Clause 115 - IHT: rate bands

Finance Bill – in a Public Bill Committee at 5:45 pm on 18th June 2002.

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Question proposed, That the clause stand part of the Bill.

Photo of Michael Jack Michael Jack Conservative, Fylde

I rise to ask the Financial Secretary some questions about current Government thinking on inheritance tax. I am delighted that the Government have proceeded on the basis of indexing inheritance tax rates. Others who contribute to the discussion may give more information on the effect on the private estates of individuals who have modest means, other than the fact that they live in London or the south-east. Such individuals may find that they creep—or march headlong—into inheritance tax as a result of the rapid rise in house prices that has occurred in this part of the world recently.

That brings me to my first question. We have not had in the House of Commons for some considerable time a proper debate about the effect and, if I may say it from the Back Benches, the legitimacy of inheritance tax. The Government will, no doubt, invite us to agree to the enhanced limit of £250,000. Why do they think that that is the right figure, bearing in mind the point that I have just made? A property owned by someone who lives in a modest Georgian terraced house in London SE11—the London borough of Lambeth, which is not known for its property activities—could well be worth two or even three times the amount that is currently allowed under inheritance tax. That is not a fault of the individual who lives in such a property but is a consequence of the marketplace.

Photo of John Bercow John Bercow Shadow Chief Secretary to the Treasury

I appreciate the potency of my right hon. Friend's example. May I offer him another, as he

develops his argument? Does he agree that the trap would also apply to someone who owns a one-bedroom flat in the London borough of Westminster? Several Members of Parliament from all parts of the House would fall into that category. In that context, it is only right that I declare an interest, as I own a two-bedroom flat in Westminster. Does my right hon. Friend agree that neither of us could automatically be considered wealthy in any sense?

Photo of Michael Jack Michael Jack Conservative, Fylde

I take my hon. Friend's point. That raises the interesting issue of whether people who earn just over double the national average wage now could later find themselves in the realm of inheritance tax. The reason I mention that and the reason why I put it in the terms that I did at the start of my remarks is that this tax is a hangover from the days when taxes on incomes were sparse and taxes on capital were the way that the Inland Revenue got at people's income, which was bound up in assets. That is also the historical background of stamp duty. It was only at the point at which an asset was realised that the Revenue could find a way of getting a share of an individual's income.

Those days are gone and individuals are now taxed in many different ways. People of modest means, such as those described by my hon. Friend the Member for Buckingham (Mr. Bercow), could accumulate the wealth that now would ultimately be subject to inheritance tax—notwithstanding the increase to £250,000—through, for example, paying a mortgage over 25 years out of their already taxed income. They now pay such mortgages without the benefit of mortgage interest relief at source.

Income that has already been taxed once is effectively taxed again in this context. Wealth in an estate could also have been accumulated through wise savings or investment. No post-war Government have disagreed with that; in fact, they have all encouraged people to save. The current Government have had mixed or negative success in that respect, whereas the previous Government were rather better at it. Either way—

Photo of Michael Jack Michael Jack Conservative, Fylde

If I can finish this point I will be delighted to give way to the hon. Gentleman.

Those who have accumulated part of their estate through savings might also, on the way through, have faced capital gains or other taxes on the dividend or other income from those savings. Inheritance tax seeks to grab hold of some of that money, which has potentially already been heavily taxed en route.

Photo of Jim Cunningham Jim Cunningham Labour, Coventry South

The right hon. Gentleman said that this was an old form of taxation, but I remind him that when his party was in government it did not do very much about inheritance tax. Given that he questions the formula, I should have thought that he would have done something about it when in government. However, I have some sympathy with what the right hon. Gentleman is saying. There is an argument for inheritance tax to be adjusted, because

values are changing through mortgages and that sort of thing, so I accept that his argument has merit.

Photo of Michael Jack Michael Jack Conservative, Fylde

I am grateful for the hon. Gentleman's support and I accept it in the spirit that it was offered. His implied criticism was that the Conservative Government did not do what they could have done. They did in fact over-index the level of inheritance tax on a number of occasions.

