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There are, however, some specific measures I would urge the Government to make—

Lord Bassam of Brighton: My Lords, the noble Lord has 10 minutes.

Lord Burnett: My Lords, the 2006 trust tax changes were ill considered and unfair. I am not referring to the discretionary trust regime, but to the interest in possession trusts, and accumulation and maintenance trusts, created during a settlor’s life time. I quite understand that the Government were concerned that life tenants, often surviving widows, could have their income depleted by trustees appointing the income or even capital to others. This could easily have been dealt with by giving life tenants an absolute veto on such appointments. These interests in possession trusts are not set up for tax avoidance. They are set up in recognition of the fragility of marriage or to cope with vulnerable individuals and the young. The Inland Revenue’s market research into the use of trusts conducted in January 2007 made it abundantly clear that these trusts were set up for reasons other than tax avoidance. I would hope that the Government would consider reverting to the pre-2006 regime where a trust was taxed on death, transfer or surrender by the life tenant.

Another unfairness is the taxation of siblings who live together. They cannot marry and there are quite a few sisters and brothers living together who in appropriate circumstances should be allowed to transfer their estates,

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exempt on the death of the first, provided that the transfer is to the surviving sibling. This mirrors the relief available to the surviving spouse of marriage couples and civil partners.

Finally, many hundreds of carers in this country have similarly forsaken the opportunity of getting on to the housing ladder to look after their parents, their relations or even their friends. Their selfless, conscientious dedication and effort should be recognised in so far as a modest house in which an individual lives with his own carer should, if it is transferred to the carer, be free of inheritance tax. I look forward to hearing from the Minister the Government’s proposals on these and the matter of inheritance tax generally.

Lord Bassam of Brighton: My Lords, I remind speakers please to keep to the agreed time, otherwise the Minister will not be able to respond to all the points raised in the debate.

7.44 pm

Lord Forsyth of Drumlean: My Lords, I am very grateful to the noble Lord, Lord Burnett, for raising this subject. I did not mind him running over time because he said a lot of things that I would say in agreement. He should be on these Benches, not his Benches, with the views that he has expressed on capital taxation. It seems to me that we need to have a lower, fairer, flatter, simpler tax system. Perhaps I may do something very unfashionable; that is, to praise the Prime Minister as Chancellor for some of the measures he implemented which were about producing a simpler and a more competitive tax system. Unfortunately, in respect of capital taxes and income taxes, he did only half what he needed to do, which is one reason why the Government are in such deep trouble in respect of tax. For example, it was a good idea to remove the 10 per cent band, which the then Chancellor introduced in the first place, in order to create a simpler tax system. But it should have been done in consort with raising the threshold so that those people who were no longer within the 10 per cent band did not face a doubling of the rate of income tax they paid on modest incomes.

Similarly, with the reform of capital taxes, the idea of getting rid of the complex system of allowances, indexation and the rest was brilliant. I say all credit to the Prime Minister. I also agree that the Government were right to get rid of the artificial distinction between different classes of capital gains, different business assets and other assets. But where it all went wrong was that they used a simplification measure in respect of capital taxation to raise another £1 billion or so of revenue and discriminated against people who had built up businesses with a particular view of the taxation system. It would be much better to have a short-term capital gains tax with a taper which tapered to zero over, say, a 10-year period, to encourage people to make savings—the savings ratio has halved since 1997 under this Government—and to encourage people to take a long-term view of investments.

I do not wish to add to the Government’s difficulties, but it is not on just the 10p threshold that they will face problems. The changes which the present Chancellor

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made to capital tax will create another enormous problem. As regards the 10p band, poorer people have ended up paying more tax and richer people have benefited. The same thing will happen because of the capital gains tax reforms. The Chancellor has introduced capital gains tax at 18 per cent. People paying marginal rates of tax of 40 per cent will be besieged by clever people in the City with schemes to enable them to convert income into capital gains. It is a well known fact that the Tories did not abolish capital gains tax, much as we would like to in principle, because of the problem of leakage. If you have a lower rate of capital gains tax than the marginal rate of income tax, people will convert income into capital gains. I confidently predict that we will hear a lot about loopholes for the next three or four years arising from the Chancellor’s foolish decision to make a change in the capital gains tax rate without having a proper taper and without matching the marginal rate with the capital gains tax rate.

