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Julia Goldsworthy:
I am coming to that point. I was asking the Chief Secretary to consider whether the Government are prepared to look again at the seven-year limit. I wonder whether a time limit of 15 years would perhaps be more reasonable, taking into account how life expectancy has changed. Of course, I recognise that we must not get rid of lifetime gifts altogether and that, even with the seven-year time limit, there is a need to keep records. Increasing the limit to 15 years, however, might make the system a little bit fairer and would not
impose too great a bureaucratic burden; after all, people keep records for capital gains tax purposes and so on.
In conclusion, the point of the amendment was to raise two key questions. Does the Chief Secretary accept that the nature of inheritance tax is changing and that the decline in the number of very large estates paying inheritance tax and the increase at the lower end means that the tax is increasingly impacting on those who would consider themselves to be at middle-income level? Does he agree that unless there is a change either to the threshold or, perhaps, the lifetime gifts rule, as I have suggested, revenues will continue to rise? If house prices continue to rise, more and more people will be caught and the nature of inheritance tax will change fundamentally. Instead of a tax on significant wealth, inheritance tax is a tax that the significantly wealthy seem to be more than capable of avoiding paying, while those who are least able to afford it end up paying a much greater proportion of it.
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Mrs. Villiers: Like the hon. Member for Falmouth and Camborne (Julia Goldsworthy), the Opposition recognise the concern felt by many across the country about the increase in the number of people caught in the inheritance tax net since the Chancellor took up residence in No. 11 10 years ago. Under this Chancellor, inheritance tax is no longer confined to the wealthy and now impacts on those on middle incomes, too.
The hon. Member for Falmouth and Camborne has already told us some of the figures, and I shall add a few more. The Inland Revenue figures show that the revenue raised by inheritance tax has more than doubled under Labour, rising from £1.6 billion in 1997 to £3.6 billion last year. The Treasury expects the tax take to rise again this year to £4.1 billion. The proportion of estates liable to inheritance tax has tripled from 2 per cent. in 1997 to 6 per cent. on the most recent figures, and, as we have heard, the number of estates paying inheritance tax has more than doubled from 15,000 10 years ago to 35,000 this year.
Many people are anxious about the potential for a further increase in the number of estates affected by IHT with the growth in house prices. Halifax has carried out some extensive research on inheritance tax and has calculated that house prices have increased by 199 per cent. since 1995-96, which is far ahead of the increase in thresholds. It believes that the number of owner-occupied houses valued over the current £300,000 threshold is double what it was five years ago and now stands at 2.3 million or 12 per cent. of owner-occupied homes.
Particular concern is felt about inheritance tax in London and the south-east because of the high property prices. The average London property price went over the IHT threshold at the end of 2006. The Halifax research tells us that one in 10 postcodes have an average property price over the current £300,000 threshold, which is double the number five years ago. Scottish Widows has also published research about the increase in the number of home owners whom it believes now face the prospect of an IHT liability on the basis of their current net worth. A Grant Thornton study has projected an increase in the number of estates
paying inheritance tax to 45,000 or 50,000 by 2009, assuming that asset prices continue to grow at their long-term average rate.
As I said in Committee, the Conservative party is not making promises on changes to the inheritance tax rates, bands or thresholds. We are not making uncosted, up-front tax cut promises on IHT or any other tax, because we fear that the public finances will have deteriorated so much by the time of the next general election that the nation will not be able to afford tax cuts. I know that that will disappoint those who want radical changes to, or the abolition of, IHT, but I hope that they recognise that economic stability is even more important than tax cuts and that a Government led by my right hon. Friend the Member for Witney (Mr. Cameron) will not risk that stability.
Nevertheless, we are, of course, happy to examine the options for tax reform. In this area, as in any other, it is important that all parties seek to address the issues in a thoughtful and considered way. With that in mind, I have listened with care to the changes to inheritance tax proposed by the hon. Member for Falmouth and Camborne. Given the Liberal Democrats’ commitment to increasing thresholds for IHT, it is bizarre to table an amendment that would delete a clause that increases those thresholds, which is what amendment No. 38 would do. Then again, the Liberal Democrats are not always known for their consistency.
