Clause 4

Finance Bill – in a Public Bill Committee at 5:30 pm on 8th May 2007.

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Rates and rate bands for 2010-11

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

Photo of Stephen Timms Stephen Timms The Chief Secretary to the Treasury

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.

Photo of Adam Afriyie Adam Afriyie Conservative, Windsor

The Chief Secretary says that just 35,000 estates or 6 per cent. will be caught by inheritance tax today, but has he rolled that figure forward? What proportion of estates and how many households and families does he predict will be caught in 2010-11?

Photo of Stephen Timms Stephen Timms The Chief Secretary to the Treasury

The answer is 6 per cent. I expect the proportion in the year the hon. Gentleman refers to and that is covered by the clause to be precisely the  same as now—6 per cent. That is very different from the impression that one might get from reading some newspapers.

Photo of Julia Goldsworthy Julia Goldsworthy Shadow Chief Secretary To the Treasury, Treasury

My question is along similar lines. What is the average size of an estate that ends up paying inheritance tax? The concern is that the largest estates find ways around paying inheritance tax and that smaller estates, which are just over the threshold, are caught because of poor tax planning.

Photo of Stephen Timms Stephen Timms The Chief Secretary to the Treasury

I do not have the figure in front of me, but I hope I can give the hon. Lady some reassurance, particularly about the link between rising house prices and the payment of inheritance tax, which is where much of the discussion tends to focus. During the last quarter of 2006, the mean house price in the UK was £199,000. The median price, which I guess one might regard as the price of the typical property, was £175,000. In the south-east and London, the corresponding prices were £250,000 and £292,000 respectively. All those figures are within this year’s nil rate band.

One often reads comment in the press that misunderstands the position that we are in. When a home is owned with a mortgage, the mortgage debt will reduce the size of the estate as well. The truth is that the vast majority of property ownership falls well within the inheritance tax nil rate band. By fixing the band for 2010-11 at £350,000, we are continuing to provide certainty for families about the allowance in future years. I should like to underline my view that inheritance tax is fair, progressive and well targeted. I commend the clause to the Committee.

Photo of Theresa Villiers Theresa Villiers Shadow Chief Secretary to the Treasury

This feels rather like “Groundhog Day”, because I am starting the Finance Bill 2007 as I ended the 2006 Bill—by talking about inheritance tax. However, everyone in the room will be delighted to hear that I am not going to speak for nearly as long this time round. [Hon. Members: “Shame.”] I think it was for a week last time.

The Opposition are obviously broadly supportive of the proposal to increase the threshold for inheritance tax. However, given the controversy surrounding inheritance tax, its rates and its thresholds, I should like to address the rates and bands in the clause. However, in case my remarks instantly prompt lots of interventions, I should make it clear before I start that I am not in a position today to put forward proposals to increase the threshold further or to amend the rate. I know that many would like me to, but I am unable to do so. That is partly because it would be foolish for my hon. Friend the Member for Tatton (Mr. Osborne) to write his 2009 Budget now, but it is also because the Opposition fear that when we win a general election in 2009 or 2010, the public finances will be in a pretty poor state. That means that we feel that the nation may well not be able to afford tax cuts in 2009. We believe that economic stability is more important tax cuts. Because we adopt that fiscally responsible approach, our priority on first being elected to Government is likely to be repairing the public finances. That is why we are not making up-front promises of tax cuts.

Photo of Wayne David Wayne David Labour, Caerphilly

I will be generous. I can perhaps understand why the hon. Lady will not put forward specific amendments, but could she help us by at least giving some verbal indication of what she would liketo see?

Photo of Theresa Villiers Theresa Villiers Shadow Chief Secretary to the Treasury

I have answered the question already. I have said that we are not making up-front promises of tax cuts.

Photo of Edward Balls Edward Balls The Economic Secretary to the Treasury

For the benefit of the Committee, will the hon. Lady clarify what proposal the tax commission set up by the Leader of the Opposition and led by Michael Forsyth made on inheritance tax?

Photo of Theresa Villiers Theresa Villiers Shadow Chief Secretary to the Treasury

That commission put forward a range of interesting ideas on inheritance tax and other taxes. It proposed a significant reform of inheritance tax, which involved replacing it with a modified form of capital gains tax. That is one reform that I would hope hon. Members on both sides of the House would consider. That proposal is not the policy of the Conservative party; it is simply a proposal that we will consider, among the other ideas set forth in the Forsyth commission report.

We are always open to ideas to reform the tax system, whether they concern inheritance tax or any other sort of tax. Although we are not proposing tax cuts, it nevertheless remains important for both sides of the Committee, in assessing the merits of the rates and bands that the clause sets out, to reflect on the concerns that many of our constituents have about inheritance tax.