This is one of those matters that we should reconsider from time to time. We need to consider whether we need it and to examine the justification behind it. My argument is that people of modest means could find that, for those who succeed them, the final accumulation of their hard work and efforts as home owners and savers is once again to be taxed, and at a penal rate of 40 per cent., once they have passed from this planet.

We must re-examine the issue, because there are ways round this tax. When the Minister replies she will no doubt quote the latest figure from the Treasury to show that, with a threshold of £250,000, probably 1 or 2 per cent. of estates will be affected by the tax. However, surely the perceptive Minister would ask, ''If the tax is 98 per cent. out and only 2 per cent. in, how can that be?'' Quite a few outside London and the south-east might escape because their biggest single asset is their house. However, part of the reason that those figures are as they are—

Photo of Peter Luff Peter Luff Opposition Whip (Commons)

My right hon. Friend is underselling his case. In Edinburgh, for example, house prices have risen very sharply. In areas of the west midlands, £240,000 or £250,000 is not an unusual price for a property.

Photo of Michael Jack Michael Jack Conservative, Fylde

I am grateful to my hon. Friend for intervening on me. I do not claim an expertise on the property market outside of my constituency or where I live in London. My hon. Friend makes the case that what may be today's low percentage could develop into a much higher percentage, but I want to develop the argument.

People can circumnavigate inheritance tax by a variety of entirely legitimate means. If they are busy finding ways round it, and they can do so relatively easily—so far, the Treasury has thankfully not moved to affect the law on gifting—it surely raises the question of what the whole complex mechanism is about. The Financial Secretary will be aware of the complexities and expense not only of avoiding inheritance tax but of other matters connected with probate, valuation and all that goes with it. A case can be made for a thorough examination of the tax.

The United Kingdom is facing a crisis with respect to retirement income. For some people, the resources that are left to them will be crucial; one generation should be able to help the next live in some degree of comfort. Therefore, an argument can be made for a further review of the £250,000 limit proposed in the clause. Perhaps it should be raised to ensure that the accumulated wealth of individuals can be left to others to do the further job of ensuring that, at a time when retirement income is under particular pressure, families can pass sufficient money from one generation to the next to help the succeeding

generation to live a reasonably comfortable life. It is about passing on wealth from one generation to the next.

I hope that the Financial Secretary will explain the legitimacy that the Treasury sees in inheritance tax, as it now potentially affects a lot of people on modest incomes. I hope that she will explain why the Treasury adjudges £250,000 to be the right number. I should be grateful also if she would explain why, at this juncture, the Treasury does not seem minded to go beyond the present rate of indexation for that tax.

Photo of Mark Field Mark Field Conservative, Cities of London and Westminster

May I say how much I am in sympathy with the comments of the hon. Member for Coventry, South (Mr. Cunningham) in relation to my own party's record on inheritance tax. It is an immoral tax and it should be abolished—something that I believed long before being elected to Parliament. It may be easy for a new Conservative Member to say that, but those who were not in Parliament prior to 2001—or, indeed, prior to 1997—can dissociate themselves from that statement. I appreciate that it was not the top priority during the Conservative Government's last term; it might have been misconstrued had the better Conservative instinct to abolish that iniquitous tax come into play.

Ultimately, as my right hon. Friend the Member for Fylde (Mr. Jack) pointed out, inheritance tax is double taxation. The concept of inheritance tax came about at a time when there was either no income tax or it was charged at a very minor rate. About 200 years ago, income tax was levied only at times of war, and it would go into abeyance thereafter. I am concerned, as I said in our debate on stamp duty, that it is part and parcel of Government policy. Inheritance tax may have been raised by a derisory level—it may be more than the level of inflation, but it is clearly considerably less than the increase in the cost of housing, which is surely the relevant inflationary factor—but it is evidently part and parcel of a policy that could also lead to doing away with the seven-year rule. That will doubtless be presented as the modernisation of inheritance tax, just as the modernisation of stamp duty allows the imposition of greater taxes on property owners. It is part of a long-standing agenda. The Government have obviously realised, especially post–1997, that income tax is no longer a viable means of redistribution, so they will use every other means available to achieve that. Clearly, inheritance tax is part of their armoury.