I also recognise, however, that there is some concern about the fact that the potentially exempt transfer system, which deals with lifetime gifts, gives the wealthy opportunities for reducing their IHT bill that are not open to many people on middle incomes whose major asset is the home in which they live. We are certainly open to considering reform of the PET rules, but we would approach that with caution. It is suggested that it would be possible to fund lifting the IHT threshold via an extension of the seven-year rule for potentially exempt transfers, but that would be risky.
It is not clear how the change would work in practice, as we do not have a Liberal Democrat amendment to consider. Even more importantly, it would be difficult to predict what, if any, additional revenue would be raised simply by extending the relevant period. It would be impossible to guarantee that enough extra revenue would be raised to fund a significant increase in the threshold. An extension would have an impact on behaviour that would not be easy to predict. In many cases, extending the PET period might well simply prompt people to shift back their lifetime gifts, and the result would not be a huge additional revenue accruing to the Exchequer.
I am also concerned about the practical constraints that we would have to address to ensure that such a reform worked. The further back the rules permitted the Revenue to go in looking at lifetime transfers, the more difficult it would be to prove that they occurred and to establish what happened. Moving to a 15-year period would make it difficult for HMRC to keep track of records sufficiently and to be able to enforce the change effectively. I understand that in the past the Treasury and HMRC have given some consideration to a change along the lines of that suggested by the hon. Member for Falmouth and Camborne, but have dropped
it on the grounds that it would give rise to several administrative difficulties and costs and yield uncertain returns. If reform of the PET rules were used to fund changes or increases in thresholds, it would have to be borne in mind that any additional revenue would not accrue to the Exchequer for at least seven years, so any changes to the threshold that were to be funded by that method would have to be postponed as well.
There is a broader point to make, and I value the opportunity that the Liberal Democrats have given us to consider these issues. It would be a mistake to tinker with just one aspect of how IHT works. If workable reform is to be seriously considered, we need to examine how the IHT rules work as a whole and consider all the options rather than just the PET regime in isolation. The Institute for Fiscal Studies is working on the Mirrlees report, which will include a study on IHT in its project to increase efficiency and fairness in the tax system.
In view of the importance of considering a range of issues to do with how IHT works, I mention one further matter that I drew to hon. Members’ attention in Committee, where it was dubbed “the sister problem”. It relates to long-term cohabitees. Some categories of people cannot use the exemption that exists for transfers between husbands and wives or civil partners. Examples might include people who have lived with and cared for an elderly parent for many years, people with learning disabilities who might similarly have lived with parents over a long period in the same home, or two siblings sharing a home. I drew the Committee’s attention to the case of my constituent, Ann James, who lives with her sister in a house that they have jointly owned for many years. She is very worried that the house will have to be sold should she die before her sister or vice versa. In assessing the options for IHT reform, the House should bear in mind the situation in which Miss James finds herself.
This debate has given the House a useful opportunity to examine and highlight the anxiety and resentment that many people feel about the expansion in the scope of inheritance tax during the Chancellor’s years at No. 11 Downing street. It has also given us a chance to explore important issues to do with the operation of the tax and the options for reform. The Opposition will continue to work for a wide-ranging reform of our tax system as a whole to make it fairer, simpler and more efficient, and will of course include in that process consideration of IHT.
Mr. Timms: I drew the Committee’s attention to the fact that inheritance duties on large estates have existed in one form or another since 1694, when a tax of five shillings on all estates over £20 was introduced. The principle of such a tax is therefore well established in the United Kingdom. It yielded £3.6 billion last year and makes an important contribution to funding public services. I underline the Government’s view that it is right and fair for such a contribution to come from the largest estates.
The nil rate band is set at £300,000 for the current year and, as my right hon. Friend the Chancellor announced last year, that figure will rise faster than forecast inflation in the coming years. Clause 4 provides for a further above-inflation increase in the band to £350,000 in 2010-11.