We should consider four points: first, the fact that, like previous clauses, clause 4 proposes to legislatefor the future; secondly, the controversy surrounding house prices and inheritance tax thresholds, to which the Chief Secretary has adverted; thirdly, concerns about the general operation of inheritance tax and how the thresholds can affect some vulnerable groups; and lastly, the interaction between IHT thresholds and the pre-owned assets tax regime.

I can deal briefly with the first point by asking the Chief Secretary a question. Why does the Chancellor wish to legislate for the future in this area? As we have heard, the clause focuses on the financial year 2010-11. I am struck that he is legislating that far ahead, and I should be interested if the Chief Secretary can provide precedents. It seems odd, as the Chancellor prepares to move from No.11 to No.10, that he should be so keen to tie the hands of his successor. I should be interested to hear the rationale and whether it makes sense to set thresholds this far in advance.

My second point is more substantial and concerns the impact of rising house prices on the thresholds that we are considering. Increasing concerns have been raised about the expanding impact and reach of inheritance tax. I have received many representations on the subject. Inheritance tax is no longer a taxonly on the rich. For example, in May 2002, the distinguished accountant John Whiting wrote in the Financial Times that inheritance tax is

“increasingly a tax that affects Middle Britain.”

IHT has expanded in recent years to cover people on modest incomes, which is due in no small part to the fact that the threshold has not kept pace with house price inflation. The value of many family homes is edging over the current £300,000 threshold.

In March, the Halifax published figures on the interaction between house prices and those thresholds. Since 1995-96, house prices throughout the UK have increased by 199 per cent., which is more than double the increase in the inheritance tax threshold. The Halifax estimates that the number of properties valued above the IHT thresholds has nearly doubled in five years; it believes that the number of owner-occupied properties in the UK that are valued at more than the 2007-08 threshold of £300,000 stands at 2.3 million, or 12 per cent. of all owner-occupied properties. In 2001, only 1.3 million properties, or 7 per cent. of owner-occupied properties, were valued at more than the then IHT threshold of £242,000. The Halifax went on to project that the number of properties valued at more than the IHT threshold throughout the UK could rise by a further 88 per cent., or 2 million, to 4.3 million properties by 2020.

Photo of Adam Afriyie Adam Afriyie Conservative, Windsor 5:45 pm, 8th May 2007

Does my hon. Friend share my concern that inheritance tax is a burden for middle England and the middle classes? Those who are very wealthy can always come up with schemes and ways to get around paying it.

Photo of Theresa Villiers Theresa Villiers Shadow Chief Secretary to the Treasury

I certainly think that the impact on those with middle incomes can be tougher than it is on those with high incomes.

The Chief Secretary has given us the figures for estates that are currently caught by inheritance tax, but the real anxiety is over the projections of how many people will be drawn into the inheritance tax net in the future. On the basis of the Halifax figures, the number of postcode districts in England and Wales with an average house price above the IHT threshold would more than double from 236 in 2006 to 480 in 2020, which would account for 23 per cent. of all postcode districts. That would be mitigated by the changes, which the figures predate, but the problem will continue to occur. The Halifax figures for February 2007 show that the average house price in greater London had increased to £287,000 by the end of 2006, taking it above the £285,000 threshold then in operation. Although the national average house price is still below the threshold, average house prices in London and the south-east are edging above the rates that are in effect.

Photo of Ian Lucas Ian Lucas Labour, Wrexham

The Chief Secretary has already indicated that the proportion of estates on which the tax is paid will remain static at 6 per cent. Does the hon. Lady have any evidence to suggest that that proportion will increase?

Photo of Theresa Villiers Theresa Villiers Shadow Chief Secretary to the Treasury

Grant Thornton produced a good report on the subject, which estimated that if asset prices continue to grow at their long-term average rate between now and 2009, the number of tax-paying estates could rise to 45,000 or 50,000. Again, that figure will be slightly mitigated by the increases that we  might see in the future, but Grant Thornton is talking about 2009 figures. There is some evidence that the reach of inheritance tax will expand over the next few years.

Looking at the mitigating effect of the threshold that we are examining today—the £350,000 threshold—the delay in its implementation will mean, of course, that it will not necessarily address my concerns. That is because one can expect house prices to keep increasing; there is at least a significant chance that they will keep increasing and a significant chance of an increase in the number of estates that have to pay tax.

The expanding scope of inheritance tax is illustrated by the amount that it raises. The Halifax research examined cumulative inheritance tax revenue over the five years to 2007-08 and calculated it as £16.4 billion, up more than 50 per cent. from the £10.8 billion raised by the Government in the previous five years. As we have heard, revenue raised in 2006-07 was £3.6 billion and that was up 12 per cent. on 2005. The Government project a significant increase in annual IHT revenues, which are expected to top £4 billion in 2007-08. There are serious issues to be addressed regarding the interaction between house prices and the thresholds.

