Clause
4
Rates
and rate bands for
2010-11
Question
proposed, That the clause stand part of the
Bill.
Mr.
Timms:
I hope that this clause will enjoy equal support in
the Committee. I remind it that inheritance duties on large estates
have existed in one form or another since 1694, when a tax of five
shillings was introduced on all estates over £20. Inheritance
inits current form is somewhat more recent,
datingfrom
1986.
During the past
financial year, inheritance tax yielded £3.6 billion, so it
makes an important contribution to funding public services, and it is
right and fair for such a contribution to come from the largest
estates.
The
fundamental structure of inheritance tax is straightforward. Each
individual estate and the assets of the deceased, less any liabilities,
are compared with the nil rate band in place at the time. If the estate
exceeds the nil rate band, the excess, and only the excess, attracts
inheritance tax at a rate of 40 per cent., which was set in March
1988.
The nil rate
band is set at £300,000 for the current financial year and, in
last year’s Budget, my right hon. Friend the Chancellor
announced that the figure will rise faster than forecast inflation in
the coming years to £312,000 in April 2008 and to
£325,000 in April 2009. The clause provides for a further,
above-inflation increase in the nil rate band to £350,000 for
2010-11.
The effect of
the nil rate band allowance is twofold. First, it ensures that every
individual can leave a substantial sum of money or assets to whomever
they choose entirely free of inheritance tax. Secondly, it ensures that
the tax is progressive. For estates above the nil rate band, the
effective rate of tax increases according to the size of the estate, so
in the current year a taxable estate worth £400,000 would pay
£40,000 in inheritance tax, which is an effective tax rate of
just10 per cent. In contrast, an estate worth £1
million would pay £280,000, which is an effective rate of 28 per
cent. I hope the Committee accepts that it is right for those estates
that are in a position to do so to make a greater proportionate
contribution.
There
has been widespread discussion about how many estates will be liable to
pay inheritance tax, and I am afraid that some of that discussion has
been misleading. In the past year, 35,000 of the 600,000 estates
attracted an inheritance tax liability. The proportion of estates
liable for inheritance tax is just6 per cent. The remaining 94
per cent. pay no inheritance tax
whatever.
Adam
Afriyie:
The Chief Secretary says that just 35,000 estates
or 6 per cent. will be caught by inheritance tax today, but has he
rolled that figure forward? What proportion of estates and how many
households and families does he predict will be caught in
2010-11?
Mr.
Timms:
The answer is 6 per cent. I expect the proportion
in the year the hon. Gentleman refers to and that is covered by the
clause to be precisely the
same as now—6 per cent. That is very different from the
impression that one might get from reading some
newspapers.
Julia
Goldsworthy:
My question is along similar lines. What is
the average size of an estate that ends up paying inheritance tax? The
concern is that the largest estates find ways around paying inheritance
tax and that smaller estates, which are just over the threshold, are
caught because of poor tax
planning.
Mr.
Timms:
I do not have the figure in front of me, but I hope
I can give the hon. Lady some reassurance, particularly about the link
between rising house prices and the payment of inheritance tax, which
is where much of the discussion tends to focus. During the last quarter
of 2006, the mean house price in the UK was £199,000. The median
price, which I guess one might regard as the price of the typical
property, was £175,000. In the south-east and London, the
corresponding prices were £250,000 and £292,000
respectively. All those figures are within this year’s nil rate
band.
One often reads
comment in the press that misunderstands the position that we are in.
When a home is owned with a mortgage, the mortgage debt will reduce the
size of the estate as well. The truth is that the vast majority of
property ownership falls well within the inheritance tax nil rate band.
By fixing the band for 2010-11 at £350,000, we are continuing to
provide certainty for families about the allowance in future years. I
should like to underline my view that inheritance tax is fair,
progressive and well targeted. I commend the clause to the
Committee.
Mrs.
Villiers:
This feels rather like “Groundhog
Day”, because I am starting the Finance Bill 2007 as I ended the
2006 Bill—by talking about inheritance tax. However, everyone in
the room will be delighted to hear that I am not going to speak for
nearly as long this time round. [ Hon. Members:
“Shame.”] I think it was for a week last
time.
The Opposition
are obviously broadly supportive of the proposal to increase the
threshold for inheritance tax. However, given the controversy
surrounding inheritance tax, its rates and its thresholds, I should
like to address the rates and bands in the clause. However, in case my
remarks instantly prompt lots of interventions, I should make it clear
before I start that I am not in a position today to put forward
proposals to increase the threshold further or to amend the rate. I
know that many would like me to, but I am unable to do so. That is
partly because it would be foolish for my hon. Friend the Member for
Tatton (Mr. Osborne) to write his 2009 Budget now, but it is
also because the Opposition fear that when we win a general election in
2009 or 2010, the public finances will be in a pretty poor state. That
means that we feel that the nation may well not be able to afford tax
cuts in 2009. We believe that economic stability is more important tax
cuts. Because we adopt that fiscally responsible approach, our priority
on first being elected to Government is likely to be repairing the
public finances. That is why we are not making up-front promises of tax
cuts.