There is little doubt—my right hon. Friend the Member for Fylde put this eloquently—that the measure will penalise people in London and the south-east in particular. It seems absurd that a modestly priced property, worth £250,000—I accept that that may seem a large sum of money in many other parts of the United Kingdom—will result in inheritance tax being levied on the death of both spouses. My right hon. Friend referred to passing assets from one generation to the next. I suspect that that is what the Government object to, and that we shall see more measures introduced in years to come as part of their agenda to modernise property tax to ensure that less and less can be passed from one

generation to another. There is, however, a suicidal aspect to that approach, because while uncertainty remains in the financial markets and in other instruments, such as pensions, more and more money is being put into commercial property, especially by the younger generation. That should, perhaps, be discouraged, although I am not sure that it is the Government's role to do that. Many of my younger constituents eschew the idea of buying a pension, shares or other financial instruments and, instead, rush into investing in the property market, which has lead to its unhealthy overheating.

I worry that, behind the modest-looking provision in clause 115 lie the first steps towards some radical changes in the inheritance tax regime. I suspect that, in the next few years, the Government will think about ending the full capital gains tax exemption on a primary residence. We may see the idea of a European-style annual tax on property holdings being floated as part and parcel of the modernisation of the stamp duty or inheritance tax agenda. Hopefully, we shall have an opportunity to argue against that forcefully in due course.

Photo of Chris Grayling Chris Grayling Shadow Minister (Health) 6:00 pm, 18th June 2002

I echo the calls for a more detailed examination of the role of inheritance tax in our society. The hon. Member for Coventry, South referred to the actions of the previous Conservative Government, but we face a very different situation today, in terms of both demographics and the pensions industry. There is no longer a concrete future with respect to provision for elderly people. As their numbers increase and as we continue to experience relatively low inflation and stock market problems, and as more and more final salary pension schemes disappear, the challenge of making proper provision for old age becomes greater. The use of inheritance tax planning and the modification of inheritance tax may provide a vehicle for passing wealth from generation to generation to act as an alternative form of pension provision. It is statistically likely that one's parents' generation are no longer around when one reaches retirement age. If they pass on their wealth and property, that may provide a core bedrock of provision in old age.

I suspect that the Government regard inheritance tax as a cash cow. It must be nice for them to see house prices going up, year by year, and more and more estates falling within the inheritance tax provisions, providing more and more money to be spent on other things, but that is a narrow view. The Government now have the option of considering how to sort out the pensions situation for the future.

Photo of John Bercow John Bercow Shadow Chief Secretary to the Treasury

Given that the Government propose an increase of 3.3 per cent. in the threshold, when, according to the Halifax, house price inflation is running at 18.5 per cent., does my hon. Friend agree that the Government owe us an explanation as to which of three possible scenarios describes their position on the matter? Do we not need to know whether the Government intend more property owners to be brought into inheritance tax, whether they expect house price inflation to be reversed or reduced, or whether they are less optimistic in their prognosis for inflation than the Chancellor has led us to believe?

Photo of Chris Grayling Chris Grayling Shadow Minister (Health)

I would be as interested as my hon. Friend to hear the Government's response to those issues. I suspect that they see an opportunity to levy another stealth tax, and so to provide a valuable source of revenue by bringing more estates into inheritance tax year by year. Even if house price rises slow down in the future, they are likely to continue to rise over time in line with at least average earnings. Therefore, if the threshold on inheritance tax continues to increase year on year at a rate less than the rise in average earnings, by definition, more and more estates will be brought into inheritance tax every year.

Pensions are only one aspect of the matter. The Government are completely missing another, which is the payment for residential, care and nursing homes in old age. Levying increasing levels of inheritance tax is likely to end up costing the Government money. If they tell the average family in many parts of the south-east, where such sums will be inherited from parents, that they must look at inheritance tax planning to ensure that they do not pay a large chunk of their parents' wealth to the tax man, those families will try to reduce the size of their parents' estate while they are still alive. That may well mean giving away the principal property. It may mean giving the maximum allowable under law, year by year.