The third set of issues to which I would like todraw the Committee’s attention concern the general operation of inheritance tax and the threshold that the clause amends, and the impact on certain vulnerable groups. The impact of the current threshold would have been significantly more controversial were it not for the spouse exemption for inheritance tax. As we all know from last year, that exemption enables husbands and wives to pass property between one another free of inheritance tax. In assessing the appropriate thresholds and rates, the Committee should take into account the scope of that exemption, since it has a significant impact on how the overall tax operates and upon whom the burden falls.

Were it not for the spouse exemption, many more people would have had to sell the family home to pay their tax bill. That is why the Government’s proposals to limit the spouse exemption in the Finance Bill 2006 were so controversial and why their turnaround on that issue was so widely welcomed. Another significant change is the Civil Partnerships Act 2004, which expands spouse exemption to gay couples entering a civil partnership.

There is another matter that all parts of the House should consider, in a completely bipartisan way, in respect of inheritance tax and how it should be reformed: the question of long-term dependent cohabitees who do not have the option of using the spouse exemption via marriage or a civil partnership. They might be long-term carers of elderly parents, adult disabled children living with their parents or, as illustrated by a case in my constituency, sisters who have lived with one another for many years. My constituent, Ann James, wrote to me on several occasions to set out her grave concerns about the impact of inheritance tax on her and her sister. She expects to have to sell her home if her sister dies before she does, and vice versa.

Those who cannot use a spouse exemption can often be harshly treated by this legislation, particularly in a constituency such as mine, where house prices are high. As well as the position of dependent cohabitees, the  Committee should also briefly consider—I promise that I will raise this matter briefly, Mr. Gale—the after-effects of last year’s changes to inheritance tax and trusts, and their impact on another vulnerable group: the disabled. We had a lengthy and controversial debate on that issue, and I will not repeat the arguments, but it is worth noting that those affectedby the changes that were introduced still have real difficulty working out how the system operates and affects the disabled.

It is an incredibly complex system and I turn to the effects of the thresholds that we are considering in the clause. As I am sure you are aware, Mr. Gale, trusts for disabled people often exceed the £300,000 threshold that is currently in place and the £350,000 threshold that we are considering putting in place for 2010. That is because sums of money devoted to caring for disabled people often have to cover a lifetime of care. Trusts are frequently used in such a situation, particularly where personal injury damages are received as a result of litigation. However, settlements resulting from damages or compensation payments could easily exceed £350,000. Under the current schedule 20 regime, such trusts are frequently affected by inheritance tax. Before last year, that was never a problem because people used life interest trusts, but that option has broadly been shut down by the Finance Act 2006. I have received representations about the framework that resulted from the 2006 Act as it is a complex system with considerable confusion about trusts for disabled people.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

I am listening carefully to what the hon. Lady says, but, as a former personal injury lawyer, I cannot quite understand her point about damages for those who have a major disability as a result of an accident. Those damages are sometimes transferred into trusts to provide compensation for an individual during the course of their life, not for their heirs and successors. Without going into too much depth, perhaps she could explain how that type of trust for someone with a disability comes into play?

Photo of Theresa Villiers Theresa Villiers Shadow Chief Secretary to the Treasury

The problem occurs when the trustis set up because, as a result of schedule 20, an inheritance tax charge will automatically be incurred unless the person for whom it is set up is covered bythe limited disabled exemption. As we discussed, the exemption for disabled people is quite narrow and depends on someone’s entitlement to disability living allowance. Therefore, a significant range of people who have important disabilities do not fall within the definition. That is one of the key issues. The other issue relates to the complex interaction between income tax, capital gains tax and IHT rules. Essentially, the problem is that it is difficult for a disabled person to get the allowances to which they are entitled under all three taxes. There are occasions when the two taxes are doubling up and a CGT charge and an IHT liability is incurred in the same situation, which makes the system tougher than it was before the Finance Act 2006. That probably was not intended to be a result of the 2006 Act and, on the record, I ask the Chief Secretary to look at that issue. I believe that the 2006 Act was not meant to have such an effect and I am sure that the Government did not mean to penalise disabled people  for using trusts. People are concerned about that problem and there is a strong case for reform and a simplification of the rules. I hope that the Chief Secretary can say today whether it is a matter of interest to him and whether the Government are prepared to consider the issue with a view to introducing reform of the legislation next year.

