(Except clauses 1, 4, 8, 189 and 209, schedules 1, 23 and 33, and certain new clauses and new schedules) - Clause 206 - Indexation of rate bands

Finance Bill – in a Public Bill Committee on 26th June 2012.

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

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Education) 10:30 am, 26th June 2012

I welcome you again to the Chair, Mr Bone, on the final day of this Finance Bill Committee. I assure you that the Committee will be as thorough and scrutinising as it has been from the start. It is an honour to serve under your chairmanship today.

I will address clause 206 and introduce some of the queries and concerns that arise from the clauses on inheritance tax. We all remember what a priority inheritance tax was for the Government when they went into the last general election. Their manifesto pledge to raise the inheritance tax threshold to £1 million lasted just 12 days and did not make it into the coalition agreement. That was good news for Opposition Members because the pledge was a millionaires’ charter that would have given the richest people in this country a tax break at a time when the incomes of millions of hard-working families are being cut.

I can therefore happily say that these clauses do not introduce a large rise in the threshold. Instead, clause 206 will limit the threshold by changing the automatic index-linking of the nil rate band—the amount that can be inherited before inheritance tax is payable—to the consumer prices index inflation measure, instead of to the retail prices index. We do not oppose that change. The vast majority of people will be unaffected by the measure; only 6% of estates are large enough to be subject to inheritance tax. Labour’s last Budget in 2010 confirmed that the nil rate band would be frozen until 2015 as a deficit reduction measure. We therefore see the change as a reasonable measure to slow down the rate at which the threshold will grow after that.

Will the Minister confirm whether his Government’s policy is to lift the freeze after 2015? What are the Government’s future plans?

Photo of Charlie Elphicke Charlie Elphicke Conservative, Dover

Is the hon. Lady saying that she opposes any rise in the threshold, now or in the future? Or does she believe that there should be a rise in the threshold at some point?

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Education)

I am not in any way saying that I am opposed to rises in the threshold. I am grateful that the hon. Gentleman gives me this opportunity to make it clear that I do not think it is appropriate at this stage, given the current economic situation and the burden that is falling on those who earn the least, for the threshold to be frozen for those who are most able to bear such a burden. I seek confirmation of the Government’s policy on the freeze and any potential future rises.

The measure before the Committee will collect more revenue from the people who can afford it most. For that reason, we will not oppose or seek any amendment to the clause.

Photo of Jacob Rees-Mogg Jacob Rees-Mogg Conservative, North East Somerset

It is a great pleasure to serve under your chairmanship, Mr Bone, although, to some extent, there is sorrow that we are ending this marvellous consideration of the Bill. This Committee has been a feast of delights, joys, wit and entertainment from both sides.

On inheritance tax—or death duty, as it more popularly ought to be called, because it is not on inheritance but on death—I want briefly to remind Conservatives of what they really believe. We believe that this is a monstrous tax, one of the cruellest taxes that falls on people at the worst time when they are facing the loss of a member of their family, somebody to whom they were probably devoted. This tax takes something that has been built up over years, sometimes generations, and penalises it at a 40p rate, snatching it into the grasp of Revenue and Customs. One would think that the undertaker turns up followed immediately by somebody accounting for the Inland Revenue. That is a cruel and sad thought. The Conservative party was amazingly popular when it said it would raise the threshold to £1 million. The right hon. Member for Kirkcaldy and Cowdenbeath (Mr Brown) decided that a general election could not be called, so popular were the Conservatives at that point. The opinion poll ratings shot up; it made us almost as popular as the veto of the European treaty did. There is a lesson to learn from that of sticking to the true Conservative principles of low taxation and not taxing capital, because that is a tax on something that is not fundamentally liquid. That is bad whether it is on death, wealth or property.

Photo of Grahame Morris Grahame Morris Labour, Easington

I am sorry to interrupt the hon. Gentleman’s flow. Will he advise the Committee whether he agrees with his right hon. Friend the Member for North Somerset (Dr Fox)? On a radio interview during the week, he said that he believed in the abolition of inheritance tax.

