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The major part of someone’s capital is their house. My main concern is that this discussion about capital taxation involves the appalling position where someone could die without a will and only £125,000 can be guaranteed to the surviving spouse, plus half the rest only as a life interest, and the children get the rest. Of course most families would tend to sort that out, but if there are rapacious children about, that may well not be the case. Where capital taxation is concerned, this further issue should be taken into account.

In the past century there were only seven changes in the intestacy rules, while I suspect that the capital

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gains tax relief changes every year. When we change the intestacy rules and we look at the figures, they should be linked in some way to inheritance tax reliefs. That would be one way in which we would not have to constantly be looking at this issue: link it to something that is already going to be there.

8.11 pm

Baroness Noakes: My Lords, it is a pleasure to be taking part in this short debate, especially as the noble Lord, Lord Burnett, has again demonstrated his great expertise in tax matters. He surprised me a little with his digression into international tax avoidance. I also note that practically every noble Lord wanted to talk about the abolition of the 10p rate. I shall not be dealing with either of those matters tonight, but the Minister knows we will be returning to the 10p rate later this week.

The noble Lord, Lord Burnett, claimed credit, to some extent, for the Government’s adoption of his idea of the transferability for tax-exempt amounts between spouses.

Lord Burnett: My Lords, I am grateful for what the noble Baroness has said, but it was not my idea. It was my suggestion, but many other people have had that idea as well.

Baroness Noakes: My Lords, the noble Lord is quite right that he was the person who brought it to your Lordships’ House, and he must therefore take some credit for it. I was going to go on to say that my own party claims the main credit for last year’s PBR changes to inheritance tax, when my honourable friend George Osborne announced his policy of increasing the tax threshold to £1 million and pushed the Government into their own changes.

We all remember those heady days last September, when the Prime Minister was set upon an early general election and the date of the PBR had been announced as the launch pad. But we announced our policy one week before, and it was hugely popular. The Prime Minister bottled out of an election, and all the talk was that the Treasury spent the whole of the weekend rewriting the PBR. This rushed policy making led to the most chaotic set of tax changes that I can ever recall. The changes were driven by politics, not principle—I think the noble Lord, Lord Shutt, would agree with that analysis—and as the Government sow, so shall they reap.

The IHT changes were accompanied by changes to the taxation of non-domiciled persons and to capital gains tax—all controversial and imperfect. I shall be talking later about capital gains tax; for now, I shall merely recall that the measure aroused the intense anger of the business community and led to the partial climbdown in January.

So far as inheritance tax is concerned, the Government’s proposals are useful in allowing married couples to avoid the nil-rate discretionary trust route, but that is about all. Our proposal for a £1 million exemption would remove 98 per cent of estates from the possibility of an inheritance tax charge. The Government’s changes

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still leave significant numbers of people worried that they will fall into the charge in respect of their home, as other noble Lords have mentioned. As the noble Lord, Lord Burnett, and my noble friend Lord Northbrook have reminded us, the proposals do nothing for non-married persons sharing a family home: siblings, people caring for relatives or the disabled, or unmarried partners.

There are many in my party, led this evening by my noble friends Lord Forsyth and Lord Northbrook, who would seek to abolish inheritance tax entirely. As they have said, it discourages saving and represents double taxation. We certainly do not rule that out, but the state of the economy when we come to power will be our first concern. Once we have dealt with that, we can then move on to the very long list of taxation wrongs that need to be righted by a Conservative Government.

I return to capital gains tax. The Prime Minister earned much of his reputation for being pro-business when he was Chancellor by his introduction of the taper relief, which gave a 10 per cent rate. His successor has squandered all that good will. The new lifetime entrepreneurs relief, which he was forced into, is a pale shadow of the supportive capital tax regime that it replaced and will leave many entrepreneurs within the charge at the full rate. The Chancellor also turned a deaf ear to the hundreds of thousands of ordinary employees who will lose out with regard to their holdings in employee share schemes. There is no transitional relief, no transitional period, no grandfathering of reliefs already earned. It took until January, as I said, for the Chancellor to reveal the entrepreneurs relief.

