Clause 4
Finance Bill
5:30 pm
Stephen Timms (Chief Secretary, HM Treasury; East Ham, Labour)
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.