Photo of Jacob Rees-Mogg Jacob Rees-Mogg Conservative, North East Somerset

Somerset is such a place of wisdom and sense that it is no surprise to me that I agree with my right hon. Friend and immediate neighbour, with whom I am sometimes privileged to be confused when people forget the word “East” in my constituency. I take it as a matter of honour to be compared to the great man, and his wisdom is known across the nation. What he said is absolutely right.

Photo of John Mann John Mann Labour, Bassetlaw

To clarify the hon. Gentleman’s core Conservative principles, which he advises his colleagues to consider for the first time in the  Committee, will he say whether it is his view that taxation, as he suggests, should be lowered, but that everybody who avoids the set rates of tax should be pilloried and identified, from Prime Minister onwards—for example, Mr Jimmy Carr? Would he like to name other tax avoiders, who ought to be named and shamed in the true new Conservative tradition?

Photo of Jacob Rees-Mogg Jacob Rees-Mogg Conservative, North East Somerset

I am grateful to the hon. Gentleman, who sometimes manages to put a more Tory case than I can myself. It troubles me that Bassetlaw is not about to become an outpost, an honorary part of Somerset, when he has so robust and staunch a view.

Tax avoidance is perfectly legal, and people are entitled to prevent the Revenue, as Lord Clyde said, “putting the largest possible shovel” into their stores, by making such arrangements as they see fit and are legal. Some things might turn out not to be legal.

Photo of Grahame Morris Grahame Morris Labour, Easington

Leaving aside the point about tax avoidance, I do not think that that defence would hold in the court of public opinion. In relation to the hon. Gentleman’s advocacy of the abolition of inheritance tax, how would he pay for that tax cut? That cut of £4 billion would benefit a very small proportion of people, a lot of them in Somerset.

Photo of Jacob Rees-Mogg Jacob Rees-Mogg Conservative, North East Somerset

I am grateful to the hon. Gentleman for that point. There is a serious economic argument for getting rid of inheritance tax. On the propriety of taxing people on death, I would question whether it is right for the Government in principle to impose a tax at that point.

On the economic argument, taxing capital ties it up in inefficient ways. There are a variety of reasons for that, not least that there are all sorts of exemptions relating to inheritance tax that encourage people to make particular types of investment, which may not be the best economic use of capital. They may invest in or hold goods that are exempt, buy trading farms or put the money into land—raising the price of land, already currently high—and not necessarily into other productive investments. There is a great prejudice in favour of a private business as against a public business, but public businesses may need investment more than private trading companies. Private trading companies may be over-capitalised because that is a way to get round inheritance tax. Our public companies find it hard to raise capital. Bank deposits are lowered; if someone has a bank deposit that is the easiest way to levy inheritance whereas if the money is in a corporate structure, it is taken out of inheritance tax.

The anomalies that are caused through inheritance tax are economically very damaging and ensure that capital is not best used. It seems crucial that any tax system should do the least damage to people’s investment decisions, because our economy will grow only if capital is used efficiently and productively. I argue strongly that death duties lead to the unproductive use of capital.

The only reason for death duties, as they currently stand, is as a “Let’s soak the rich” approach to taxation.

Photo of Ian Mearns Ian Mearns Labour, Gateshead

The hon. Gentleman is giving a stout defence of those who avoid paying and subsequently may fall foul of inheritance tax. If the apocryphal Mr Carr were to fall unfortunately under  the number 53 Saltwell park omnibus one day, his estate, which he has put offshore, would fall foul of inheritance tax, because the offshore trust would revert back to his estate. Is the hon. Gentleman saying that such an estate should not be subject to any inheritance tax?