Mr.
David:
I will be generous. I can perhaps understand why
the hon. Lady will not put forward specific amendments, but could she
help us by at least giving some verbal indication of what she would
liketo
see?
Mrs.
Villiers:
I have answered the question already. I have
said that we are not making up-front promises of tax
cuts.
Ed
Balls:
For the benefit of the Committee, will the hon.
Lady clarify what proposal the tax commission set up by the Leader of
the Opposition and led by Michael Forsyth made on inheritance
tax?
Mrs.
Villiers:
That commission put forward a range of
interesting ideas on inheritance tax and other taxes. It proposed a
significant reform of inheritance tax, which involved replacing it with
a modified form of capital gains tax. That is one reform that I would
hope hon. Members on both sides of the House would consider. That
proposal is not the policy of the Conservative party; it is simply a
proposal that we will consider, among the other ideas set forth in the
Forsyth commission report.
We are always open to ideas to
reform the tax system, whether they concern inheritance tax or any
other sort of tax. Although we are not proposing tax cuts, it
nevertheless remains important for both sides of the Committee, in
assessing the merits of the rates and bands that the clause sets out,
to reflect on the concerns that many of our constituents have about
inheritance tax.
We
should consider four points: first, the fact that, like previous
clauses, clause 4 proposes to legislatefor the future;
secondly, the controversy surrounding house prices and inheritance tax
thresholds, to which the Chief Secretary has adverted; thirdly,
concerns about the general operation of inheritance tax and how the
thresholds can affect some vulnerable groups; and lastly, the
interaction between IHT thresholds and the pre-owned assets tax
regime.
I can deal
briefly with the first point by asking the Chief Secretary a question.
Why does the Chancellor wish to legislate for the future in this area?
As we have heard, the clause focuses on the financial year 2010-11. I
am struck that he is legislating that far ahead, and I should be
interested if the Chief Secretary can provide precedents. It seems odd,
as the Chancellor prepares to move from No.11 to No.10, that he should
be so keen to tie the hands of his successor. I should be interested to
hear the rationale and whether it makes sense to set thresholds this
far in
advance.
5.45
pm
My second point
is more substantial and concerns the impact of rising house prices on
the thresholds that we are considering. Increasing concerns have been
raised about the expanding impact and reach of inheritance tax. I have
received many representations on the subject. Inheritance tax is no
longer a taxonly on the rich. For example, in May 2002, the
distinguished accountant John Whiting wrote in the Financial Times
that inheritance tax
is
“increasingly a tax
that affects Middle Britain.”
IHT has expanded in recent years to cover
people on modest incomes, which is due in no small part to the fact
that the threshold has not kept pace with house price inflation. The
value of many family homes is edging over the current £300,000
threshold.
In March,
the Halifax published figures on the interaction between house prices
and those thresholds. Since 1995-96, house prices throughout the UK
have increased by 199 per cent., which is more than double the increase
in the inheritance tax threshold. The Halifax estimates that the number
of properties valued above the IHT thresholds has nearly doubled in
five years; it believes that the number of owner-occupied properties in
the UK that are valued at more than the 2007-08 threshold of
£300,000 stands at 2.3 million, or 12 per cent. of all
owner-occupied properties. In 2001, only 1.3 million properties, or 7
per cent. of owner-occupied properties, were valued at more than the
then IHT threshold of £242,000. The Halifax went on to project
that the number of properties valued at more than the IHT threshold
throughout the UK could rise by a further 88 per cent., or 2 million,
to 4.3 million properties by
2020.
Adam
Afriyie:
Does my hon. Friend share my concern that
inheritance tax is a burden for middle England and the middle classes?
Those who are very wealthy can always come up with schemes and ways to
get around paying it.
Mrs.
Villiers:
I certainly think that the impact on those with
middle incomes can be tougher than it is on those with high
incomes.
The Chief
Secretary has given us the figures for estates that are currently
caught by inheritance tax, but the real anxiety is over the projections
of how many people will be drawn into the inheritance tax net in the
future. On the basis of the Halifax figures, the number of postcode
districts in England and Wales with an average house price above the
IHT threshold would more than double from 236 in 2006 to 480 in 2020,
which would account for 23 per cent. of all postcode districts. That
would be mitigated by the changes, which the figures predate, but the
problem will continue to occur. The Halifax figures for February 2007
show that the average house price in greater London had increased to
£287,000 by the end of 2006, taking it above the £285,000
threshold then in operation. Although the national average house price
is still below the threshold, average house prices in London and the
south-east are edging above the rates that are in
effect.
Ian
Lucas (Wrexham) (Lab): The Chief Secretary has already
indicated that the proportion of estates on which the tax is paid will
remain static at 6 per cent. Does the hon. Lady have any evidence to
suggest that that proportion will
increase?