I have trespassed on the Committee’s patience for too long already, so I lastly mention that the Government’s ferociously complicated pre-owned assets tax regime interacts with inheritance tax. The regime was created to prevent people from avoiding inheritance tax and I will not anticipate the discussion that we will have about clause 25, but it is unfortunate that the Government have failed to resolve the problems with section 80 of the 2006 Act. They have also failed to deal with the problem of elections between inheritance tax and the harsh pre-owned assets tax regime.

In conclusion, as we have heard, inheritance tax continues to be a matter of deep controversy for a range of different political commentators and hon. Members. I hope that the Minister will consider some of the points that I have raised, particularly the expanding reach of inheritance tax on middle Britain and whether we need to reform the system to deal with the position of dependent cohabitees. In relation to schedule 20, we must ensure that the system doesnot operate to the disadvantage of disabled people, many of whom find trusts useful and, as a result of schedule 20, may have an increased inheritance tax bill.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West 6:00 pm, 8th May 2007

It is a pleasure to serve under you again, Mr. Gale.

I have to say to the hon. Member for Chipping Barnet that, if that was an abridged version of her speech, it was rather like reading a version of “War and Peace” in which the only abridgement has been to get rid of all the excess names and titles. On inheritance tax, I understand why the Conservatives will not put forward any figures at the moment. Their only slim chance of getting into office in 2009-10 will be if public finances are poor. In those circumstances, were the electorate misguidedly to put them into office, they would be able to do nothing about inheritance tax, so she is at least being honest.

It always interests and saddens me that the Conservative position on inheritance tax is basically a defence of the rich and scaremongering. For almost everybody who pays inheritance tax and who is not very rich, it is a tax based on a windfall gain due to the increase in the value of property. In most cases, that occurs not because of any action taken by the individual but because the market has risen. Secondly, it is paid only on death, so in almost every case except that of the super-rich, it is a tax on a windfall gain that is paid on death, which seems to me a reasonable tax.

Photo of Adam Afriyie Adam Afriyie Conservative, Windsor

Does the hon. Gentleman really not recognise that many people work incredibly hard for their entire lives to support their families and secure them in a home? They are not deeply wealthy people but people such as the owners of owner-managed businesses all over the country, who keep those  business going for their families. We are talking not about extremely wealthy people but about middle England, average income, average people.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

No, I do not accept that. I do not accept that they are middle income people. We are not talking about income. Inheritance tax is a capital tax. The idea of middle income is rubbish. People on an average income, unless they are incredibly hard savers, will never get to the threshold unless they buy a house and it goes up a lot in value. The hon. Gentleman, who is a very successful business person, may not realise it, but for those of us who have been on decent incomes for most of our working lives, the concept of being able to save anything like £350,000, apart from through a house, just out of a bit of income is completely alien. With “middle incomes”, to use the phrase used by the Opposition, in most cases, it comes about because people have a windfall gain in the increase in the value of their private home. That is why the Opposition keep banging on about house prices.

Photo of Brooks Newmark Brooks Newmark Conservative, Braintree

I am curious. Does the hon. Gentleman want a more European society in which individuals do not save? Does he wish to have a society in which people are encouraged not to save but to spend all the money that they earn, and not invest at all in the future for the sake of their families? Is that the sort of society that he wants, or would he prefer a society in which people, having put money aside, see some benefit accruing to their families?

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

First, I was born and raised in this country and have lived all but nine years of my life here. I have always been a European and I shall remain a European. Secondly, in terms of people’s savings, I do not accept the intellectual constraint of the hon. Gentleman’s argument. People work hard in this country, and people save money. People buy houses. For a lot of people, including me, the value of those houses—in my case over 23 years—has gone up about tenfold. That is not because of anything that they have done but because the market has gone up. I have no objection to people paying inheritance tax on that windfall gain. Most of the people whom we have discussed have benefited from the general rise in house prices, not from their thrift in building up a business. Those who have built up a business above the threshold or saved money have done very well. Good luck to them. I do not think that they should object to an inheritance tax that has to be paid on death.

The Grant Thornton figures that were cited by the hon. Member for Chipping Barnet—35,000 to 40,000 or even 50,000—represent, in round terms, an increase from 6 per cent. to 8 per cent. of estates. Given that fewer than 10 per cent. of people in the United Kingdom pay higher-rate income tax, we are talking about the well-to-do, including every hon. Member and right hon. Member here, because we quite properly pay higher rate taxes, even though by some standards we do not earn a fortune. I am very well paid for being a Member of Parliament, and I have no other source of income. I am happy to pay tax at the higher rate. I do not regard myself as wealthy, and I should be quite  happy to pay the inheritance tax were my estate valued above that threshold. As far as I know, our estate—that of my wife and I—will not be valued above that threshold. We do not live in London. Some people in London who have very high house prices because of rising house prices will pay inheritance tax.