Like the hon. Member for Chipping Barnet (Mrs. Villiers), I was puzzled about the reason for the amendment, but the hon. Member for Falmouth and Camborne (Julia Goldsworthy) explained that it was tabled simply so that we could have a debate. However, if the Liberal Democrats have proposals on the matter—I note that the hon. Member for Twickenham (Dr. Cable) presented some ideas in a speech last week—the House should have an opportunity to discuss them.
It is worth outlining the twofold effect of the nil rate band allowance. First, it ensures that every individual can leave a substantial sum to whomever they choose— including, for example, a sister—entirely free of inheritance tax. Secondly, it ensures that the tax is progressive because, for estates above the nil rate band, the effective rate of tax increases with the size of the estate.
The number of estates that are liable for inheritance tax was mentioned. As has rightly been said, of approximately 600,000 estates a little under 6 per cent. attracted an inheritance tax liability in the past year. That means that the proportion of estates liable for inheritance tax is about 6 per cent. The remaining 94 per cent. paid no inheritance tax. That may come as a surprise to those who believe what they read in the newspapers, from which one gets the impression that the numbers are rather different.
The hon. Member for Chipping Barnet mentioned the proportion 10 years ago, but if one goes back 20 years, to the height of Thatcherism, one finds that the proportion was 5 per cent. The proportion has therefore gone up and down over the years. The consequence of the changes that we have set out for the next few years is that the proportion will stay roughly at the current figure of approximately 6 per cent. of estates.
In the last quarter of 2006, the mean house price in the UK was £199,000. The median price—the best measure of the “typical” property—was £175,000. The median prices for the south-east and London were £220,000 and £250,000 respectively. All those figures are within this year’s nil rate band. Of course, when a home is owned with a mortgage, that debt will reduce the size of the estate on death The vast majority of property ownership falls well within the inheritance tax nil rate band. It is important to underline those points when the newspapers often give the impression that a large proportion of estates is becoming liable for inheritance tax. That is not the case.
Julia Goldsworthy: I am grateful to the Chief Secretary for the way in which he is dealing with the issue. Surely the biggest problem is that the number of very large estates that pay inheritance tax is declining. There is concern about the lack of a level playing field as well as fear at a lower level that people’s estates will ultimately become liable for inheritance tax.
Mr. Timms: Again, if the hon. Lady has proposals that might address that, I would be happy to consider them. However, as she said earlier, we have introduced changes to deal with the matter and ensure that the wealthy pay their fair share of inheritance tax. We will not hesitate to take further steps if we consider them appropriate. I agree with the hon. Lady that fairness needs to be seen to be applied to these arrangements, as with every other part of the tax system.
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I want to underline a few more points that I think are appropriate, given the discussion that we have had. Not everyone is a home owner, and not every estate includes a house. In fact, housing makes up only 40 per cent. of the assets that are charged to inheritance tax, and it is important to acknowledge the other elements that make up the majority of such assets. Property values are a substantial contribution, however, and that is why we have had a period—and will have a further period—during which the nil rate threshold has been raised faster than the rate of inflation.
Following the suggestion made by the hon. Member for Twickenham last week, the hon. Lady has suggested that the seven-year period could be extended, perhaps to 15 years. I suggest that the present system strikes the right balance between ensuring that the tax is not open to abuse and minimising the administrative burden on taxpayers and the operational costs involved. Taxing gifts made 20 or 25 years before death would involve people retaining a record of their finances over a long period. We need to strike the right balance between the complexity and difficulty of such record keeping and ensuring that we block loopholes where they arise. Assets gifted many years before death could be difficult to trace.
I am grateful to the hon. Lady for explaining that she simply wanted to air this issue. I hope that the House will take the view that the balance we have set out in clause 4 and other announcements is the right one, and I am pleased that the hon. Lady has confirmed that she will not be pressing her amendment to a vote.
Julia Goldsworthy: I welcome the opportunity to discuss this issue, and we have had a constructive debate. The hon. Member for Chipping Barnet (Mrs. Villiers) was right to highlight the constraints on raising issues in the Finance Bill, in regard to which issues may be raised and whether we may discuss matters that might have an impact on revenue raising. I welcome the generally constructive tone of the debate.