Photo of Jacob Rees-Mogg Jacob Rees-Mogg Conservative, North East Somerset

It is not for me to discuss the affairs of particular comedians. All I will say is that it is interesting that both Ken Dodd and Mr Carr have got into trouble over their tax affairs, and I wonder if there is any connection between them, or whether Mr Dodd is funny and the other is not. That may be a minority taste, even among the Committee.

Photo of Ian Mearns Ian Mearns Labour, Gateshead

I think it was Ken Dodd who said that comedians were not accountants, but some accountants are comedians.

Photo of Jacob Rees-Mogg Jacob Rees-Mogg Conservative, North East Somerset

I do not wish to be pedantic, but I think it was George Carman, his QC, who said that, rather than Ken Dodd himself. The point is none the less well made.

On death duties relating to offshore trusts, once again, we are seeing perverse decisions being made to try and get round the tax system that are not necessarily for the best and most productive use of capital.

Photo of Grahame Morris Grahame Morris Labour, Easington

This is an important point. The hon. Gentleman is arguing that the abolition or the reduction of inheritance tax would act as a stimulus to the UK economy, but what is the opportunity cost, and how would the hon. Gentleman propose to fund that? Would he increase indirect taxes such as VAT, which would be regressive, with the burden falling on the poorest?

Photo of Jacob Rees-Mogg Jacob Rees-Mogg Conservative, North East Somerset

The hon. Gentleman makes a good point. If you are in favour of any tax cut, it is necessary to work out where the revenue will come from to replace it.

I make two observations on death duties. First, the amount is small for a complex area of taxation, and it is expensive for the Government to enforce. Some £4 billion is not a large amount of money in a Government system that is taking in the order of magnitude of £700 billion a year at expenditure level.

Photo of Julie Hilling Julie Hilling Labour, Bolton West

It interests me that the hon. Gentleman says it is a small amount of money, when the Government say that they have to make enormous changes to welfare benefit, which would produce less money than he is talking about here. Again, is that intended to hit the poor and benefit the rich?

Photo of Jacob Rees-Mogg Jacob Rees-Mogg Conservative, North East Somerset

The hon. Lady misattributes what is going on. Any welfare reform requires a large number of individual steps, each one of which raises a remarkably small amount of money, but that does not mean that those steps do not need to be taken. Cumulative steps are needed to implement major reform of an expenditure area of £200 billion a year. On something in welfare reform only affecting £1 billion or so, yes, the individual amount of expenditure is small. If that were the only thing being done, it would not be worth it for that amount of money, but if the £1 billion is part of a much bigger and more sensible reallocation of resources, it becomes important in its own right.

To return to inheritance tax—death duties—£4 billion is an amount that the economy could make up very easily if more sensible capital allocations were made and if money were released from being tied up in tax avoidance schemes, not only of a legitimate kind but of the kind that the Government specifically encourage. A small trading business is 100% exempt from inheritance tax, but small does not have to be small; it could be very large. That business therefore maintains higher levels than it needs and does not necessarily invest that money as it otherwise would, because the money may simply be used as a means of protecting the investment. That could be unleashed if people were not devoting their capital to ensuring that their heirs and successors inherited in the end.

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Education)

The hon. Gentleman is making an interesting argument and clearly an impassioned one. Does he therefore suggest that inheritance tax would be more acceptable to him and perhaps many of his party colleagues if it were linked directly to specific investment decisions? For example, the charity tax, which we will debate in the next clause, is a targeted relief. If inheritance tax was targeted at specific business investment decisions, would he then accept it as a form of duty?

Photo of Jacob Rees-Mogg Jacob Rees-Mogg Conservative, North East Somerset 10:45 am, 26th June 2012

I am grateful to the hon. Lady for asking that, because it is important to clarify that it is exactly what I do not believe. The Government are the worst possible organisation to guide people on what investment decisions they ought to make.

Photo of Peter Bone Peter Bone Conservative, Wellingborough

Order. We are getting a little away from replacing the retail prices index with the consumer prices index. Perhaps the hon. Gentleman could get back to the point.