The way around this is to introduce a short-term capital gains tax, tapering perhaps to zero over 10 years and starting at the marginal rate of tax. If one did that, there is also an opportunity to abolish inheritance tax altogether by bringing in capital gains tax on death, which would get over the noble Lord’s point that rich people do not pay inheritance tax. The people who pay inheritance tax are those whose main asset is over their heads. As we have seen in recent days, that for many people is a declining asset, but it is still substantial. By introducing capital gains tax on death, the main family home would be exempt, but any short-term assets which had not been held for 10 years or more would be subject to tax. We would then have a much fairer system, which would bring in revenue from people who are able to escape at present because they are able to order their affairs in such a way.

I should like to say a bit about inheritance tax because I note that the Fabian Society, in a sort of last gasp, has come out arguing strongly in favour of inheritance tax in principle. I think that it is a wicked tax. It is double taxation in that it is a tax on money that in the main has already been subject to tax, and it does something very wicked: it encourages people to spend rather than to save. If someone has finished their working life, paid their taxes, has a capital sum, and then spends the money on floozies and Ferraris, there is no tax to pay. If they save it to pass on to their children, there is a tax to pay at 40 per cent. We then wonder why savings have gone down and debt has gone up in our country.

I urge the Government to embrace the idea of a simpler, fairer tax system and look at what they have done in respect of capital taxes. At the moment their proposals will help those who have wealth and discourage those on lower incomes who wish to amass wealth and pass it on to their children, which is a basic human motivation. If we encourage people to save more and to take greater responsibility for their families in the long term, that must be good news for our country as a whole.

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7.51 pm

Lord Lee of Trafford: My Lords, I congratulate my noble friend on his choice of subject for the debate. For a number of years he has taken a deep personal and professional interest in the area of inheritance tax and capital gains tax. In the limited time I have allotted to speak, I want to focus on capital gains tax, and I appreciate the opportunity to be able to follow the noble Lord, Lord Forsyth, because a number of my points address almost precisely the areas he touched upon.

In endeavouring to frame an ideal capital gains tax policy, one is seeking to get the balance right between five aspects. First, there is the desire to encourage businesses to be creative in terms of wealth and job creation, and to encourage the development of more family businesses in this country. When, for the sake of argument, we compare ourselves with Germany, we see that the strength of the German economy is due in part to the fact that it has so many more substantial family businesses that are passed down from generation to generation. Secondly, we want a society that favours longer-term investment rather than the short-termism that I am afraid has dominated the UK economy over recent years, perhaps personified by hedge funds more than any other individual group. Thirdly, we want the ability to administer and calculate capital gains tax to be relatively easy. Fourthly, we want to encourage what I would call a savings society rather than one that focuses on debt and encourages borrowing. Fifthly, of course, there is the whole question of revenue raising. We must be conscious that the state has a responsibility to raise revenue from somewhere, and it is not unreasonable to look to capital gains to make its contribution.

Until the recent changes made to capital gains tax, as the noble Lord, Lord Forsyth, commented, the whole system had become unduly complex with its taper relief and indexation. There was a clamour from both professionals and investors to simplify capital gains tax because it had become almost impossible to calculate and administer. However, I have to say that the Government handled the changes in a very ham-fisted way. They seemed to rush into making changes with hardly any consultation. While I welcome the entrepreneurial relief on the first £1 million of gains taxed at 10 per cent, I would have thought that in making those changes the Government would have appreciated what they were actually doing by going ahead with capital gains tax changes without bringing in some sort of relief to encourage the establishment of businesses. But thankfully the Government did respond to pressure.

I have some sympathy with the Government because, had they announced in public that they were contemplating substantial changes to capital gains tax, there would have been considerable speculation and, in my judgment, enormous pressure on them to make an immediate announcement. In a way the Government were caught between a rock and a hard place. However, we have ended up in a rather ironic situation where capital gains tax on second homes has for many people been reduced from an effective rate of 40 per cent to 18 per cent. Whether a Labour Government

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are proud of bringing about such a reduction, I am not sure. Perhaps the Minister will indicate the Government’s thinking on that.

My preference, and again I align myself to some extent with the noble Lord, Lord Forsyth, is to bring back the differentiation between short- and long-term capital gains. I accept that short-term capital gains—those made in up to a year—should be taxed at the top rate, whatever it is. But for longer term gains—and we should be encouraging long-term investment—on assets held for over a year, I suggest a rate of 15 per cent. It should not be as high as 18 per cent or as low as 10 per cent, so 15 per cent would strike the right balance.