The hon. Lady was also right to say that, if such changes were introduced to lifetime gifts, we would not see an immediate impact on revenue and it would be difficult to judge the impact of such measures on behaviour. I refer her back to the comments made by the Minister last year, however, when we were discussing the inheritance tax treatment of trusts. The debate revolved around the fact that problems were being caused by individuals who were seeking to get round the inheritance tax rules but who did not want to give up control of their assets. That is the key point that I want to raise in talking about extending the time limit for lifetime gifts. Such an extension would still allow people to make a lifetime gift, but it would raise the issue of their having to give up full control of the asset at the time.
I gave an example of a couple who lived with their parents, and the hon. Lady gave another example of people who might fall foul of the existing legislation. Part of the problem is that they possibly do not even realise that they have done so until it is too late to do anything about it. Similarly, I am sure that some people who are caring for elderly parents will be caught by the changes to pre-owned asset taxes. They might have had the house given to them, but a parent could then move
back in when they became too old. These problems are likely to raise their head at difficult times in people’s lives.
The Minister talked about the above-inflation increase in the threshold for inheritance tax, but I must point out that house price inflation is very different from retail prices index inflation. There have been hot spots in which there have been massive increases. The hon. Lady mentioned the south-east where there are historical pressures, but parts of the south-west have also had massive house price increases. Combined with the fact that incomes are low there will be significant difficulty, in particular in some of the coastal villages in my part of the world where individuals know that they do not have a hope in hell of affording a property in the place where they were born and bred.
There is widespread fear of inheritance tax, which may actually be greater among people who do not come within the tax’s threshold at present. However, they fear the tax because they see that the threshold is not keeping pace with house price inflation, which in most cases is their main asset. The issue needs to be addressed, but it has not been, even by the increases that have been made so far. The increase in the Bill is welcome, but it is unlikely to be sufficient. Unless something is done, more and more people will continue to be caught by inheritance tax.
I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Mr. Paul Goodman (Wycombe) (Con): I beg to move amendment No. 6, page 14, line 9, leave out sub-paragraph (a).
Mr. Deputy Speaker (Sir Alan Haselhurst): With this it will be convenient to discuss the following:
Amendment No. 7, page 14, line 35, at end insert—
‘(8) Regulations under section 58B shall expire one year after coming into force, but, subject to subsection (9) below, without prejudice to the making of further regulations under that section.
(9) Further regulations under section 58B may not be made unless they contain a provision specifying that they expire one year after coming into force.’.
Mr. Goodman: First, we welcome Government amendment No. 1, on the regulations referred to in the clause. The Economic Secretary wrote about them to my hon. Friend the shadow Chief Secretary and the hon. Gentleman will doubtless address them in a moment.
Our amendment No. 6 makes a relatively minor inquiry about a small part of the clause. It is not entirely clear why it is necessary to write it in the Bill that the regulations referred to in subsection 58C(2) may
“refer to a scheme or process”.
I understand why it is necessary to include provisions in the regulations for the establishment of a “process of certification”, in paragraph (b), and for the establishment of a process of “certifying energy efficiency” in paragraph (c). However, it is not clear why the fact that the regulations may refer to something needs to be on the face of the Bill, so we would be grateful for clarification on that point.
By proposing that the regulations lapse after a year, amendment No. 7 allows us to make further inquiries about the scheme that the clause proposes. It is clear that the scheme will provide for a number of zero-carbon—or more properly speaking, energy efficient—homes, which is why we welcomed it in Committee. What is not clear is whether it will provide the number that the Government claim it will provide eventually. After hearing the Economic Secretary’s reply to the debate in Committee, we were more doubtful about whether the scheme would provide that number than we had been before he stood up to speak. Anticipating his response that that reflects more on us than on him, I shall share with the House the causes of some of the difficulties encountered by the Committee.
I shall not linger long over the mystery of the current number of energy-efficient homes. At column 139 of the Committee report, the Economic Secretary said that there were
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