Mrs.
Villiers:
Grant Thornton produced a good report on the
subject, which estimated that if asset prices continue to grow at their
long-term average rate between now and 2009, the number of tax-paying
estates could rise to 45,000 or 50,000. Again, that figure will be
slightly mitigated by the increases that we
might see in the future, but Grant Thornton is talking about 2009
figures. There is some evidence that the reach of inheritance tax will
expand over the next few years.
Looking at the mitigating
effect of the threshold that we are examining today—the
£350,000 threshold—the delay in its implementation will
mean, of course, that it will not necessarily address my concerns. That
is because one can expect house prices to keep increasing; there is at
least a significant chance that they will keep increasing and a
significant chance of an increase in the number of estates that have to
pay tax.
The
expanding scope of inheritance tax is illustrated by the amount that it
raises. The Halifax research examined cumulative inheritance tax
revenue over the five years to 2007-08 and calculated it as
£16.4 billion, up more than 50 per cent. from the £10.8
billion raised by the Government in the previous five years. As we have
heard, revenue raised in 2006-07 was £3.6 billion and that was
up 12 per cent. on 2005. The Government project a significant increase
in annual IHT revenues, which are expected to top £4 billion in
2007-08. There are serious issues to be addressed regarding the
interaction between house prices and the
thresholds.
The third
set of issues to which I would like todraw the
Committee’s attention concern the general operation of
inheritance tax and the threshold that the clause amends, and the
impact on certain vulnerable groups. The impact of the current
threshold would have been significantly more controversial were it not
for the spouse exemption for inheritance tax. As we all know from last
year, that exemption enables husbands and wives to pass property
between one another free of inheritance tax. In assessing the
appropriate thresholds and rates, the Committee should take into
account the scope of that exemption, since it has a significant impact
on how the overall tax operates and upon whom the burden
falls.
Were it not
for the spouse exemption, many more people would have had to sell the
family home to pay their tax bill. That is why the Government’s
proposals to limit the spouse exemption in the Finance Bill 2006 were
so controversial and why their turnaround on that issue was so widely
welcomed. Another significant change is the Civil Partnerships Act
2004, which expands spouse exemption to gay couples entering a civil
partnership.
There is
another matter that all parts of the House should consider, in a
completely bipartisan way, in respect of inheritance tax and how it
should be reformed: the question of long-term dependent cohabitees who
do not have the option of using the spouse exemption via marriage or a
civil partnership. They might be long-term carers of elderly parents,
adult disabled children living with their parents or, as illustrated by
a case in my constituency, sisters who have lived with one another for
many years. My constituent, Ann James, wrote to me on several occasions
to set out her grave concerns about the impact of inheritance tax on
her and her sister. She expects to have to sell her home if her sister
dies before she does, and vice versa.
Those who cannot use a spouse
exemption can often be harshly treated by this legislation,
particularly in a constituency such as mine, where house prices are
high. As well as the position of dependent cohabitees, the
Committee should also briefly consider—I promise that I will
raise this matter briefly, Mr. Gale—the after-effects
of last year’s changes to inheritance tax and trusts, and their
impact on another vulnerable group: the disabled. We had a lengthy and
controversial debate on that issue, and I will not repeat the
arguments, but it is worth noting that those affectedby the
changes that were introduced still have real difficulty working out how
the system operates and affects the disabled. It is an incredibly complex
system and I turn to the effects of the thresholds that we are
considering in the clause. As I am sure you are aware, Mr.
Gale, trusts for disabled people often exceed the £300,000
threshold that is currently in place and the £350,000 threshold
that we are considering putting in place for 2010. That is because sums
of money devoted to caring for disabled people often have to cover a
lifetime of care. Trusts are frequently used in such a situation,
particularly where personal injury damages are received as a result of
litigation. However, settlements resulting from damages or compensation
payments could easily exceed £350,000. Under the current
schedule 20 regime, such trusts are frequently affected by inheritance
tax. Before last year, that was never a problem because people used
life interest trusts, but that option has broadly been shut down by the
Finance Act 2006. I have received representations about the framework
that resulted from the 2006 Act as it is a complex system with
considerable confusion about trusts for disabled
people.
Rob
Marris:
I am listening carefully to what the hon. Lady
says, but, as a former personal injury lawyer, I cannot quite
understand her point about damages for those who have a major
disability as a result of an accident. Those damages are sometimes
transferred into trusts to provide compensation for an individual
during the course of their life, not for their heirs and successors.
Without going into too much depth, perhaps she could explain how that
type of trust for someone with a disability comes into
play?
Mrs.