Finally, I want to comment on the Alternative Investment Market. I am all for encouraging the creation of new businesses through tax incentives. The previous situation was that stock held for two years by the 40 per cent taxpayer attracted only a 10 per cent capital gains rate and was free of inheritance tax held for over two years. It is illogical that old established public companies—I had a number in my own investment portfolio and they are declared in the Register of Members’ Interests—should purely by dint of shareholder vote be allowed to move across from the main market to the Alternative Investment Market and immediately enjoy the very attractive taxation advantage of the effective 10 per cent CGT rate and no inheritance tax if stock is held for two years. There was something rather odd in those advantages. The capital gains tax advantage has fallen away to some extent because the rate has gone up to 18 per cent, but the inheritance tax advantage remains in place.

7.58 pm

Lord Northbrook: My Lords, first I declare an interest as the owner of land, property and equities. The House last debated this issue in February 2007, part of it being inheritance tax. It is interesting to reflect on what was said then and what has happened since. Essentially, the Minister said then on behalf of the Government:

Perhaps he was concerned enough in private to help persuade the Government to make the key change in the Pre-Budget Report only a few months later which effectively doubled the exempt threshold to £624,000. Let us hope that, knowing his influence, the Minister’s well judged public concerns on an unconnected matter—the abolition of the 10p income tax rate—will be met by a change in Government policy too. Of course, the Government’s change of mind was also influenced by the Conservative Party’s well judged announcement that the threshold would be increased to £1 million if and when we get into power.

There have also been considerable changes to capital gains tax since February 2007. Initially, the joy for some people of the rate going down from 40 per cent to 18 per cent was tempered by the abolition of the 10 per cent rate for entrepreneurs. That is yet another example of the Government getting rid of a favourable tax rate that they themselves introduced. Only after a tremendous campaign by many business

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interests, and supported by notable Government spokesmen such as the noble Lord, Lord Jones of Birmingham, was the 10 per cent rate restored on the first £1 million of business gains. Nevertheless, buried in Table C6 on page 181 of the 2008 Budget Report is the real truth: the so-called CGT reforms are yet another stealth tax rise. Receipts from CGT are estimated at £4.8 billion for 2007-08, and £5 billion in 2008-09, although this last figure would have been even more at £5.4 billion, according to the 2007 Pre-Budget Report, had there not been the hue and cry over the 10 per cent abolition. Without this protest, the 18 per cent change would have represented no less than a 12.5 per cent tax take increase in CGT over the previous years.

So let us now look at the two taxes as they stand. The inheritance tax exemption for 2008-09 now stands effectively at £624,000. However, as the noble Lord, Lord Burnett, rightly said in February 2007, unmarried siblings living together do not benefit from this change, neither do relatives and others who give live-in care for the elderly and the infirm. Despite the change to IHT, problems remain with the concept of the tax, many of which have been referred to by previous speakers in the debate.

The Minister said in February 2007,

With the greatest respect to him, if you have paid out of taxed income or capital for an asset and then are taxed again at death, surely this can only be double taxation. It is not the same as his analogy between income tax and VAT.

Other concerns mirror those of the noble Lord, Lord Burnett. As he said in February 2007,

The tax also militates against savings and investments. It encourages individuals to spend money rather than save it just to be taxed. I am not sure whether this represents official Lib Dem policy but, as the noble Lord, Lord Burnett, stated,

I agree with him also that the rate is too high, but rather than just alter the rate I would wish to do something more radical, as other speakers have suggested. The report of the noble Lord, Lord Forsyth, Tax Matters, suggests the abolition of inheritance tax and its replacement by a short-term gains tax. I support this idea. The suggested abolition is not only a Conservative idea but was also proposed by the former Labour Cabinet Minister Stephen Byers. In an article in the Sunday Telegraph in August 2006 he said:

The Government should grasp the nettle. The move is costed in the Forsyth report at £2.6 billion but how would this be paid for? I would suggest two areas: first, by tightening-up the operation of the tax credit system more efficiently you would stop the over-payments, which I understand are running at some £2 billion a year; the rest of the sum I would make up

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by charging the carry interests on private equity funds to individuals’ income tax rather than CGT rate. I cannot see any reason why the interests should be charged to capital gains tax. It would be a generally popular measure. In my view, the sector still pays too little tax compared to directors of its quoted rivals.