Photo of Jacob Rees-Mogg Jacob Rees-Mogg Conservative, North East Somerset

I will come back immediately to replacing the consumer prices index with the retail prices index, but my general point is that the inheritance tax threshold should be raised as much as possible whatever index you choose. I would choose an infinite index, better than the CPI, so that its effect would be ameliorated altogether and removed. The Government should certainly not develop and devise schemes to encourage people to invest in certain ways, because Governments always get people to go into schemes that might have been a good idea five years ago but are not now. That is the nature of Government and we have seen that historically.

My point is that inheritance tax is inefficient, ties up capital and is unfair, because of the time at which it strikes people, and that capital taxation as a rule is a bad form of taxation. There is no transaction flow with it to produce the cash for people to pay the tax falling upon them. Transactional taxes, be they income or sales taxes, are related to a flow of funds which is then available for the tax to be siphoned off. Capital taxation singularly fails to do that. It leads to bad decision making, inefficiencies within the economy and ultimately less money to the Exchequer. Thus, I think that  Conservatives should stick to their guns and persuade our Lib Dem Friends—and indeed Members from Bassetlaw who seem keen to come in this direction—that what we should do is have thorough-going blue water policies.

Photo of Julie Hilling Julie Hilling Labour, Bolton West

It is, as normal, a pleasure to serve under your chairmanship, Mr Bone. The issue of inheritance tax is extremely interesting, because in 2007, to great fanfare, the Tory party announced that it would introduce a £1 million threshold for inheritance tax. It now says that because of its Lib Dem colleagues in the coalition, it has had to go back on that. Interestingly, in 2009, the right hon. and learned Member for Rushcliffe (Mr Clarke) announced that the rise in inheritance tax thresholds would not go ahead in the Tory Government’s first term anyway. They are perhaps choosing to put the blame a little bit—perhaps a little unfairly—on their coalition partners. It has, of course, been a great disappointment to Tory voters that the Government have not increased the threshold, though I am not saying that they should have done. It is a conundrum.

I was in a meeting with the chief economist for the Greater Manchester chamber of commerce last night, and I asked him about inheritance tax. He felt it was fairly useless in some ways, because those whom it is meant to capture are not being captured as they use avoidance tactics, so each time, revenues tail off. He said the very wealthy avoid paying it, because they can pay for advice.

Last night, when I decided to speak on the clause, I googled IHT. The first item that came up was “How to avoid paying inheritance tax”, as was the second. Clearly, the people who should be paying it—millionaires—are not.

Photo of Aidan Burley Aidan Burley Conservative, Cannock Chase

It is not just millionaires who have to pay inheritance tax. It is everybody who has an asset, such as a house, that is liable at the 40% rate. That is the point made by my hon. Friend the Member for North East Somerset: it hits the poorer disproportionately hard.

Photo of Julie Hilling Julie Hilling Labour, Bolton West

The hon. Gentleman has pre-empted my next comment. I wanted to talk about the dilemma relating to whether to use the retail prices index or the consumer prices index.

Photo of Ian Mearns Ian Mearns Labour, Gateshead

I am grateful to the hon. Member for Cannock Chase, who has just massively inflated the value of my house.

Photo of Julie Hilling Julie Hilling Labour, Bolton West

I thank my hon. Friend for that intervention. When the Tory party talked about raising the inheritance tax threshold to £1 million, it said that that would help 9 million families, and that only millionaires would pay the tax. We know there are families, particularly in the south of England, who are of ordinary means and are caught in the inheritance tax trap. Again, it is one of those taxes that affect the squeezed middle. The rich, thanks to the reduction from 50% to 45% tax and other measures in the Budget, are getting away with paying less tax. We are helping the super-rich, but the squeezed middle is suffering in all sorts of different ways. Think of the changes to child benefit and tax credits, and all the other things that have hit that squeezed middle.