People will have to make a judgment. If they have elderly parents in nursing homes, they do not know whether they will be there for only a year or two. The average time spent in a nursing home is as little as 18 months, but many residents live there for much longer. If the Government encourage people to run down their wealth to save inheritance tax, there is a risk that people who spend longer in nursing homes will have to have the bill for their care picked up because they no longer have the money to pay it themselves.

I do not think that the Government have fully thought through the implications of the measure. They regard it as a cash cow, but they miss the obvious point that it could contribute to a solution to the pensions issue. They miss the fact that they may end up picking up the bill themselves when elderly parents are in nursing homes for several years.

Why is inheritance tax levied at 0 per cent. or 40 per cent? To the best of my knowledge, it is the highest marginal rate of tax in the tax system. I can think of no other example in which there is a jump of greater than 40 per cent. Why on earth is a single rate set at the highest rate of income tax? Why do we not have a more graduated rate if the Government want to levy the tax fairly?

Photo of John Bercow John Bercow Shadow Chief Secretary to the Treasury

My hon. Friend makes a powerful point in any case, but does he agree that it would be even stronger if it were to transpire that many of those liable to inheritance tax and obliged to pay it at the rate to which he referred did not pay higher rate tax on their normal incomes? I do not have the figures with me to know whether that is true.

Photo of Chris Grayling Chris Grayling Shadow Minister (Health)

I thank my hon. Friend for that important point. Moreover, some of those who inherit properties from elderly parents may be entering or

approaching retirement, so may not be on a substantial income.

Although the Government will see the measure as a logical annual progression, they should tell the Committee what they plan to do with inheritance tax in the future and give full consideration to a proper review of the role of the tax and the contribution that it could make to some key issues.

Photo of Mr John Burnett Mr John Burnett Liberal Democrat, Torridge and West Devon

I should like to make one or two other points about the impact of inheritance tax, on not only the economy of the country but the social aspects of people's lives, especially given the significant rise in asset values. That rise far exceeds the lower limit provided for in clause 115 and other lower limits.

Before I entered the House, I was an adviser on taxation matters to individuals. Even five years ago, I detected an unhappy state of affairs within families. Significant pressure was put on older people to make potentially exempt transfers—far too early and of the wrong assets. I refer particularly to people's main residences. I have always taken the view that people should own and control their main residence, if possible until the day they die. They need that for their independence. These days, pressure is exerted on older people to make gifts of equitable interests, of their main residence or of the entirety of their main residence in order to start the seven-year period running. It can be corrosive of family relations if individuals are constantly being persuaded to make such gifts. The elderly should not be put under that pressure and they should retain their independence. It is an unhappy state of affairs, and brothers and sisters can fall out as well as parents and children. I hope that the Minister will let us have an idea of the Government's philosophy and their intentions with regard to the tax. How do they see it evolving and what will its future be?

Photo of Peter Luff Peter Luff Opposition Whip (Commons)

I should declare an interest. I have a modest terraced property in addition to my main residence. I rent it on an assured tenancy and have, therefore, known income from it. Without taking away from the comments of my hon. Friends, I want to defend the Minister. She proposes an increase in the threshold above the rate of inflation. It is only a modest one, but it is there and I would not want her to demolish my hon. Friends' arguments, with which I entirely agree, by claiming to be over-indexing. That would not be an adequate response to the powerful points made.

The housing market is in the process of change. My hon. Friend the Member for Epsom and Ewell (Chris Grayling) made the potent point, which the Minister should address in her concluding remarks, that over time the housing market tends to increase by the rate of earnings growth, not that of the retail price index. Now that the value of their residences is the principal component in most people's estates, the logic is to index inheritance tax in line with earnings and not with the retail price index. That important point is made more powerful by the fact that more people are now buying houses to rent—buy-to-rent mortgages are common—because they are fearful of their pension provision. That is inflating house prices by more, in a secular way, than has been the case in the past. We

shall see house prices rising by more than average earnings for the next few years as people seek to protect their pension provisions. I see that my hon. Friend the Member for Buckingham is frowning. Many of my friends in London believe that the property market in London is so hot because a number of people are buying flats to rent out to give them a capital gain that will help them in their old age.