The hon. Member for Chipping Barnet has a point, however, about—in shorthand—the sister situation. The Government will have to consider that. In that situation, there should not be an exemption from inheritance tax in the same way that there is for transfers between spouses upon death, but the Government should consider a deferral of inheritance tax. I stand to be corrected, but when one sister dies, having lived with the other in the same house for 40 or 50 years because neither of them married or entered a civil partnership, the inheritance tax that is payable on their death should be deferred, so that the second sister can carry on living in what is essentially the family home.

Having said that, I have a couple of minor technical queries for the Chief Secretary. First, the wording of subsection (3) is, to say the least, opaque. For a lay person like me, it does not appear to bear much relation to explanatory note No. 4 on clause 4, so I urge the Chief Secretary to look at it again.

Secondly, it will not surprise Members to know that I strongly object to the wording of subsection (4), starting as it does with “But”. In that context, the word is completely redundant. However, the wording is also opaque to the lay person, and it does not appear to bear any relation whatever to explanatory note No. 5.

In addition, “that section” in subsection (4) may refer to

“section 8 of IHTA 1984”,

which subsection (3) mentions. However, grammatically, the sudden appearance of “that section” means that it does not necessarily refer to any particular section. The parliamentary draftspeople need to have another look at it. There is opaque wording in subsections (3) and (4), there is the anathema of “But” at the beginning of subsection (4), and “that section” in subsection (4) does not appear to relate to any specified section therein.

Photo of Julia Goldsworthy Julia Goldsworthy Shadow Chief Secretary To the Treasury, Treasury

The clause sets out the rate of inheritance tax at £350,000 for 2010-11. The Chief Secretary echoed the words that were used when the provision was set out in the Budget, saying that the threshold change would be introduced to continue to provide a fair and targeted tax system. I do not think that anyone would go against that intent, and to give credit to the Government, the change raises the inheritance tax threshold in real terms for six successive years.

There is an issue about the fact that the Bill sets the rate for 2010-11. We have already had a debate about the corporation tax and income tax changes that will kick in next year. The provision under discussiongoes one step further, showing perhaps that the chancellorship will move to No. 10 along with the current Chancellor. Owing to the announcement of other significant tax changes and the headlines that they grabbed, the change before us perhaps slipped by the wayside.

How will the real terms growth involved in lifting the threshold fit with the current and projected growth in house prices? I should also be interested to know the average size of the estates that pay inheritance tax. If we are serious about providing a fair and targeted tax system, our chief concern should be about what happens to very wealthy estates. We have been discussing people who largely fear inheritance tax. They live in their property, and it is more difficult for them to dispose of their asset than it is for people who are incredibly wealthy and have all kinds of assets that are easier to dispose of in the lifetime gift system. If the tax system is to be fair and targeted, we must recognise that there is an inconsistency between the treatment of lifetime gifts and the inheritance tax system. The concern is that it is easier for people with higher value assets to dispose of them in a way that avoids inheritance tax than others—I do not mean those on an average income. As we have heard, a significant number of people are involved, but when we talk about averages, a large number of people fall below the average. The concern is that the people at the level above the average will find it easy to dispose of their assets; they have seven years to do so and do not live in their assets in the way in which the people who are concerned about inheritance tax do. Not dealing with that inconsistency means that the system is not targeted or fair.

My constituents have brought the issue to my attention. I live in a part of the country where average incomes are probably 20 per cent. below the national average, but some houses have seen price rises among the highest in the country. Fishermen, who live in family cottages and have a family business have children who will not be able to stay in their property. Fishermen live in the area to do their job, but because properties are bought as second homes and house prices are going through the roof, there is no way that someone doing that job can continue to live in that property.

Another issue that is regularly brought up in my surgery concerns people who fall into the inheritance tax boundaries because they have not had proper advice. The wealthier someone is, the easier it is for them to employ an accountant or lawyer for advice on how best to make use of the allowances and the spouse exemption and on how to maximise the use of the thresholds. People come to me who failed to do that through their own error, but then saw themselves and their families caught by inheritance tax. What can the Treasury do to ensure that such people understand and can make the best use of the system?

What comparisons has the Treasury made between the projected rises and the increase in house prices? For many people, inheritance tax is a stealth tax. As the hon. Member for Wolverhampton, South-West said, people live in their asset, and so they might not know the value of the property until they have to realise the estate. There is a lack of understanding and a fear that thresholds will not keep pace with house price inflation, which will mean that people will unwittingly be caught by the system. People do not understand what they need to do to make the most of their allowances, as they are entitled to do.