The proposal to raise the threshold by CPI rather than RPI is unfair. We say that that will not keep pace with inflation. A major difference between CPI and RPI is that RPI includes housing costs. Given that we are fundamentally talking about a housing cost, it seems a little odd not to raise the threshold according to RPI.

I am consistent: I think the Government have been mealy-mouthed in all the cases where raises have used CPI rather than RPI, be it for pensions or other benefits. There must be hundreds of thousands of people worried about the proposal—people whose only asset is the family home. We are not talking about the rich. The people who are caught and most affected are those who do not pay accountants for advice, and cannot afford to, because all they have is the property. This is another example of the Government attacking the squeezed middle.

However, as my hon. Friend the Member for Newcastle upon Tyne North said, only 6% of estates are affected by inheritance tax. I assume that is the 6% who are not paying accountants. I wonder if the figure is actually higher. Will the Minister explain why CPI, not RPI, has been chosen in this instance?

Are the Tories still going to raise the IHT threshold enormously? What will the Minister do about avoidance measures? Given all the ways of avoiding it, one wonders if the Government are planning to crack down on avoidance tactics on IHT, in order to increase the tax take and ensure that the rich pay their fair share of taxes. It seems to Opposition Members that throughout the Budget the rich are not paying their fair share. The burden is falling on the low-paid—those who live ordinary lives—who are facing tax hikes in all sorts of areas.

Photo of John Mann John Mann Labour, Bassetlaw

Again, welcome to the Chair, Mr Bone. Another week passes by, and we have more interesting revelations from the Government. I wish to ask the Minister about the impact of the change from RPI to CPI on the behaviour of tax-paying individuals, and whether he believes that the change will lead to a difference in the taxpayer’s behavioural attitude.

I am somewhat concerned by the changes, because the Government chose in the Budget specifically and particularly to target pensioners. I suspect that, even later today, more will be revealed on how pensioners and pension funds are being disproportionately hit by the Government’s economic policies—something that the Budget failed to address, and so pensioners pay the price. This change, which runs through the Budget and is reinforced by clause 206, means that pensioners pay a greater price than everybody else. That is our concern about the Government’s meddling with indexation.

I welcome the fact that, at last, the hon. Member for North East Somerset, a true, clear and unequivocal Conservative, is putting forward the Conservative party’s position—the position that it takes in its bones, ethos and whole ideology—as opposed to the mishmash that we get from those who lead the coalition, represented by the Ministers here today, whom we see U-turning every week.

I disagree with the hon. Member for North East Somerset on many points of principle, but it is refreshing to have an open, honest debate. Indeed, he and I are considering taking this debate further, post-Committee, during a visit to Taunton cricket club to enjoy a true  English tradition—willow on the bat, and all that—as the north comes to the south-west. [Interruption.] Willow on the ball. I am glad the Minister is listening today.

The question is the impact on behaviour. Death duties have done a lot for this country. The National Trust was created because death duties allowed stately homes to be handed over for the enjoyment of everyone. In my constituency, the Newcastles had to hand over Clumber park and Clumber hall, a wonderful major tourist attraction that will hopefully benefit from the tourists coming for the London Olympics. That attraction underpins the local economy and provides green lungs for the industrial workers, all created because death duties required that family generously to hand over the whole estate to the people through the National Trust. There are such examples all over the country. This is the essence of modern Britain today.

Photo of Julie Hilling Julie Hilling Labour, Bolton West

Does my hon. Friend agree that the National Trust has also meant that there are other ways for the economy to benefit from death duties? Longleat and Woburn safari parks were created because the families had to pay their death duties. Even though the families retained the parks, they became open to the public, creating great enjoyment for visitors.

Photo of John Mann John Mann Labour, Bassetlaw

My hon. Friend hits on a point dear to my heart, because many years ago I was the chair of the all-party group on endangered species, which should perhaps be recreated. Those safari parks contribute to maintaining the ecology of the world’s fauna, which is fundamental to our role in the modern world. This is not just about Britain showing itself in all its glory to tourists, and creating opportunity for our own people; it is also about making our contribution to the world’s species—all provided for by the generosity of those who have paid death duties.