It would be right to resist indexing by 18 per cent. this year because the Halifax says that the market has risen by 18 per cent. this year. The Economist of 15 June tells us that the major threat to the Labour Government is the future house price correction. It says that a house price correction

''is on its way and the Government won't like it any more than homeowners will.''

There is a strong case for considering a new, strategic, approach to inheritance tax. The Minister should consider two modest proposals before the next Finance Bill: one is the proposal to index in line with earnings rather than with inflation; and the other is to exempt the principal private residents from taxation altogether. Those alternative proposals would address the problem that the Financial Secretary faces. However, I urge her not to rely on the fact that she is over-indexed in terms of the proposal.

Photo of Edward Davey Edward Davey Shadow Spokesperson (Office of the Deputy Prime Minister), Shadow Minister (Olympics and London), Liberal Democrat Spokesperson (Olympics and London), Liberal Democrat Spokesperson (Office of the Deputy Prime Minister) 6:15 pm, 18th June 2002

With the leave of the Committee, I would like to make a few brief comments, even though I was not here at the start of the debate. While I have been here, it has been interesting. I have strong concerns about how inheritance tax bites, not only in London and the south-east but across the country. Increasingly, people who cannot afford good tax planners pay inheritance tax.

Inheritance tax is increasingly a random or lottery tax, paid for by people who die young in accidents or car crashes and have not thought about tax planning. They leave young families without resources because the taxman has grabbed some of them. Alternately, the taxman hits people on relatively modest incomes who happen to have stayed in a property for many years, the value of which has increased substantially. However, such people never thought that they would need to make provision for tax planning or did not have the income to afford it.

Although substantial sums of inheritance tax revenue come from wealthy people, increasingly that is not the case. Large proportions of inheritance tax revenue come from people on relatively modest incomes, which is a major change from when the tax and its predecessors were introduced. They were aimed at trying to put a tax base on the super wealthy. Now that is not the case, so the need to reconsider the rationale behind the tax grows year by year.

I urge the Government to consider inheritance tax in terms of an overview of capital taxes. The distinction that I would make between it and, say, capital gains tax is that although CGT has economic distortive effects, it is important in terms of underpinning the strength and integrity of the income tax system. Without a CGT system, it would

be easy for people to convert income into capital gain and escape income tax. Inheritance tax does not play that role at all. There is no economic reason for it, as it does not impinge on other aspects of the revenue-raising devices in the Exchequer's armoury.

Therefore, the Government must consider seriously a reform of capital taxes, to see whether they could radically restructure inheritance tax and even—dare I say it?—abolish it. At the same time, they must ensure that some of the revenue that would be lost from that reform was clawed back elsewhere. Although the Financial Secretary will probably say that the public finances are in robust health, I am not suggesting that we can have across-the-board tax cuts and abolish inheritance tax without looking for other sources to raise that revenue. Before Back-Bench Labour Members rush off to the Library to tot up the Liberal Democrat tax proposals in Committee, I should say that that is not my position.

The Financial Secretary and her colleagues should consider that idea, although she will clearly not do so today. As the hon. Member for Epsom and Ewell said, there are many knock-on effects on the pension sector, the care sector and industry in general. When I talk to business men and tax advisers—my hon. Friend the Member for Torridge and West Devon was one in a former life—about inheritance tax, they tell me that they spend huge amounts of time planning for the tax, at huge private sector cost. No doubt there is public sector cost on the other side of the equation. However, there is little gain to the Exchequer. In terms of compliance costs alone, there is a case for having another look at the tax.

I conclude by congratulating the Government. They are raising the allowance above RPI: a modest step in the right direction. However, it is time to look again at the tax, which has been given to us by history, but does not apply in the modern world.

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

We have had a very interesting debate on inheritance tax, with contributions from many Members. I am grateful to the hon. Member for Mid-Worcestershire (Mr. Luff) for reminding the Committee that in the Budget the Chancellor raised the rate at which inheritance tax becomes due from £247,000 to £250,000. I would like to remind the Committee that the legislation says that the inheritance tax threshold, along with other tax measures, rises with inflation unless otherwise specified by the Chancellor. The Chancellor specified otherwise this year. It is useful to set the recent modest increase in context.