My key concerns are about the lack of understanding and about whether the tax is consistent with the Government’s taxation of wealth. The poorest  20 per cent. pay a higher proportion of their income in tax than the richest 20 per cent. What can the Government do to inheritance tax to ensure that they capture the growing wealth, especially among the richest 1 per cent.? If the idea is to make the system fairer and more targeted, the Government need to go far beyond the clause. Fundamentally, the treatment needs to be consistent not only for properties but for other assets. The Government must also be consistent in how they deal with lifetime gifts, which are the easiest way for people who can easily dispose of their assets to get out of paying inheritance tax. The situation is difficult for those with a property, and people are getting confused. They are unwittingly getting caught, and that is where the chief concerns lie.

Photo of Adam Afriyie Adam Afriyie Conservative, Windsor

They say that there are two certainties in life: death and taxes. The Government—I am not sure that they should be commended, because it is rather alarming—have managed to combine the two for about 50,000 people. In 1987, about 18,000 were caught by the inheritance tax threshold, and by 2009-10 up to 50,000 people could well be caught.We were having a little debate earlier with thehon. Member for Wolverhampton, South-West, who observed that the people caught in the inheritance tax trap are relatively wealthy. I argued that they are not necessarily wealthy but can easily be people with a middle income who have been doing the right thing for most of their lives.

The reports that we have been talking about and the projections for estates caught in the inheritance tax trap extend only to about 2010 or perhaps 2011. If those forecasts are rolled forward 20 or 30 years, far more people will be caught in the trap. It is self-evident that most people with mortgages in this country have repayment mortgages, or the value of the mortgage compared with the property falls gradually over a long period. That will of course have an impact on their estates at the unexpected time when they pass away.

The other thing to remember is that inheritance tax is not just about house prices. Many people on average salaries amass enough during their lifetime to cross the current threshold, perhaps not by 2010, but certainly by 2015 or 2020 as they gradually pick away at their mortgages and, hopefully, save for their pensions funds. All sorts of assets are built up over a longer period. I have concerns about the very long term and the number of people who will be caught.

I am also concerned about people who are self-employed and owner-managers of small family businesses. They may make a small profit each year—perhaps £50,000 or £100,000—and when those businesses are sold on death, their value may be in the region of between five and 15 times net annual income. People who have worked hard all their lives, perhaps with family members, and built up an asset in a business are caught within the inheritance tax threshold. It is not just house prices that affect the number of people caught in the trap.

A wider debate that is of interest concerns what sort of tax we want to raise in the United Kingdom. There is a strong argument for income tax to be lower during our lifetime while we are working hard and generating   prosperity for the nation. There is also an argument that inheritance tax should be higher. We should not dismiss immediately any concept that what we have today should be fixed in stone. The matter needs consideration, so I am not blinkered about inheritance tax and am not saying that it is inherently a dreadful and bad tax, but it is certainly double taxation. In 1997, we did not expect to see what has happened by 2007, but we should not be too rigid in our view of exactly what sort of taxation is right or wrong in the economy.

It seems odd and bizarre that we talk about corporation tax on small businesses only one year ahead—although we have been talking about two or three years ahead—and all of a sudden we are told out that in 2010 the inheritance tax threshold will be £350,000, marginally above the rate of indexation if it were indexed. Why have the Chancellor and the Treasury chosen to do that now when in so many other areas they have covered their hand to hide or obscure what the tax regime may be in a few years’ time?

We are talking about inheritance tax rates in 2010. What sort of behaviour is that supposed to encourage? Is it to encourage us all to live longer than 2010, or to die sooner than 2010? What is the objective of making the announcement today rather than indexing the allowances? Why choose to announce today what will happen in 2010? What is the rationale behind that?

Finally, I have a general question for the Chief Secretary. What is the announcement’s objective? Is it to stop people growing the value of their estate by spending money during their lifetime? Is it to stop hard-working families with owner-managed businesses passing them on, or selling the business early and spending the money? Or is it a straightforward tax-raising mechanism, albeit indexed marginally higher than the rate of inflation today? I should appreciate clear answers to my questions.

Photo of Brooks Newmark Brooks Newmark Conservative, Braintree 6:15 pm, 8th May 2007

There is a perception that inheritance tax is an archaic, deeply regressive, immoral tax, not least because it amounts to a double taxation. I am not here to incur the wrath of my Front-Bench team, and it is beyond my remit as a mere Back Bencher to suggest tax changes, but it is my role as a member of the Opposition to probe and to question.

I did not need to read the explanatory notes because the clause heading states, in bold print, “Rates and rate bands”. I expected them to be for 2007-08, but, blow me, the heading continues, “for 2010-11”. Why do the general public, who have concerns about the motives behind inheritance tax, have to wait for 2010-11 for the band to be raised to £350,000?