Photo of Ian Mearns Ian Mearns Labour, Gateshead 11:00 am, 26th June 2012

When my hon. Friend chaired that group looking after the interests of endangered species, did he have the foresight to include Liberal Democrats?

Photo of John Mann John Mann Labour, Bassetlaw

I hear what my hon. Friend says, but this is the last day of Committee, and I urge him to show more generosity. Surely we need to see some free thinking from the Liberals in at least one vote in this Committee. What is the point of being in a political party if all you do is act as lapdogs to an equivocating Government? There is not even any following of the true Conservative tradition, as outlined by the Member for North East Somerset. He would prefer no death duties, and I would prefer an inheritance tax at an appropriate level. I am concerned that any change to the system might encourage the kind of disgraceful tax avoidance we have seen from persons unnamed—and one who has been named by the Prime Minister, Mr Jimmy Carr. I was most surprised when, in the Budget, I heard the Chancellor talk about tax avoidance—as opposed to evasion—being “morally repugnant”. My ears pricked up, because that means the behaviour, rather than the legality.

Returning to my question to the Minister about what the change in indexation will do to the behaviour of individuals, I look forward to hearing what analysis the Government have carried out on the behavioural impact.  The Prime Minister says that Jimmy Carr is morally repugnant—the Chancellor has given him the opportunity to say so—but what about the many others? Newspapers are naming person after person. They all seem to be directly connected to one particular political party, perhaps because it is that party that is attempting, John Major-style, to take the moral high ground.

Courageously, the Member for North East Somerset has distanced himself entirely from the party leadership on this issue. He is clear and consistent that the Tory party of the past—I do not think I am misrepresenting what he said—believed that it was a patriotic duty to avoid paying taxes, as long as that was within the law. That is where we disagree. I am absolutely with the Prime Minister and the Chancellor. They clearly say that there is a moral duty to pay all taxes and not attempt to avoid them. I want to see consistency in approach. Will this change in indexation affect behaviour, so that people are more, not less, likely to avoid taxes in the way that so many donors, Cabinet members and others are alleged by the media to have done—a way that is unpatriotic, morally repugnant and unacceptable in modern Britain? That is a point on which the Prime Minister, the Chancellor and I combine coherently, and to which we adhere.

Photo of Julie Hilling Julie Hilling Labour, Bolton West

Does my hon. Friend agree that there may be other consequences for some of those who have been avoiding their taxes? I for one will never buy another record by Gary Barlow, and I am sure I must be in good company. There will be other consequences for the people who so publicly and horrendously avoid doing what ordinary people have to do, day in, day out: pay their taxes. We have no choice, but those who make their money on the backs of ordinary people are not being patriotic and are not paying their dues.

Photo of Mark Garnier Mark Garnier Conservative, Wyre Forest

The hon. Gentleman makes a powerful point about millionaires and highly paid people avoiding tax, but it is not only millionaires who do so. Many people around the country will offer a tradesman a cash payment, which is just as morally repugnant.

Photo of Mark Garnier Mark Garnier Conservative, Wyre Forest

My hon. Friend is right. People look at the very rich avoiding tax, which is wrong. I disagree with my hon. Friend the Member for North East Somerset, in that tax avoidance uses the letter of the law to get around the spirit of the law, and it is very different from tax planning. Avoiding tax is endemic, and people are doing it at every level. That moral point is very strong, because it is universal.

Photo of John Mann John Mann Labour, Bassetlaw

We are beginning to build a new, tax-collecting coalition across Government. The hon. Gentleman is right, and the scrap metal trade, the problems created by it, and the criminality that comes from it is a classic case of the cash economy. It is not that one should be morally condemning those who are  managing to get their way through the cash economy; the problem with the cash economy in areas such as mine is that it is economically inefficient and non-aspirational. The idea of getting by with a bit of wheeler-dealing, rather than forming a company, having proper accounts, and participating in and aspiring to grow in the real economy, holds down aspiration in areas such as mine, and it has done for generations.

