. It is amazing to me that anybody in this Chamber, irrespective of their political party, thinks that it is a frightfully good idea to give a large amount of capital, in relation to that family's total assets, to a young person of 18 to dispose of quite freely. Is that sensible? The right
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hon. Lady may want to give her son such an amount at the age of 18, but I certainly would not want to do that to my children because it would be extremely dangerous. Why should the Government try to change the law so as to force that to happen?

4.45 pm

Equally, the Government are changing the law to ensure that the only beneficiaries of accumulation and maintenance trusts can be either those who are benefiting from a criminal injuries order, or the beneficiaries of trusts set out by parents. However, let us consider trusts set up by grandparents, people who wish to set up a trust for the benefit of their own children and the children of a dead sister or brother who have been left in difficulty, or, indeed, people with no children who wish to leave money in a trust for the benefit of the children of their dead brother or sister. Why should we penalise such trusts as against trusts set up by parents? What is the Government's agenda?

I am mystified by why the Government have suddenly got it into their head to have a run at trusts. Was it, as has been suggested, a purely emotional and symbolic thing? Did the Paymaster General suddenly think that trusts are nasty because they are associated with richer people? I am sure that that is not the explanation because I know her too well to think that she would suddenly have such a rush of blood to the head and thus decide to draw up such legislation.

Was a rational calculation made of the amount of money that could be squeezed out of the public by changing the rules on trusts? The hon. Member for Falmouth and Camborne (Julia Goldsworthy), who speaks for the Liberal party—she has also left the Chamber—disposed of that one. She said that on the Government's figures, the provisions will result in a net increase in revenue of £15 million. She gave us an estimate of the cost of rewriting trusts and of taxpayers rearranging their affairs that ran to hundreds of millions.

However, even if the hon. Lady's substantial estimate was a little excessive, on the figures that she gave to the Committee, one can easily envisage that a modest estimate of the costs would be tens of millions. On the test of proportionality to which, I think, the Paymaster General and her Government are committed, the provisions thus fail because the incremental revenue bears no relation to the cost to taxpayers, which is basically a cost to the economy. Although the change might be a good thing for the accountancy and legal professions, it will mean that people will incur large costs that are gratuitously imposed by a piece of legislation with a motive that none of us really understands.

Before we go any further, it would be extremely helpful if the Paymaster General gave the Committee an explanation. Perhaps I have, naively, missed an obvious point, but, if so, I am reassured that no hon. Member on either side of the Chamber appears to have grasped it. What was the objective behind targeting trusts? Why have trusts been scheduled for punishment in such a way? What is the rationale behind the approach? We must have rational government in a sophisticated democracy. If the Government bring forward new measures and want to change the law, the burden must
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be on them to demonstrate that the change is beneficial and sensible. They must show that they have thought the change through from the point of view of the country's economic interests, fairness and justice to individuals and the proportionality of cost, because they are the classic principles on which good law, including good tax law, must always be based.

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