Villiers:
The problem occurs when the trustis set
up because, as a result of schedule 20, an inheritance tax charge will
automatically be incurred unless the person for whom it is set up is
covered bythe limited disabled exemption. As we discussed, the
exemption for disabled people is quite narrow and depends on
someone’s entitlement to disability living allowance. Therefore,
a significant range of people who have important disabilities do not
fall within the definition. That is one of the key issues. The other
issue relates to the complex interaction between income tax, capital
gains tax and IHT rules. Essentially, the problem is that it is
difficult for a disabled person to get the allowances to which they are
entitled under all three taxes. There are occasions when the two taxes
are doubling up and a CGT charge and an IHT liability is incurred in
the same situation, which makes the system tougher than it was before
the Finance Act 2006. That probably was not intended to be a result of
the 2006 Act and, on the record, I ask the Chief Secretary to look at
that issue. I believe that the 2006 Act was not meant to have such an
effect and I am sure that the Government did not mean to penalise
disabled people
for using trusts. People are concerned about that problem and there is a
strong case for reform and a simplification of the rules. I hope that
the Chief Secretary can say today whether it is a matter of interest to
him and whether the Government are prepared to consider the issue with
a view to introducing reform of the legislation next
year.
I have
trespassed on the Committee’s patience for too long already, so
I lastly mention that the Government’s ferociously complicated
pre-owned assets tax regime interacts with inheritance tax. The regime
was created to prevent people from avoiding inheritance tax and I will
not anticipate the discussion that we will have about clause 25, but it
is unfortunate that the Government have failed to resolve the problems
with section 80 of the 2006 Act. They have also failed to deal with the
problem of elections between inheritance tax and the harsh pre-owned
assets tax regime.
In
conclusion, as we have heard, inheritance tax continues to be a matter
of deep controversy for a range of different political commentators and
hon. Members. I hope that the Minister will consider some of the points
that I have raised, particularly the expanding reach of inheritance tax
on middle Britain and whether we need to reform the system to deal with
the position of dependent cohabitees. In relation to schedule 20, we
must ensure that the system doesnot operate to the
disadvantage of disabled people, many of whom find trusts useful and,
as a result of schedule 20, may have an increased inheritance tax
bill.
6
pm
Rob
Marris:
It is a pleasure to serve under you again,
Mr. Gale.
I have to say to the hon.
Member for Chipping Barnet that, if that was an abridged version of her
speech, it was rather like reading a version of “War and
Peace” in which the only abridgement has been to get rid of all
the excess names and titles. On inheritance tax, I understand why the
Conservatives will not put forward any figures at the moment. Their
only slim chance of getting into office in 2009-10 will be if public
finances are poor. In those circumstances, were the electorate
misguidedly to put them into office, they would be able to do nothing
about inheritance tax, so she is at least being honest.
It always interests and saddens
me that the Conservative position on inheritance tax is basically a
defence of the rich and scaremongering. For almost everybody who pays
inheritance tax and who is not very rich, it is a tax based on a
windfall gain due to the increase in the value of property. In most
cases, that occurs not because of any action taken by the individual
but because the market has risen. Secondly, it is paid only on death,
so in almost every case except that of the super-rich, it is a tax on a
windfall gain that is paid on death, which seems to me a reasonable
tax.
Adam
Afriyie:
Does the hon. Gentleman really not recognise that
many people work incredibly hard for their entire lives to support
their families and secure them in a home? They are not deeply wealthy
people but people such as the owners of owner-managed businesses all
over the country, who keep those
business going for their families. We are talking not about extremely
wealthy people but about middle England, average income, average
people.
Rob
Marris:
No, I do not accept that. I do not accept that
they are middle income people. We are not talking about income.
Inheritance tax is a capital tax. The idea of middle income is rubbish.
People on an average income, unless they are incredibly hard savers,
will never get to the threshold unless they buy a house and it goes up
a lot in value. The hon. Gentleman, who is a very successful business
person, may not realise it, but for those of us who have been on decent
incomes for most of our working lives, the concept of being able to
save anything like £350,000, apart from through a house, just
out of a bit of income is completely alien. With “middle
incomes”, to use the phrase used by the Opposition, in most
cases, it comes about because people have a windfall gain in the
increase in the value of their private home. That is why the Opposition
keep banging on about house prices.
Mr.
Newmark:
I am curious. Does the hon. Gentleman want a more
European society in which individuals do not save? Does he wish to have
a society in which people are encouraged not to save but to spend all
the money that they earn, and not invest at all in the future for the
sake of their families? Is that the sort of society that he wants, or
would he prefer a society in which people, having put money aside, see
some benefit accruing to their
families?
Rob
Marris:
First, I was born and raised in this country and
have lived all but nine years of my life here. I have always been a
European and I shall remain a European. Secondly, in terms of
people’s savings, I do not accept the intellectual constraint of
the hon. Gentleman’s argument. People work hard in this country,
and people save money. People buy houses. For a lot of people,
including me, the value of those houses—in my case over 23
years—has gone up about tenfold. That is not because of anything
that they have done but because the market has gone up. I have no
objection to people paying inheritance tax on that windfall gain. Most
of the people whom we have discussed have benefited from the general
rise in house prices, not from their thrift in building up a business.