The Chief Secretary did a good job of answering the question on corporation tax, which I appreciated. The hon. Member for Falmouth and Camborne and my hon. Friend the Member for Windsor asked why we had to wait for 2010-11, and I may have an explanation for them: inheritance tax is another example of the Government’s commitment to taxation promoting behaviour change by encouraging people to live long enough for them to leave office. But who knows? The year 2010 is a long way off and there is much damage that the Government can continue to do with the tax system.

The Chief Secretary said that roughly 6 per cent. would pay inheritance tax, yet my hon. Friend made the point that in 1997, roughly 18,000 people paid  inheritance tax. I do not have the projected figures, but in 2005, 37,000 paid inheritance tax, more than double the 18,000 figure.

I also have figures from research carried out by the analysts Lombard Street Associates, who indicated that the number of people whose wealth stands above the inheritance tax threshold is set to rise from 2.1 million in 2002 to approximately 4.5 million in 2009. How does that square with the 6 per cent. figure?

It is not for me to make suggestions on tax cuts, or on where savings can be made, but I shall slightly provoke my hon. Friend the shadow Chief Secretary and make the minor suggestion that money wastedon the tax credit overpayments alone amount to£1.8 billion, which is only 50 per cent. of the£3.6 billion estimated to be collected in inheritance tax receipts. Perhaps the Government could consider some flexibility in that small area.

Photo of Julia Goldsworthy Julia Goldsworthy Shadow Chief Secretary To the Treasury, Treasury

I wonder whether the hon. Gentleman’s earlier comments on the Laffer curve would apply in this case. If inheritance tax rates were reduced, would fewer people choose to die?

Photo of Brooks Newmark Brooks Newmark Conservative, Braintree

They may have no choice over whether or not to die, but they do have a choice over whether to make their tax affairs more efficient. A lot of people who very much believe in the spirit of what the hon. Member for Wolverhampton, South-West said about our having a due to society and our obligation to leave something behind. I would therefore encourage the Government to think again about where savings could be made, so that they could perhaps raise the threshold a little more, so as to encourage people to save for the future and give to their children.

Photo of Stephen Timms Stephen Timms The Chief Secretary to the Treasury

The hon. Member for Chipping Barnet gave us a very different perspective on the Forsyth report from the shadow Chancellor when it was published. If I recall, he warmly welcomed it. She described it simply as a set of potentially interesting ideas that the Opposition will consider, along with all the others proposed to them. That was a striking and noteworthy contrast.

The hon. Lady asked me, as did other Opposition Members, why we were announcing the nil rate threshold for 2010-11 so early. She then talked about what house prices would be like in 2020, and I thought that she was going to ask me to announce the threshold for then, too. In fact, setting out the threshold a few years ahead, as we have done consistently over the past few years, is helpful in giving families confidenceabout how things will be over the period ahead. The threshold for the current rate was announced in the 2005 Budget, while the threshold for the following two years was announced in last year’s Budget. We are simply maintaining that practice.

There has been some discussion about the incidence of estates paying inheritance tax. In 1986-87, the proportion of those paying inheritance tax was not what Opposition Members said it was—it was 5 per cent., or 30,000 estates, so only fractionally below what it is now. The rate was 6 per cent. in 2004-05, 6 per cent. in 2005-06 and 6 per cent. last year, and I expect it to be 6 per cent. consistently over the next few years.

Photo of Theresa Villiers Theresa Villiers Shadow Chief Secretary to the Treasury

On that point, I have a Library note that indicates that the figures for 1997-98 were 3 per cent. and 18,000 estates, which is consistent with what my hon. Friends stated, rather than with the figures that the Chief Secretary has just quoted.

Photo of Stephen Timms Stephen Timms The Chief Secretary to the Treasury

No, the hon. Member for Windsor was referring to 1987. In 1986-87, the figure was 30,000, or 5 per cent. of estates.

Photo of Adam Afriyie Adam Afriyie Conservative, Windsor

My apologies, but just to clarify, I did mean to say 1997.

Photo of Stephen Timms Stephen Timms The Chief Secretary to the Treasury

It may nevertheless be of interest to the Committee that the figure in 1987 was 30,000, or 5 per cent. of estates.

The hon. Member for Chipping Barnet said that there were some outstanding difficulties with the way in which the trust provisions from last year were operating. I have seen little evidence of that, but if she wants to drop me a line or draw my attention to any particular difficulties, I should be glad to look at those. Neither she nor any other Opposition Member has tabled an amendment to the clause, so I presume that they are broadly happy with how the arrangements are working. However, if there are particular difficulties, I should be happy to consider those.