Let us now turn to capital gains tax as a whole. The Government have cut the headline rate for some from 40 to 18 per cent. They have taken away the huge advantage of indexation and taper relief. This means, in effect, that long-term assets will in many cases be subject to more tax than previously. I believe this in essence to be wrong. It is much more equitable to follow the logic of the Forsyth report and levy a heavier tax on short-term gains, tapering the rate down to nil after 10 years. This is not just because it would favour me personally; the new 18 per cent regime favours short-term speculators. As other speakers have mentioned, the CGT regime should be more like France and Germany, where no CGT is payable if you hold assets for a longer period.

In view of the fact that the receipts from IHT and CGT amount to less than 2 per cent of net tax revenues, there is no reason not to be radical about the reform. Clearly capital gains tax is necessary to avoid individuals turning income into capital, especially in the short term, and avoiding the tax altogether, but I do not believe IHT is necessary and it should be abolished.

8.05 pm

Lord Shutt of Greetland: My Lords, I, too, congratulate my noble friend Lord Burnett on securing the debate. He made a useful contribution when he referred, particularly, to some of the problems he sees in the inheritance tax and capital gains tax regimes. Two Conservative Peers have given their views and although the noble Lord, Lord Forsyth, believes inheritance tax is wicked, even he would replace it with a capital gains tax on death. There is a general view that it is perhaps right that capital should be taxed, whether as an inheritance or as a capital gain. My noble friend could not resist the opportunity to refer to the 10p income tax rate and the non-domiciles—I, too, will not be able to resist saying something shortly—but those are other issues in our tax system at the present time.

The noble Lord, Lord Forsyth, took the view that we should be looking at capital gains and felt that there was a sense that the present position was anti-business; that we should be looking particularly at the short-term gains rather than the long-term gains. My noble friend Lord Lee was also concerned about short-termism and about looking at both the short term and long term as far as gains are concerned, yet again acknowledging that revenue raising was important.

The noble Lord, Lord Northbrook, and my noble friend Lord Burnett referred to families that are other than straightforward married couples and the problems that this can raise, particularly with a shared house, and all that that means for inheritance tax.

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The noble Lord, Lord Northbrook, on looking at the small print, found this figure of £4.8 billion, and £5 billion for next year. I think it will be a little more than £4.8 billion because many people have been rushing to pay. The regime lasted until 5 April, a few weeks ago, and therefore the Government’s coffers may well be higher.

The debate concerns plans for the future of inheritance tax and capital gains tax. It is interesting—the noble Lord, Lord Northbrook, mentioned this—that the Tories met at their conference on 1 October and said that they were going to change inheritance tax and have a £1 million threshold rather than £300,000. Lo and behold, nine days later the present Chancellor put out a statement that the £300,000 would be doubled to £600,000. Today it is £312,000, which can also be doubled. That may or may not have been right, but it surprises me that a big change in policy can occur in nine days; it is a wonder. Of course it may have been a fluke and it might have been going to happen anyway. We do not know that, but it might.

Similarly, an announcement was made about capital gains tax and the 18 per cent figure, but no taper relief and no indexation. But indexation is still retained for companies. Then people went on about family companies and so on and we get this late change and a £1 million life time allowance. Again I ask whether this has been thought through. The question that has come out is whether the capital gains tax regime is right and good to encourage the long-term investor. People have always taken the view that we should tax get-rich-quick merchants and short-termers, but it is important for the country and everyone that there is long-term investment. I hope that when the Government consider the future of these taxes they will think about the long term.

The related matter that I wanted to raise was the whole business of intestacy, because the provisions regarding it are related to inheritance tax. On 8 September 2004 I asked an Oral Question on the subject, which the noble Lord, Lord Filkin, answered. He said he was going to consult. Then there was something of a delay. By 25 January 2005 it had not happened and the noble Baroness, Lady Ashton, had taken his place. Eventually a document was published on 7 June 2005—nearly three years ago. What do your Lordships think if we alter the intestacy figures from £125,000 to £350,000 and further changes? Still nothing has happened. I contrast that period of nearly three years with the nine days for the inheritance thing following that Tory conference.

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