New Clause 30 - Principal private residence exempt from IHT

Finance Bill – in a Public Bill Committee at 6:15 pm on 25th June 2002.

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'. After section 6(3) of the Inheritance Taxes Act 1984 (c. 51) insert—

''(3A) A person's principal private residence is excluded property.''.'.—[Mr. Hoban.]

Brought up, and read the First time.

Photo of Mark Hoban Mark Hoban Opposition Whip (Commons)

I beg to move, That the clause be read a Second time.

At the outset, may I just say that, due to the timing of the tabling of the new clause, I was unable to table the other part of the clause, which reduced the inheritance tax threshold? That brings a sigh of relief from the Minister. I am not so cavalier with the Government's finances as to suggest that we leave the threshold unchanged. I am conscious that there was a fairly lengthy debate on Thursday afternoon on inheritance tax and I have read much of it. One of the issues was indexation of the threshold. I am suggesting another way of getting around the issue by exempting a principal private residence from the scope of inheritance tax.

We have spoken at length about the way in which house price inflation has made people's homes the principal part of their estate, particularly for those with a relatively modest income but a relatively high asset base. It strikes me as unfair that the beneficiaries of a will should have to pay tax on the increase in the value of the property. That is beyond their control and also beyond the control of the person who bequeathed them the house. The exemption is important for another reason. Several of the issues that we face today about people saving for their retirement and the growing period over which mortgages can be repaid can be traced back to the increase in house prices. Because house prices have risen so much, people have taken out longer mortgages. The daughter of one of my constituents has taken out a 35-year mortgage, which causes me no end of concern. It shows what people on modest incomes need to do to buy houses in expensive areas.

We also referred during Treasury questions last week to the fall in the savings ratio. One reason why it is falling is that people are putting more money into their mortgages, partly because they have to spend more on their mortgage simply to acquire a house that they feel is appropriate for their family. Exempting the principal private property from inheritance tax will encourage intergenerational transfers so that children can benefit from the capital that their parents have

built up to repay some of those mortgages over long repayment periods. They will also find their savings augmented by the proceeds of the sale of the house, which will be free of inheritance tax. It is a relatively simple measure that addresses several issues that people experience as a consequence of high house prices.

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

I am relieved that the hon. Member for Fareham (Mr. Hoban) intended to accompany his new clause with a reduction in the threshold at which inheritance tax would apply. His new clause would be extremely costly to the Exchequer. I understand that the estimated cost would be around £950 million every year and it is with some relief that I understand that the hon. Gentleman does not intend the Exchequer to bear that cost and that he would seek to compensate by lowering the threshold.

Cost is only one factor in this debate. Perhaps the main objection to the new clause is that it would be profoundly unfair. When we considered clause 115 last week, hon. Members were keen to ask profound questions about the philosophy behind inheritance tax and the threshold. I am not going to be drawn into that or to rehearse those previous arguments, but, like our predecessors, we are all concerned about fairness, and particularly horizontal equity, so that people in broadly similar circumstances face broadly similar tax bills and not large differences in liability for reasons unconnected with their capacity to pay. The new clause runs flatly counter to that principle.

Every member of the Committee is aware that house prices have recently risen sharply, and we also know that there have been large regional variations. I am sure that hon. Members are aware of figures from the Land Registry showing that the average price of a detached property in the north-west is just over £139,000, whereas a similar property in Hampshire would cost £246,000. Under the new clause, someone in Hampshire would pay no tax if he or she owned property worth just under £500,000 and happened to live in that county's average-priced detached property, whereas someone in the north-west at the same place on the housing ladder and with the same total wealth would pay around £45,000. That does not seem fair.

I could go on about other aspects of the new clause that strike me as unfair, but for the Committee's sake, I want to make progress. I want to point out the practicalities of introducing a relief that would encourage people to buy the most expensive house irrespective of their needs. That is precisely what the housing market does not need at the moment.

Recent house prices rises have resulted in some sharp changes in people's ideas of where they stand in the wealth pecking order and people take time to adjust to that new state of affairs. They can be assured that my right hon. Friend the Chancellor will look carefully, as he always does and always has done, at the new pattern of assets when setting the IHT threshold each year and make adjustments as and when necessary. I do not believe that there is any call to make vast structural changes to IHT to accommodate passing movements in asset prices, and

particularly not to single out a particular asset price if such a change would be unfair and counter-productive.

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

It is accepted that the principle private residence is exempt from another property tax—capital gains tax—so what is the rationale for not making a similar exemption from inheritance tax for the same asset?

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury 6:30 pm, 25th June 2002

The hon. Gentleman is trying to draw me into the philosophy behind inheritance tax, which we debated at great length at our previous sitting. Suffice it to say that such a tax would not be fair. It would strike people in similar tax circumstances and with similar wealth differently in different parts of the country. It would be hugely expensive unless it were accompanied by a reduction in the inheritance tax threshold to, I believe, around £130,000. For those reasons, I urge hon. Members on both sides of the Committee to reject the amendment.

Photo of Mark Hoban Mark Hoban Opposition Whip (Commons)

I am grateful to the Paymaster General for her reply, but picking her up on that final point, I was not over-generous in the draft amendment that was not tabled; I suggested that the threshold should go down to £100,000. That would therefore have been tax generating—which, I must say, I regret.

This was very much a probing new clause, but it concerns an important issue for many people on a relatively modest income who have a large proportion of their estate tied up in property. It was important to air that issue. I suspect that we shall have to return to it in later years if we see a continuing increase in property prices across the country. I beg to ask leave to withdraw the motion.

Motion and clause, by leave, withdrawn.New Clause 32Costs of residential care (No. 2)