Those who have built up a business above the threshold or saved money
have done very well. Good luck to them. I do not think that they should
object to an inheritance tax that has to be paid on death.
The Grant Thornton figures that
were cited by the hon. Member for Chipping Barnet—35,000 to
40,000 or even 50,000—represent, in round terms, an increase
from 6 per cent. to 8 per cent. of estates. Given that fewer than 10
per cent. of people in the United Kingdom pay higher-rate income tax,
we are talking about the well-to-do, including every hon. Member and
right hon. Member here, because we quite properly pay higher rate
taxes, even though by some standards we do not earn a fortune. I am
very well paid for being a Member of Parliament, and I have no other
source of income. I am happy to pay tax at the higher rate. I do not
regard myself as wealthy, and I should be quite
happy to pay the inheritance tax were my estate valued above that
threshold. As far as I know, our estate—that of my wife and
I—will not be valued above that threshold. We do not live in
London. Some people in London who have very high house prices because
of rising house prices will pay inheritance tax. The hon. Member for Chipping
Barnet has a point, however, about—in shorthand—the
sister situation. The Government will have to consider that. In that
situation, there should not be an exemption from inheritance tax in the
same way that there is for transfers between spouses upon death, but
the Government should consider a deferral of inheritance tax. I stand
to be corrected, but when one sister dies, having lived with the other
in the same house for 40 or 50 years because neither of them married or
entered a civil partnership, the inheritance tax that is payable on
their death should be deferred, so that the second sister can carry on
living in what is essentially the family home.
Having said that, I have a
couple of minor technical queries for the Chief Secretary. First, the
wording of subsection (3) is, to say the least, opaque. For a lay
person like me, it does not appear to bear much relation to explanatory
note No. 4 on clause 4, so I urge the Chief Secretary to look at it
again.
Secondly, it
will not surprise Members to know that I strongly
object to the wording of subsection (4), starting as it does with
“But”. In that context, the word is completely redundant.
However, the wording is also opaque to the lay person, and it does not
appear to bear any relation whatever to explanatory note No.
5.
In addition,
“that section” in subsection (4) may refer to
“section 8 of IHTA
1984”,
which subsection (3)
mentions. However, grammatically, the sudden appearance of “that
section” means that it does not necessarily refer to any
particular section. The parliamentary draftspeople need to have another
look at it. There is opaque wording in subsections (3) and (4), there
is the anathema of “But” at the beginning of subsection
(4), and “that section” in subsection (4) does not appear
to relate to any specified section therein.
Julia
Goldsworthy:
The clause sets out the rate of inheritance
tax at £350,000 for 2010-11. The Chief Secretary echoed the
words that were used when the provision was set out in the Budget,
saying that the threshold change would be introduced to continue to
provide a fair and targeted tax system. I do not think that anyone
would go against that intent, and to give credit to the Government, the
change raises the inheritance tax threshold in real terms for six
successive years.
There is an issue about the
fact that the Bill sets the rate for 2010-11. We have already had a
debate about the corporation tax and income tax changes that will kick
in next year. The provision under discussiongoes one step
further, showing perhaps that the chancellorship will move to No. 10
along with the current Chancellor. Owing to the announcement of other
significant tax changes and the headlines that they grabbed, the change
before us perhaps slipped by the wayside.
How will the
real terms growth involved in lifting the threshold fit with the
current and projected growth in house prices? I should also be
interested to know the average size of the estates that pay inheritance
tax. If we are serious about providing a fair and targeted tax system,
our chief concern should be about what happens to very wealthy estates.
We have been discussing people who largely fear inheritance tax. They
live in their property, and it is more difficult for them to dispose of
their asset than it is for people who are incredibly wealthy and have
all kinds of assets that are easier to dispose of in the lifetime gift
system. If the tax system is to be fair and targeted, we must recognise
that there is an inconsistency between the treatment of lifetime gifts
and the inheritance tax system. The concern is that it is easier for
people with higher value assets to dispose of them in a way that avoids
inheritance tax than others—I do not mean those on an average
income. As we have heard, a significant number of people are involved,
but when we talk about averages, a large number of people fall below
the average. The concern is that the people at the level above the
average will find it easy to dispose of their assets; they have seven
years to do so and do not live in their assets in the way in which the
people who are concerned about inheritance tax do. Not dealing with
that inconsistency means that the system is not targeted or
fair.
My constituents
have brought the issue to my attention. I live in a part of the country
where average incomes are probably 20 per cent. below the national
average, but some houses have seen price rises among the highest in the
country. Fishermen, who live in family cottages and have a family
business have children who will not be able to stay in their property.
Fishermen live in the area to do their job, but because properties are
bought as second homes and house prices are going through the roof,
there is no way that someone doing that job can continue to live in
that property.