In the few weeks running up to the end of the tax year, we saw the inevitable rush of people selling ahead of the 80 per cent hike in the capital gains tax rate for business investors—including the noble Lord, Lord Sainsbury of Turville, who, according to press reports, saved £27 million in tax by so doing. We do not criticise any of those who sold last month, because they were merely acting rationally.

At first sight, the Chancellor swept away a complex capital gains regime which owed much to history—it had 1982 re-basing; it had indexation; and it had taper relief—and that made the calculation of capital gains tax on long-owned assets very difficult. The flat rate of 18 per cent is much simpler in concept, but there is a problem with it. The previous regime, which owes its origins to the reforms introduced by my noble friend Lord Lawson of Blaby when he was Chancellor, taxed capital—once you had taken the reliefs—at the same marginal rate of income tax. That significantly reduced the incentive to shift income gains into capital. I completely agree with my noble friend Lord Forsyth that we can expect to see in subsequent finance Bills great swathes of anti-avoidance legislation on top of that which exists already, aimed at schemes designed to turn 40 per cent income into 18 per cent capital gains.

We have seen all this before: the Government introduce a relief or a reduced rate of tax for apparently good reasons. They are then used in a way for which in the Government’s view they were not intended, and

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so anti-avoidance legislation follows—often several generations of it. The result is something which starts simple and ends up generating its own huge amount of complexity.

The Government have made a mess of their capital gains tax and have upset the business community. Their IHT changes have not taken away anxiety about inheritance tax bills from enough people. It was no surprise to us that eight out of 10 respondents to a poll in the City last month thought that the current Chancellor should go, and that a recent YouGov poll showed his approval rating at minus 42.

8.19 pm

Lord Davies of Oldham: My Lords, I join all noble Lords in thanking the noble Lord, Lord Burnett, for introducing this most interesting debate, although he will recognise that including inheritance tax and capital gains tax in the Question has provided quite enough to bite off in the hour that we have available to us, and for a ministerial response of just over 10 minutes, without him then introducing some interesting reflections on other aspects of taxation. He will forgive me if I do not comment on those too much in circumstances where I want to concentrate on the main issues of the debate.

However, a number of noble Lords, including the noble Baroness, Lady Noakes, who indicated that she might return to the issue later in the week, reflected on the tax package and the abolition of the 10p rate. I emphasise that I am not prepared to accept—I hope that I will have the opportunity later in the week to demonstrate it—that easy canard which has been reflected in several speeches this evening, including that of the noble Baroness, Lady Noakes; namely, that the poor have suffered from the Budget because of the abolition of that tax rate. We have introduced a wide range of compensatory measures, particularly in terms of tax credit changes, to ensure that the bottom deciles, the poorest-off in the population, gain from this Budget as they have gained from preceding Budgets under this Government. It is quite clear that a section of the population has not gained, and that is the one to which the Chancellor is now addressing the major part of his concentration.

Baroness Noakes: My Lords, the noble Lord provokes me so much. He has chosen to major on the 10p tax rate. Will he remind the House how many individuals lose out after compensating changes from the abolition of the 10p rate?

Lord Davies of Oldham: My Lords, we will return to that matter in detail later in the week. The noble Baroness and one or two other noble Lords were generalising in saying that the poor have suffered from the Budget as a result of this change. I emphasise that the poorest section of the population did not lose out, and she will recognise the categories into which they fit. I will have the time to expand on that later.

The noble Lord, Lord Forsyth, played entirely fair, although he was as controversial as ever, by concentrating

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on the significant issues which the noble Lord, Lord Burnett, emphasised in his speech—inheritance tax and capital gains tax, and it is those which I must address. It is of course true that the changes to inheritance tax were not the product of immediate thinking within the Treasury; we have clear records of work on potential changes to inheritance tax which long preceded the autumn of last year. It is not conceivable that changes can be effected in those terms without necessary preparation. The Government have made it clear that these concepts were before the Chancellor well before they became public in the autumn of last year.