I am also grateful to the hon. Gentleman for reminding the Committee that various organisations and representative bodies, and indeed hon. Members, make different predictions about what will happen to house prices. While some claim that house prices may rise because of the buy-to-let phenomenon, others argue that house prices may be about to suffer a sharp correction. It would be wrong to infer too much about future policy from the recent increase in house prices. The Government take a longer-term view, rather than acting on the basis of last month's—or last year's—figures, and I very much hope that we continue to do so.

It might have been useful had the hon. Gentleman also reminded the Committee that this modest measure still raises £2.5 billion for the Exchequer each year. That is the latest estimate for the revenue from this measure that we have for the current financial year. The hon. Member for Cities of London and Westminster (Mr. Field) and others who propose the abolition of inheritance tax must argue for a replacement source of finance, otherwise it would be only right if my hon. Friends were to tally up the spending commitments in this Committee and hold Conservative Members to account at a later date, a point ably made by the hon. Member for Kingston and Surbiton (Mr. Davey).

The right hon. Member for Fylde, as well as the hon. Member for Kingston and Surbiton, argued on several fronts that the tax was somehow historic and a hangover from the past with no relevance today.

Photo of John Bercow John Bercow Shadow Chief Secretary to the Treasury

I know that the Financial Secretary will not be tempted to misbehave in important matters of costing, but can I put it on the record for the avoidance of doubt that, although a very stimulating debate has already taken place, there has been no spending commitment by the Conservatives on the matter? That point is clear to me, it is clear to my hon. Friend the Member for Arundel and South Downs, and to the person to whom both of us defer, my hon. Friend the Member for Mid-Worcestershire.

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

I thank the hon. Member for Buckingham, who speaks for the Opposition on such matters, for clarifying that for the record. It would indeed be quite a significant spending commitment had the Opposition said today that they proposed to abolish inheritance tax. I am glad that that has been put right for the record. However, that does not mean to say that we cannot hold individual hon. Members to account in future for the spending commitments that have been made, and I am sure that that will be done.

The debate has betrayed, in many senses, the Opposition's obsession with housing wealth and house price rises at the expense of increases in other asset prices, depending on the assets to which one is referring. It is only right that housing is seen as part of a portfolio of different sources of wealth, and inheritance tax makes no specific distinction between the different sources of wealth. It is understandable that housing should dominate thinking at this time of rapid house price rises, but it is certainly not the case that housing is the dominant asset for people paying inheritance tax.

The latest figures that we have for inheritance tax payers are for 1998-99, but that is not too distant for us to refer to them usefully today. They show that inheritance tax payers in the 80 to 84 age group, a very typical age for those paying the tax, had less than a quarter of their total wealth in housing. That was matched by their holdings of cash and was far less than their holdings of stocks and shares. Even in the under–65 age group, about 8 per cent. of all inheritance tax payers, stocks and shares were a greater proportion of wealth holdings than property. Of course, that does not mean to say that house prices have no effect on

that group. They do have an effect, but that should be put in context and seen in proportion.

Some hon. Members have been arguing that house price rises have drawn more and more people into the inheritance tax net recently and they have particularly pointed to differential property prices in London and the south-east compared with other parts of the country. I remind the Committee that we should not look merely at the short term, but see house prices in a longer context. It would be foolhardy to react solely on the basis of a recent surge in house prices. Those with long memories will no doubt recall the housing boom that preceded the recent one.

Photo of Ann McKechin Ann McKechin Labour, Glasgow Maryhill

My hon. Friend the Financial Secretary has made a very good point about looking at the long term. While house prices have been increasing in certain parts of the country, the stock market has suffered a serious decrease in valuation. As she correctly pointed out, most estates involved in inheritance tax have a fairly significant stocks and shares portfolio. There is a degree of balance going on between the two elements. As the hon. Member for Mid-Worcestershire pointed out, some people are now moving into property to try to counter that, but it has to be seen that most people who have assets liable to inheritance tax are likely to have a different balance of assets to cover the different risks that occur at different times in stock and property valuations.