Another issue that is regularly
brought up in my surgery concerns people who fall into the inheritance
tax boundaries because they have not had proper advice. The wealthier
someone is, the easier it is for them to employ an accountant or lawyer
for advice on how best to make use of the allowances and the spouse
exemption and on how to maximise the use of the thresholds. People come
to me who failed to do that through their own error, but then saw
themselves and their families caught by inheritance tax. What can the
Treasury do to ensure that such people understand and can make the best
use of the system?
What comparisons has the
Treasury made between the projected rises and the increase in house
prices? For many people, inheritance tax is a stealth tax. As the hon.
Member for Wolverhampton, South-West said, people live in their asset,
and so they might not know the value of the property until they have to
realise the estate. There is a lack of understanding and a fear that
thresholds will not keep pace with house price inflation, which will
mean that people will unwittingly be caught by the system. People do
not understand what they need to do to make the most of their
allowances, as they are entitled to do.
My key concerns are about the
lack of understanding and about whether the tax is consistent with the
Government’s taxation of wealth. The poorest
20 per cent. pay a higher proportion of their income in tax than the
richest 20 per cent. What can the Government do to inheritance tax to
ensure that they capture the growing wealth, especially among the
richest 1 per cent.? If the idea is to make the system fairer and more
targeted, the Government need to go far beyond the clause.
Fundamentally, the treatment needs to be consistent not only for
properties but for other assets. The Government must also be consistent
in how they deal with lifetime gifts, which are the easiest way for
people who can easily dispose of their assets to get out of paying
inheritance tax. The situation is difficult for those with a property,
and people are getting confused. They are unwittingly getting caught,
and that is where the chief concerns lie.
Adam
Afriyie:
They say that there are two certainties in life:
death and taxes. The Government—I am not sure that they should
be commended, because it is rather alarming—have managed to
combine the two for about 50,000 people. In 1987, about 18,000 were
caught by the inheritance tax threshold, and by 2009-10 up to 50,000
people could well be caught.We were having a little debate
earlier with thehon. Member for Wolverhampton, South-West, who
observed that the people caught in the inheritance tax trap are
relatively wealthy. I argued that they are not necessarily wealthy but
can easily be people with a middle income who have been doing the right
thing for most of their lives.
6.15
pm
The reports
that we have been talking about and the projections for estates caught
in the inheritance tax trap extend only to about 2010 or perhaps 2011.
If those forecasts are rolled forward 20 or 30 years, far more people
will be caught in the trap. It is self-evident that most people with
mortgages in this country have repayment mortgages, or the value of the
mortgage compared with the property falls gradually over a long period.
That will of course have an impact on their estates at the unexpected
time when they pass
away.
The other thing to remember is
that inheritance tax is not just about house prices. Many people on
average salaries amass enough during their lifetime to cross the
current threshold, perhaps not by 2010, but certainly by 2015 or 2020
as they gradually pick away at their mortgages and, hopefully, save for
their pensions funds. All sorts of assets are built up over a longer
period. I have concerns about the very long term and the number of
people who will be
caught.
I am also
concerned about people who are self-employed and owner-managers of
small family businesses. They may make a small profit each
year—perhaps £50,000 or £100,000—and when
those businesses are sold on death, their value may be in the region of
between five and 15 times net annual income. People who have worked
hard all their lives, perhaps with family members, and built up an
asset in a business are caught within the inheritance tax threshold. It
is not just house prices that affect the number of people caught in the
trap.
A wider debate
that is of interest concerns what sort of tax we want to raise in the
United Kingdom. There is a strong argument for income tax to be lower
during our lifetime while we are working hard and generating
prosperity for the nation. There is also an argument
that inheritance tax should be higher. We should not dismiss
immediately any concept that what we have today should be fixed in
stone. The matter needs consideration, so I am not blinkered about
inheritance tax and am not saying that it is inherently a dreadful and
bad tax, but it is certainly double taxation. In 1997, we did not
expect to see what has happened by 2007, but we should not be too rigid
in our view of exactly what sort of taxation is right or wrong in the
economy. It seems odd
and bizarre that we talk about corporation tax on small businesses only
one year ahead—although we have been talking about two or three
years ahead—and all of a sudden we are told out that in 2010 the
inheritance tax threshold will be £350,000, marginally above the
rate of indexation if it were indexed. Why have the Chancellor and the
Treasury chosen to do that now when in so many other areas they have
covered their hand to hide or obscure what the tax regime may be in a
few years’
time?
We are talking
about inheritance tax rates in 2010. What sort of behaviour is that
supposed to encourage? Is it to encourage us all to live longer than
2010, or to die sooner than 2010? What is the objective of making the
announcement today rather than indexing the allowances? Why choose to
announce today what will happen in 2010? What is the rationale behind
that?
Finally, I have
a general question for the Chief Secretary. What is the
announcement’s objective? Is it to stop people growing the value
of their estate by spending money during their lifetime? Is it to stop
hard-working families with owner-managed businesses passing them on, or
selling the business early and spending the money? Or is it a
straightforward tax-raising mechanism, albeit indexed marginally higher
than the rate of inflation today? I should appreciate clear answers to
my questions.