We were concerned to respond to what the noble Lord, Lord Burnett, described in his debate last year as the advantages of simplification of the tax system. I know that the noble Lord, Lord Northbrook, has waxed eloquent on this matter in the past, to say nothing of the noble Lord, Lord Forsyth, and the noble Baroness, Lady Noakes. The noble Lord, Lord Forsyth, was entirely fair in his recognition that that principle underpins changes to inheritance tax and to capital gains tax. Through a process of simplification, there are bound to be rough edges to the policy and a consequential impact on the wider society that the Chancellor has to take into account. The noble Lord, Lord Northbrook, suggested that I commented on the limited impact of inheritance tax last year in the debate that the noble Lord, Lord Burnett, introduced. That is certainly so; at that time we thought that in the analysis about 6 per cent of households paid inheritance tax, whereas we now regard it as being about 4 per cent. So I am entirely justified in indicating that the role of inheritance tax can be greatly exaggerated.

As for the concept of fairness in society, I must say to the noble Lord, Lord Forsyth, that it would be a bold Conservative shadow Chancellor indeed who actually campaigned in an election for the abolition of inheritance tax and was able to sustain the argument that it created fairness in society. That would be a difficult one to present. I hear what the noble Lord says about there being other ways in which to handle the matter—but I noted that the noble Baroness, Lady Noakes, speaking from the Front Bench, had her reservations about such a radical proposal. That reflects the fact that the Labour Government have got the issue right and that we need to take into account the fact that property prices in the past decade have enhanced the assets of the nation, with a greater number of people falling within the framework of inheritance tax. Nevertheless, the tax is fair—and it is also progressive, because it bites more heavily as the assets that are being taxed are affected. Therefore, the Opposition would have a difficult job of sustaining the argument that the noble Lord, Lord Forsyth, put forward with his usual eloquence and in the most interesting way.

On capital gains tax, once again the Government are being challenged on doing what they are constantly being prayed to do on opposition Benches—simplifying the tax system. It will be appreciated within that framework that at 18 per cent Britain has a highly competitive rate of capital gains tax. There is no mention in this debate—although the noble Lord, Lord Burnett, sought to extend this issue with regard

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to certain aspects of international comparisons—of the extremely favourable taxation position that Britain has on taxes on entrepreneurs and asset holders. The only way in which we have been able to build up the strength of the economy over the past decade is to be internationally competitive in those terms.

I hear the challenges about the costs that certain processes of simplification have inevitably brought about and the difficulties consequent on that that need to be worked through, but I maintain that the Chancellor’s position is one that responds to what the noble Lord, Lord Lee, emphasised: the general clamour for simplicity and the recognition that people should know the basis on which they are subject to taxation.

It will be appreciated that the new straightforward rate is complemented by focused tax relief for entrepreneurs, which is available on the disposal of a trading business or shares in a trading company, provided that the person who makes a disposal is an officer or employee of the company and has a minimum 5 per cent stake in the business. In these cases, the entrepreneurs’ relief reduces the effective tax rate to 10 per cent for the first £1 million of gains. That is a recognition of the necessity of giving support to entrepreneurs building up a business—and I think that the Government’s recognition of that necessity has been widely appreciated.

The noble Lord, Lord Shutt, has to a degree thrown me over the question of intestacy, largely because it is not a Treasury issue. The responsibility for rates of intestacy belongs to other aspects of the Government. I hear what he says and understand his complaint. I will write further to him on the matter. I hear his anxiety about the fact that only £125,000 is guaranteed whereas under inheritance tax we are talking about something much higher. I hope that he will appreciate that within the framework of this debate it is difficult to make relevant a discussion on intestacy. He has raised an important issue and deserves a reply. I guarantee to reply to him on that detail.

In summary, this has been a most challenging and interesting debate. My humble 12 minutes has been cut down to 10 because of the contributions of others in the debate. We have all enjoyed those contributions; they have been well worth while. I apologise if I have not covered every issue and will write to noble Lords accordingly.