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

I thank my hon. Friend for an extremely important point. It is true that people have the opportunity to diversify their portfolios. It is also the case that if the value of their house has increased significantly, people have the opportunity to cash in on that and move. For example, 40 per cent. of Londoners have been in their homes for less than five years. It is not the case that death leads to an unexpected tax for which people did not have an opportunity to prepare.

While house prices have been growing faster than the inheritance tax threshold in recent years, that reflects a rebound after house prices fell by 30 per cent. in real terms in the late 1980s and early 1990s. Looking at the longer-term picture, even just for house prices, the threshold has kept pace and the picture is much more balanced. If we include other assets, the threshold for inheritance tax has clearly kept pace with the overall increase in assets over a slightly longer time period.

I do not accept the point that inheritance tax is sometimes a form of double taxation. That is just not the case.

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

Let us look at VAT and changes in VAT. The hon. Member for Mid-Worcestershire, from a sedentary position, suggests that VAT is a double tax as well. I would not accept that point, but clearly we start our debate on taxation from different bases. In many respects, inheritance tax is not fundamentally dissimilar to that.

Photo of Peter Luff Peter Luff Opposition Whip (Commons)

If one earns income and pays tax on it and then buys goods and pays VAT, it is double

taxation, and the same thing applies to inheritance tax. If one earns income, builds up assets and pays tax on them when one dies, it is double taxation. That may be justifiable, but the Financial Secretary cannot deny the truth.

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury 6:30 pm, 18th June 2002

It is often the case that housing wealth and assets built up through increases in house prices come from sources that are not taxed, or certainly not taxed fully. I do not accept that that is a form of double taxation.

Photo of Chris Grayling Chris Grayling Shadow Minister (Health)

The Financial Secretary is trying to have her cake and eat it. The wealth of a key group of inheritance tax payers does not largely come from property, but she is using the property example to defend double taxation. It is surely the case that if one earns money, pays income tax on it, puts one's money into a savings account, pays tax on the interest and then dies and pays inheritance tax on one's estate, that is treble, rather than double, taxation.

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

The hon. Gentleman can define double or treble taxation in any manner that he chooses, but that is not an argument that the Government and I accept, and we never have. No one has ever argued that one should be exempt from a tax such as VAT because one has already paid income tax. I do not accept the principle of the argument that inheritance tax is different from other forms of tax.

Several hon. Members have suggested that abolition or changes to the inheritance tax threshold could combat undersaving by people who are attempting to build up savings for their retirement. I certainly do not accept that that is the case. It is not the case that those who have accumulated vast wealth in housing are those who currently have difficulties in retirement. I will not bore or detain the Committee with the details of what we are doing on the retirement front, but I do not accept that reforms to the inheritance tax threshold would somehow help. I do not accept the thesis that it is inevitably for the good of the nation that people are able to hand down from generation to generation vast amounts of wealth that has been built up during the course of one generation. That is not necessarily a good thing.

Photo of Mr John Burnett Mr John Burnett Liberal Democrat, Torridge and West Devon

The perversity of this tax is, of course, that the richer one is, the less likely one is to pay it. I hope that the Financial Secretary will accept that that is because it is easy legitimately to organise one's affairs to avoid tax if one has a lot of assets and money. The people in the middle ground are the ones who will get caught. Sometimes we talk about people being in the middle ground, but some of them are not well off.

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

I understand the hon. Gentleman's point and people clearly take advantage of tax reliefs and tax-avoidance measures in order to get round some of the provisions that we have in place, which is their right for obvious reasons. However, I do not accept his case that people on very modest incomes are falling into the inheritance tax trap. The percentage of such people who pay inheritance tax is more than that that suggested earlier by the right hon. Member for

Fylde. The actual figure is 4 per cent., but that still does not represent a significant sum.

Mr. Jack rose—

Mr. Flight rose—

Photo of Mr Howard Flight Mr Howard Flight Conservative, Arundel and South Downs

For the record, when people refer to the ability to give and live for seven years, they often forget that if someone gives something to their children, capital gains tax, which is often not very different from an inheritance tax bill, must be paid on it. There are sometimes wrong notions about how capital gains tax and inheritance tax work together.

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

I thank the hon. Gentleman for making an illuminating point for the Committee.