Mr.
Newmark:
There is a perception that inheritance tax is an
archaic, deeply regressive, immoral tax, not least because it amounts
to a double taxation. I am not here to incur the wrath of my
Front-Bench team, and it is beyond my remit as a mere Back Bencher to
suggest tax changes, but it is my role as a member of the Opposition to
probe and to question.
I did not need to read the
explanatory notes because the clause heading states, in bold print,
“Rates and rate bands”. I expected them to be for
2007-08, but, blow me, the heading continues, “for
2010-11”. Why do the general public, who have concerns about the
motives behind inheritance tax, have to wait for 2010-11 for the band
to be raised to
£350,000?
The
Chief Secretary did a good job of answering the question on corporation
tax, which I appreciated. The hon. Member for Falmouth and Camborne and
my hon. Friend the Member for Windsor asked why we had to wait for
2010-11, and I may have an explanation for them: inheritance tax is
another example of the Government’s commitment to taxation
promoting behaviour change by encouraging people to live long enough
for them to leave office. But who knows? The year 2010 is a long way
off and there is much damage that the Government can continue to do
with the tax
system.
The Chief
Secretary said that roughly 6 per cent. would pay inheritance tax, yet
my hon. Friend made the point that in 1997, roughly 18,000 people paid
inheritance tax. I do not have the projected figures, but in 2005,
37,000 paid inheritance tax, more than double the 18,000
figure. I also have
figures from research carried out by the analysts Lombard Street
Associates, who indicated that the number of people whose wealth stands
above the inheritance tax threshold is set to rise from 2.1 million in
2002 to approximately 4.5 million in 2009. How does that square with
the 6 per cent.
figure?
It is not for
me to make suggestions on tax cuts, or on where savings can be made,
but I shall slightly provoke my hon. Friend the shadow Chief Secretary
and make the minor suggestion that money wastedon the tax
credit overpayments alone amount to£1.8 billion, which
is only 50 per cent. of the£3.6 billion estimated to be
collected in inheritance tax receipts. Perhaps the Government could
consider some flexibility in that small
area.
Julia
Goldsworthy:
I wonder whether the hon. Gentleman’s
earlier comments on the Laffer curve would apply in this case. If
inheritance tax rates were reduced, would fewer people choose to
die?
Mr.
Newmark:
They may have no choice over whether or not to
die, but they do have a choice over whether to make their tax affairs
more efficient. A lot of people who very much believe in the spirit of
what the hon. Member for Wolverhampton, South-West said about our
having a due to society and our obligation to leave something behind. I
would therefore encourage the Government to think again about where
savings could be made, so that they could perhaps raise the threshold a
little more, so as to encourage people to save for the future and give
to their
children.
Mr.
Timms:
The hon. Member for Chipping Barnet gave us a very
different perspective on the Forsyth report from the shadow Chancellor
when it was published. If I recall, he warmly welcomed it. She
described it simply as a set of potentially interesting ideas that the
Opposition will consider, along with all the others proposed to them.
That was a striking and noteworthy
contrast.
The hon.
Lady asked me, as did other Opposition Members, why we were announcing
the nil rate threshold for 2010-11 so early. She then talked about what
house prices would be like in 2020, and I thought that she was going to
ask me to announce the threshold for then, too. In fact, setting out
the threshold a few years ahead, as we have done consistently over the
past few years, is helpful in giving families confidenceabout
how things will be over the period ahead. The threshold for the current
rate was announced in the 2005 Budget, while the threshold for the
following two years was announced in last year’s Budget. We are
simply maintaining that practice.
There has been some discussion
about the incidence of estates paying inheritance tax. In 1986-87, the
proportion of those paying inheritance tax was not what Opposition
Members said it was—it was 5 per cent., or 30,000 estates, so
only fractionally below what it is now. The rate was 6 per cent. in
2004-05, 6 per cent. in 2005-06 and 6 per cent. last year, and I expect
it to be 6 per cent. consistently over the next few
years.
Mrs.
Villiers:
On that point, I have a Library note that
indicates that the figures for 1997-98 were 3 per cent. and 18,000
estates, which is consistent with what my hon. Friends stated, rather
than with the figures that the Chief Secretary has just
quoted.
Mr.
Timms:
No, the hon. Member for Windsor was referring to
1987. In 1986-87, the figure was 30,000, or 5 per cent. of
estates.
Adam
Afriyie:
My apologies, but just to clarify, I did mean to
say 1997.
Mr.
Timms:
It may nevertheless be of interest to the Committee
that the figure in 1987 was 30,000, or 5 per cent. of
estates.
The hon.