European Union (Amendment) Bill

8.30 pm

House again in Committee.

Clause 2 [Addition to list of treaties]:

Lord Pearson of Rannoch moved Amendment No. 5:

“(i) Article 1, paragraph 4, replacement Article 2, in so far as it concerns the promotion of economic, social and territorial cohesion and solidarity among the Member States, and(ii) ”

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The noble Lord said: This is an innocent little amendment to start us off after the dinner break. Its purpose is to withdraw our regional funds and our economic and social funds. I put it down because I would like to test the present position of the Government on the regional policy for funding and I would like to test the Conservative Party on its latest position on repatriation of social and labour policy.

I start with a quotation from the present Prime Minister, Mr Gordon Brown, when he was the Chancellor of the Exchequer, as reported in the Times on 6 March 2003. I know that we have given up doing foreign quotations this evening, but I thought that one from no less a personage than the then Chancellor of the Exchequer, the current Prime Minister, might be a reasonable yardstick to test the Government’s present position.

On 6 March, Mr Gordon Brown said:

That in the clearest possible terms is the present Prime Minister saying that he thought regional policy should be repatriated to the United Kingdom, with which I and my colleagues agree. The purpose of putting down the amendment is to discover whether the Government still agree with that.

This is a useful amendment because it is the whole of Article 2 of the new treaty, which is all about combating social exclusion, discrimination, promoting social justice and protection, equality between men and women, solidarity between generations, protection of the rights of the child, and so on. I could go on. I know that we are anxious to make progress so I will not go further. Clearly, it opens the way to invite the Conservative Party to say where it stands on one of the only two policies it has announced towards the European Union, were it to be so fortunate as to win the next election. One is that if this treaty goes through, it

I do not want to press the party on that.

Noble Lords: Oh!

Lord Pearson of Rannoch: Well, we will see. It depends on what it says. But under the strict terms of this amendment—I know that the Lord President is keen that we should stick to the amendments now as we wandered a bit before dinner—I ask the party whether it still wishes to repatriate social and labour policy after it wins the next election and how it proposes to do it. I fear that the length of this debate will depend on the answers to those two questions—one to the Government and the other to my former noble friends. I beg to move.

Lord Willoughby de Broke: I support my noble friend’s amendment. I shall read out one or two quotations but I am sure that the Lord President will not mind because they are from a report of the European Union Select Committee on the future financing of the EU. That committee was chaired by

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the noble Lord, Lord Radice, who I am very pleased to see in his place. Among other things, the committee discussed cohesion and structural funds. It was a brief but very good report which stated in one of its conclusions:

Neither was the committee at all supportive of the Commission’s view that the latter was better placed than member states to run regional development funds. According to the committee, the member countries could run those themselves. I agree wholeheartedly with that. The report also states:

That could hardly be clearer. This is a helpful amendment for the Government because it is the European Union Committee’s own recommendation that regional policies and the cohesion fund should be funded by member states and that we should not pass lots of money over to Europe for this to be done through the Commission. That will give some comfort to the hard-pressed British taxpayer who resents giving money over to the Commission whose accounts have not been passed by its own Court of Auditors for the last 11, 12 or 13 years. I am sorry that the noble Lord, Lord Kinnock, is not present as he would correct me. I think the figure is 13 consecutive years. I see that the noble Lord, Lord Radice, wishes to intervene.

Lord Radice: The noble Lord quoted accurately from our report. I am glad that he approved of it. However, it is a little more complicated than he suggested. We also said that EU cohesion funds should be spent in the poorer regions of the states that were joining then. We did not suggest cutting off the funds just like that. The noble Lord rightly said that there is a case for the principle of subsidiarity to operate in the richer states and for national Governments to fund and manage their own regional policies. But we then went on to say that there are tremendous gains to be made from enabling the new member states to catch up towards the average level of wealth in the Union. So it is a slightly more complicated argument than the noble Lord suggested.

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