I should like to expand on the point about assets because the Government are committed to spreading wealth, assets and opportunity, and we have proposals that are specifically designed to do that. There has been an over-emphasis on income as a means to greater opportunity, and we have to look at wealth as well as income. The way to do that is not to encourage the very wealthy to hand down money to their sons and daughters, but to spread assets more widely among those who do not have any. That is why we are proposing, for example, the child trust fund, which will give an endowment across the population, give more to families on lower incomes and allow children to build up assets from birth that they will be able to access at the age of 18. We have proposals to spread assets, which are an important component of our strategy to combat poverty and inter-generational inequality.

Photo of Michael Jack Michael Jack Conservative, Fylde

Before the Financial Secretary moves too far away from the point at which she used the word ''vast''—she said that she did not like vast wealth being passed on—can she for the benefit of the Committee define in monetary terms what she means by that?

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

No, I shall not define the words that I used; I think that they make sense to Committee members.

If we are to use taxpayers' money to spread wealth, we should use it to spread wealth among groups that have the least opportunity and advantage in our society, rather than to the benefit of others. For those reasons, I argue that the clause should stand part of Bill.

Photo of Michael Jack Michael Jack Conservative, Fylde

I listened with interest to the Financial Secretary, and I thank her for responding to an interesting discussion on the clause. However, she has not responded to the challenge from the Opposition side of the Committee. Back-Bench Members certainly called for a reconsideration of the purpose of inheritance tax.

The Financial Secretary attacked us for basing our arguments on the question of house prices, and said that people accumulated personal wealth by other mechanisms. However, she will be aware that her Government introduced individual savings accounts, and that their predecessors—personal equity plans—

will have accumulated wealth. Some people who have been using such savings vehicles to busily save to the maximum year on year are, I would hazard a guess, sitting on £150,000 to £200,000 of tax-free gain. They could be living in the most modest of properties—namely, valued at £50,000—and still be caught by the provision. The Government must decide on the objective of their strategy on capital tax.

The Financial Secretary may have a point that some large estates have grown to their size because the owners of the assets managed to circumnavigate taxation. Many lesser mortals have not been able to do that because they are PAYE taxpayers and must pay taxes because no mechanism exists legitimately to circumnavigate them. However, the point is that we are to be denied the opportunity to review that fact.

In justifying her support for the clause, the Financial Secretary invited those of us who implied that there was a case for abolishing inheritance tax to suggest where the missing money could come from. The Government have the solution in their hands. As we discussed at the beginning of the Bill, the National Audit Office produced a report on the indirect tax system, and the hon. Lady knows that that is losing more than £7 billion a year. If she and her Government ran it properly she would have more than enough to make up the missing money. There are ways and means.

Photo of Tom Harris Tom Harris Labour, Glasgow Cathcart

Will the right hon. Gentleman tell the Committee whether his enthusiasm for abolishing inheritance tax is a new-found belief, or whether he expressed it when he was a Treasury Minister in the previous Conservative Government?

Photo of Michael Jack Michael Jack Conservative, Fylde

I believe that the hon. Gentleman will find that my right hon. and learned Friend the Member for Rushcliffe (Mr. Clarke) indicated in speeches that in the long term it was certainly the intention of the then Conservative Government—I absolve my right hon. and hon. Friends on the Front Bench from any imputation that they may wish to follow these routes—to abolish not only inheritance tax but capital gains tax. The problem that we faced was one of economy. I would have been delighted if the Financial Secretary had said that the Government needed £2.5 billion and that such taxes were a nice way of getting it, because those who are taxed are dead and cannot say anything about it. That would have been an honest reply, but we did not get an honest reply. We got a pseudo-justification.

I have given the Financial Secretary a way of recovering the necessary moneys. There is a case to be made for re-examining capital taxes to determine whether they are effective, given the fact that there are ways around them. A £250,000 limit, up by all of £3,000, may be welcomed by some people at the margin of the last pound—I would not deny that. However, the Government should reconsider the tax and the way that it operates because, as discussed by Opposition Members, there may well be circumstances that the Government would subsequently regret.

Question put and agreed to.

Clause 115 ordered to stand part of the Bill.