This is not about a moral crusade, but about economic efficiency, from the poorest to the wealthiest—[Interruption.] From a sedentary position, the Government Whip mentioned Ken Livingstone. I unequivocally condemn any Labour politician who avoided taxation in the way that he did, and he paid a heavy price. Knowing what happened, if I had my way and had any influence over the Labour party, he would not have been a candidate because of his moral stance. It is wholly unacceptable that a person running for senior office—

Photo of Peter Bone Peter Bone Conservative, Wellingborough

Order. Before the hon. Member for Bassetlaw does so, I am sure that he will relate his points to RPI and CPI.

Photo of John Mann John Mann Labour, Bassetlaw

I absolutely will, Mr Bone. I am illustrating the behavioural effect of changing indexation. The question I am posing to the Minister, who will want to answer soon, is whether changing the indexation will affect behaviour. I am doing so—hopefully I am in order, Mr Bone—using examples of the kind of behaviour that I would like to illustrate. Mr Kenneth Livingstone is one of those examples, and the way that he avoided taxation cost the Labour party the London mayoral election. Such is the price paid by political parties when one from their fold is not prepared to do the decent thing and does not see it as a moral obligation to pay taxes.

Photo of Grahame Morris Grahame Morris Labour, Easington

I do not intend to take issue with my hon. Friend’s comments about the Labour mayoral candidate, but I seek his views on the opportunity cost and what the consequences should be. Government Members are defending individuals’ right to employ tax avoidance mechanisms, whereas Opposition Members share the country’s moral outrage. The hon. Member for Richmond Park (Zac Goldsmith) has advocated a Bill, to which the Government may well be committed, allowing for the recall of Members of Parliament. Would a Member’s employing such methods be taken into account if they were to be recalled? We see a constant drip-feed in the press of cases of celebrities who employ such methods; the politicians who do so will surely be next.

Photo of John Mann John Mann Labour, Bassetlaw

That is an interesting suggestion. The coalition, if it is expanding to Richmond, will be broader still, and all the better for it. We need to root out the concept of tax avoidance at the top. We should start with politicians: every Cabinet member should declare unequivocally that they do not avoid tax. The Government’s and the Prime Minister’s new press secretary should do the same thing. Donors to all parties should be judged on that basis, and those who are avoiding tax should  pay the money back. Political parties should agree among themselves—perhaps we could agree in principle today—that all parties should refuse donations from those who avoid tax. They should not be eligible to donate. The hon. Member for North East Somerset caught my eye earlier, so I will give way to him.

Photo of Jacob Rees-Mogg Jacob Rees-Mogg Conservative, North East Somerset

The hon. Gentleman has moved on slightly, but in the interests of balance, I ought to defend Ken Livingstone, who behaved perfectly legally. All he did was delay tax. If he had paid the money out to himself, he would have been subject to tax in the normal way. There is no obligation on socialists to pay a higher rate of tax than the law allows to be taken. If they want a higher rate of tax, the socialists need to win elections to put a higher rate in place, as they would be completely entitled to do.

Photo of John Mann John Mann Labour, Bassetlaw

I thank the hon. Gentleman for his candid, straightforward clarity. This is the debate that should be taking place across the country. On the one hand, there is our principle, which clearly, perhaps accidentally, the Prime Minister and the Chancellor have strayed into—hence each and every person associated with the Conservative party has this new scrutiny test to pass. On the other hand, there is the unequivocal position of, shall we say, the Tory shire counties, which totally oppose the Prime Minister and Chancellor and are diametrically opposed to the coalition Government. That is the big new split in the modern Conservative party. “Modernist” and “traditionalist” are mere descriptions; the fundamental issue is what lies behind.