The hon. Lady made the point—my hon. Friend the Member for Wolverhampton, South-West picked this up, too—about the position, which one could well imagine occurring, of two sisters living together in a house that had grown to be worth quite a large amount. The approach that we prefer—I think it is the right approach—is to uprate the basic nil rate band for all taxpayers, rather than to introduce a special relief for a specific group. One could imagine how such a relief might work, but, again, nobody has proposed such a relief in an amendment and it would be quite complicated to introduce one.

We all support simplicity, and inheritance tax is straightforward in how it works. There is a good deal to be said for our approach, which is to uprate the basic nil rate band beyond inflation, so reducing the bill for all taxpayers and taking some estates out of the tax altogether. It may be helpful to make the point that where inheritors do not wish to sell a house, inheritance tax that is due on that house can be paid in instalments over 10 years, provided that the house is not sold. In some instances, that might be helpful.

Photo of Adam Afriyie Adam Afriyie Conservative, Windsor 6:30 pm, 8th May 2007

The Chief Secretary drew party political pleasure by pointing out that in 1987, 30,000 people were paying inheritance tax. Does he seek to equal our record of reducing the number of people who pay inheritance tax in the next 10 years?

Photo of Stephen Timms Stephen Timms The Chief Secretary to the Treasury

No. As I have made clear, I expect a pretty steady proportion of estates to pay inheritance tax in the next few years. I expect it to remain steady at around 6 per cent., so 94 per cent. will therefore pay no inheritance tax.

The hon. Member for Chipping Barnet asked about trusts for disabled people. As she knows, they were taken out of inheritance tax in specific circumstances. Although I was not here, I know that the rules and the   qualifying criteria were debated at some length last year. If there are particular issues that she would like us or Her Majesty’s Revenue and Customs to consider, she should draw them to my attention in a letter and I will be happy to ensure that that happens.

My hon. Friend the Member for Wolverhampton, South-West was uncertain about the wording of the clause. I hope that I can help him. Subsection (3) is used to set the nil rate band for 2011-12—that is to say the year after the value of £350,000 set by the provision earlier in the clause. Subsection (4) will stop the retail prices index increase for 2010-11. I think that that works correctly. If he thinks otherwise, I am sure that he will draw my attention to that fact.

The hon. Member for Falmouth and Camborne asked about the average value of an estate paying inheritance tax. I do not have that figure to hand. However, I do not accept that inheritance tax is optional for wealthy people. We have taken determined steps to close loopholes in inheritance tax to ensure that people pay their fair share. In addition, we keep inheritance tax under close review, and people looking at our record will be in no doubt that we will act against unfair tax avoidance in this or any other area.

The hon. Lady asked what will happen given future house price increases. As I said, we believe that the threshold that we have set will keep consistent the proportion of estates paying inheritance in the next few years. The thresholds take account of expected increases in house prices over that time.

The hon. Member for Windsor suggested that inheritance tax might be set at a higher rate. That is an interesting suggestion, and one which may commend itself to his hon. Friends. To respond to his point on owner-managers, £350,000 is a substantial sum in that instance. There is specific relief, however, for qualifying privately owned businesses, which can reduce, or in some cases eliminate, inheritance tax, which may be helpful in the circumstances that concern him.

To describe inheritance tax as double taxation,as the hon. Member for Braintree did, is to make a completely specious argument. It is rather like saying that VAT is double taxation because people have already paid income tax on their income. As he knows, double taxation is a pretty well-defined concept and I certainly do not think that it applies in this instance.

On the whole, the Committee has welcomed the fact that there will be above inflation indexation.

Photo of Brooks Newmark Brooks Newmark Conservative, Braintree

Perhaps the right hon. Gentleman buys houses differently from the rest of us. Those of us that buy our houses buy them with income and we have paid our tax on income. Having paid our tax on income, if we are then hit with inheritance tax at the end of the day, that is indeed a double taxation.

Photo of Stephen Timms Stephen Timms The Chief Secretary to the Treasury

Presumably the hon. Gentleman takes the view that VAT is also double taxation.

Photo of Stephen Timms Stephen Timms The Chief Secretary to the Treasury

The hon. Gentleman confirms that that is his view, in which case I would be very interested to know what implications he draws from that. However, I do not think that he is on to anything fruitful with that line of argument.

I am grateful that the Committee has welcomedthe fact that the nil rate threshold will be increased ata rate above inflation. I commend the clause to the Committee.

Question put and agreed to.

Clause 4 ordered to stand part of the Bill.

Photo of Roger Gale Roger Gale Conservative, North Thanet

Before we proceed, and in case an adjournment conflicts with a Division on the Floor of the House, I would like to indicate to Members now that there are red boxes behind me for the storage of Members’ papers for the duration of the sittings of the Committee.