Member for Chipping Barnet said that there were some outstanding
difficulties with the way in which the trust provisions from last year
were operating. I have seen little evidence of that, but if she wants
to drop me a line or draw my attention to any particular difficulties,
I should be glad to look at those. Neither she nor any other Opposition
Member has tabled an amendment to the clause, so I presume that they
are broadly happy with how the arrangements are working. However, if
there are particular difficulties, I should be happy to consider
those.
6.30
pm
The hon. Lady
made the point—my hon. Friend the Member for Wolverhampton,
South-West picked this up, too—about the position, which one
could well imagine occurring, of two sisters living together in a house
that had grown to be worth quite a large amount. The approach that we
prefer—I think it is the right approach—is to uprate the
basic nil rate band for all taxpayers, rather than to introduce a
special relief for a specific group. One could imagine how such a
relief might work, but, again, nobody has proposed such a relief in an
amendment and it would be quite complicated to introduce one.
We all support simplicity, and
inheritance tax is straightforward in how it works. There is a good
deal to be said for our approach, which is to uprate the basic nil rate
band beyond inflation, so reducing the bill for all taxpayers and
taking some estates out of the tax altogether. It may be helpful to
make the point that where inheritors do not wish to sell a house,
inheritance tax that is due on that house can be paid in instalments
over 10 years, provided that the house is not sold. In some instances,
that might be helpful.
Adam
Afriyie:
The Chief Secretary drew party political pleasure
by pointing out that in 1987, 30,000 people were paying inheritance
tax. Does he seek to equal our record of reducing the number of people
who pay inheritance tax in the next 10
years?
Mr.
Timms:
No. As I have made clear, I expect a pretty steady
proportion of estates to pay inheritance tax in the next few years. I
expect it to remain steady at around 6 per cent., so 94 per cent. will
therefore pay no inheritance tax.
The hon. Member for Chipping
Barnet asked about trusts for disabled people. As she knows, they were
taken out of inheritance tax in specific circumstances. Although I was
not here, I know that the rules and the
qualifying criteria were debated at some length last
year. If there are particular issues that she would like us or Her
Majesty’s Revenue and Customs to consider, she should draw them
to my attention in a letter and I will be happy to ensure that that
happens. My hon.
Friend the Member for Wolverhampton, South-West was uncertain about the
wording of the clause. I hope that I can help him. Subsection (3) is
used to set the nil rate band for 2011-12—that is to say the
year after the value of £350,000 set by the provision earlier in
the clause. Subsection (4) will stop the retail prices index increase
for 2010-11. I think that that works correctly. If he thinks otherwise,
I am sure that he will draw my attention to that
fact.
The hon. Member
for Falmouth and Camborne asked about the average value of an estate
paying inheritance tax. I do not have that figure to hand. However, I
do not accept that inheritance tax is optional for wealthy people. We
have taken determined steps to close loopholes in inheritance tax to
ensure that people pay their fair share. In addition, we keep
inheritance tax under close review, and people looking at our record
will be in no doubt that we will act against unfair tax avoidance in
this or any other
area.
The hon. Lady
asked what will happen given future house price increases. As I said,
we believe that the threshold that we have set will keep consistent the
proportion of estates paying inheritance in the next few years. The
thresholds take account of expected increases in house prices over that
time.
The hon. Member
for Windsor suggested that inheritance tax might be set at a higher
rate. That is an interesting suggestion, and one which may commend
itself to his hon. Friends. To respond to his point on owner-managers,
£350,000 is a substantial sum in that instance. There is
specific relief, however, for qualifying privately owned businesses,
which can reduce, or in some cases eliminate, inheritance tax, which
may be helpful in the circumstances that concern
him.
To describe
inheritance tax as double taxation,as the hon. Member for
Braintree did, is to make a completely specious argument. It is rather
like saying that VAT is double taxation because people have already
paid income tax on their income. As he knows, double taxation is a
pretty well-defined concept and I certainly do not think that it
applies in this
instance.
On the
whole, the Committee has welcomed the fact that there will be above
inflation indexation.
Mr.
Newmark:
Perhaps the right hon. Gentleman buys houses
differently from the rest of us. Those of us that buy our houses buy
them with income and we have paid our tax on income. Having paid our
tax on income, if we are then hit with inheritance tax at the end of
the day, that is indeed a double taxation.
Mr.
Timms:
Presumably the hon. Gentleman takes the view that
VAT is also double
taxation.
Mr.
Timms:
The hon. Gentleman confirms that that is his view,
in which case I would be very interested to know what implications he
draws from that. However, I do not think that he is on to anything
fruitful with that line of argument.
I am grateful that the Committee
has welcomedthe fact that the nil rate threshold will be
increased ata rate above inflation. I commend the clause to
the
Committee.
Question
put and agreed
to.
Clause 4
ordered to stand part of the
Bill.
The
Chairman:
Before we proceed, and in case an adjournment
conflicts with a Division on the Floor of the House, I would like to
indicate to Members now that there are red boxes behind me for the
storage of Members’ papers for the duration of the sittings of
the Committee.
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