I repeat my question to the Minister about indexation. Will the proposed change in indexation improve or worsen the behaviour of those whom the Chancellor describes as “morally repugnant”?

Photo of David Gauke David Gauke The Exchequer Secretary

It is a great pleasure to see you in the chair, Mr Bone, for the last Committee day. For those who are worried that we are reaching the end of the process, such as my hon. Friend the Member for North East Somerset, Report stage is only a few days away. That is something for us all to look forward to.

We have had a broad-ranging debate but I will focus my remarks on clause 206, which would make changes to the indexation of the IHT nil rate band. The nil rate band will remain frozen at its current level of £325,000, up to and including 2014-15. From 2015-16, the automatic annual increase in the nil rate band will rise in line with CPI rather than RPI.

The hon. Member for Newcastle upon Tyne North asked what the Government policy is for the future of the nil rate band threshold. Clause 206 is the answer to that: it is frozen and then will increase in line with CPI. The IHT nil rate band is automatically indexed every year in normal circumstances, unless Parliament sets a different figure. Indexation works by referencing the nil rate band to inflation over 12 months to September in the previous year, subject to a rounding up to the nearest £1,000. From 2015-16, the measure of inflation used will be CPI rather than RPI. That change will ensure that the nil rate band more accurately reflects the rate of inflation. The Government seek consistency across all areas of direct tax.

The nil rate band has been frozen at £325,000 up to and including 2014-15, as per the 2010 autumn statement. The measure was confirmed as the right course of action at that point, and given the economic circumstances, it is still the right action. Clause 206 confirms that the nil rate band will remain frozen at its current level of £325,000 until 2014-15. The nil rate band will then rise in line with the CPI, instead of the RPI, from 2015-16.

We have had a broad-ranging debate, and I am sure there will be many opportunities to debate avoidance in the broadest terms. Although perhaps not directly relating to clause 206, the hon. Member for Bolton West raised the specific point of inheritance tax avoidance, which the Government take seriously. As the Committee will hear shortly when we come to clause 208, we will take action, when necessary and appropriate, where there are steps we can take.

The behavioural impact of clause 206 is not in itself likely to be significant. The effect of moving from RPI to CPI will, over time, bring more estates into inheritance tax and will raise additional revenue. The sums we are talking about are relatively small, so there is unlikely to be a dramatic impact on avoidance.

On the extent of the additional revenue that the measure is likely to raise, the tax information and impact note states:

“This element of the reform is expected to increase receipts by approximately £20 million in 2015-16.”

Photo of Julie Hilling Julie Hilling Labour, Bolton West 11:15 am, 26th June 2012

I hear what the Minister says about clause 208, but I wonder whether he intends to do anything else to close some of the other loopholes. He has addressed one small element, but what about all the other tactics that people use to avoid inheritance tax? Will he look to bring in other measures to close those loopholes?

Photo of David Gauke David Gauke The Exchequer Secretary

We are committed to tackling inheritance tax avoidance, as we are with other taxes. Where there is evidence of new avoidance behaviour, HMRC acts quickly with litigation and, if necessary, the Government will act quickly with legislation to shut down such avoidance. Inheritance tax has a behavioural impact and often there are steps consistent with Government incentives whereby people minimise their inheritance tax liability. Where an action is inconsistent with the spirit of the law or the intentions of Parliament, we will, of course, take action as necessary. The Bill contains such an example.

I will try to avoid being drawn into the deep philosophical issues raised by my hon. Friend the Member for North East Somerset on the role of capital taxation, but I remember reading recently of the debate within the wider Conservative movement in the 1960s on the balance between reducing taxes on capital and reducing taxes on income. Of course, the rates at that point were particularly high. One of the most prominent and articulate exponents of the view that we should not tax capital as much as we did then was the then editor of The Times, which shows that not just wealth but political principles can be inherited.

Question put and agreed to.

Clause 206 accordingly ordered to stand part of the Bill.