Residence nil-rate band

Finance (No. 3) Bill – in a Public Bill Committee at 3:15 pm on 6th December 2018.

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Photo of Jonathan Reynolds Jonathan Reynolds Shadow Economic Secretary (Treasury) 3:15 pm, 6th December 2018

I beg to move amendment 122, in clause 65, page 46, line 6,  at end insert—

“(7) The Chancellor of the Exchequer must review the revenue effects of the changes made in this section and lay a report of that review before the House of Commons within six months of the passing of this Act.”

This amendment would require the Chancellor of the Exchequer to review the revenue effects of the changes made by Clause 65.

Photo of George Howarth George Howarth Labour, Knowsley

With this it will be convenient to discuss clause stand part.

Photo of Jonathan Reynolds Jonathan Reynolds Shadow Economic Secretary (Treasury)

It is lovely to be able to give my hon. Friend the Member for Norwich South some well earned respite before he leaves the Committee briefly.

Opposition amendment 122 would require the Chancellor to publish a review of the impact on inheritance tax revenue of clause 65’s changes to the residence nil-rate band, six months after they are adopted. As we have stated in debates on previous clauses, the lack of an amendment of the law resolution has significantly hindered our ability to properly amend such clauses, beyond requesting a general review.

The nil-rate band, also known as the inheritance tax threshold, is the amount up to which an estate does not have to pay inheritance tax. Everyone has their own nil-rate band, which is currently £325,000, or £625,000 for a married couple. Any part of the estate up to the nil-rate band threshold is chargeable to inheritance tax at a rate of 0%. Any part of the estate that exceeds the nil-rate band threshold is usually chargeable to inheritance tax on death at 40%. The nil-rate band applies to non-exempt property passing on death, together with any taxable gifts made within seven years of death.

Clause 65 focuses specifically on the residence nil-rate band—an additional nil-rate amount available on top of the nil-rate band when the deceased has left a residence, or the proceeds of the sale of a residence, to his or her direct descendants. In its current form, the residence nil-rate band is particularly complicated when the individual in question has downsized before their death by selling their residence and either buying a less valuable property or going into residential care. Given the crisis in social care and the growing pressure on elderly people to sell large homes and downsize, that is sure to be fairly common. A recent survey by McCarthy and Stone, one of the UK’s leading retirement house builders, found that 48% of pensioners—nearly 6 million people—are considering moving to smaller homes, or would be encouraged to do so if there were a stamp duty exemption. The attraction of downsizing is clearly growing.

The Opposition understand the logic behind the Government’s proposed change, which aims to simplify the residence nil-rate band in cases where homes are downsized. However, we remain concerned about the rate at which the residence nil-rate band is set, particularly since the Government plan to increase it from £125,000 to £150,000 in 2019-20, and to £175,000 in 2020-21. For estates with a net value of more than £2 million, there is a tapered withdrawal of the residence nil-rate band at a rate of £1 for every £2 over the threshold.

Like many colleagues in the Opposition and some on the Government Benches, I have profound concerns about the impact of inherited wealth on social mobility, inequality and social cohesion in the UK, but I think there is a consensus that people should be able to pass properties and family homes—or, if they have sold that home and downsized, the equivalent material value—to their direct descendants. However, we believe that inheritance tax on the whole is simply not fit for purpose. It is not only a universally unpopular tax, but one that fails to raise significant revenue.

According to the Government’s own figures in this year’s Budget Red Book, the Treasury is set to raise just £5.5 billion in inheritance tax receipts—substantially less than it raises from tobacco duties, alcohol duties, environmental levies, vehicle excise duties and even the insurance premium tax. It is therefore no surprise that there is a growing surge of public opinion in favour of reforming inheritance tax and replacing it with something better. The Institute for Public Policy Research’s commission on economic justice, which brought together economists, academics, the business community and members of civil society, recommended scrapping the tax and replacing it with a new gift tax.

The commission’s report identified that the inheritance tax system is easy to avoid and favours the wealthy, healthy and well advised. It concluded that wealth transfers confer an unearned advantage on the recipient, and should be taxed more effectively to promote equality of opportunity. I would go further and say that the principle of taxing income from work more heavily than income from wealth heavily distorts the UK tax system.

A similar critique of inheritance tax was made by Paul Johnson from the Institute for Fiscal Studies, who pointed out:

“Higher income people—those in the top 20 per cent of lifetime income—are ten times as likely to have received an inheritance of more than £250,000 as those in the bottom half of lifetime incomes.”

The Resolution Foundation has called for inheritance tax to be abolished and replaced with a new system that commands greater public support by being fairer to families and harder to avoid. Its intergenerational commission also found that the state does a poor job of collecting revenue from inheritance tax.

Under the current system, individuals can and do minimise their inheritance tax liabilities in all manner of ways, including by buying agricultural land or investing in woodlands, which I first became aware of in the House of Commons Tea Room. Members might remember the coalition Government’s plans to privatise the forests in 2011. They did not last very long, but it was at that time that a Conservative MP told me about the practice. Basically, people buy up commercial woodlands, which, once they have been owned for more than two years, become eligible for 100% business property relief. This reduces the value of a qualifying business asset to nil in the inheritance tax account, and as a result, no inheritance tax is payable on the asset in question.

Alternatively, 100% agricultural property relief can apply in certain situations. A special inheritance tax relief is also available for commercial or amenity woodlands that are owned for more than five years and to which neither business rates nor agricultural property relief apply. These abuses of inheritance tax relief limit our revenue-raising ability, yet it is still usually regarded as one of Britain’s least fair taxes. The Resolution Foundation’s intergenerational commission, like the IFS and the IPPR, recommends replacing it, favouring a lifetime receipts tax with a personal allowance of £125,000, followed by a 20p rate up to £500,000 and a 30p rate after that. It states that this will significantly reduce the marginal rate of tax on wealth transfers, while still raising up to £11 billion in 2020-21, compared with the £6 billion that the current system is projected to raise.

The lack of an amendment of the law resolution makes it impossible for the Opposition to table an amendment asking for a wider review. However, amendment 122 would force the Government to publish a review of their changes to the residence nil-rate band, factoring in the amount of revenue that the changes will raise and their impact on the Exchequer’s total inheritance tax receipts.

I will raise one final point on inheritance tax. I particularly enjoy, when discussing the different parts of a Finance Bill, references to the origins of some of the taxes in question. Inheritance tax has existed in the UK in some form or other since 1694, when probate duty became payable on estates. However, it was not until 1796 that a tax on estates was first introduced by the Chancellor and Prime Minister, William Pitt the Younger. It was deliberately introduced at the height of the French revolution to deter a similar revolt from taking place in the UK. I think it is fair to say that the Government needed the revenue to fight the subsequent war against Napoleon.

The Government then recognised the need to prevent wealth being simply handed down to the already wealthy. At a time of continued austerity and hardship for many communities across the UK, we should not forget that the top 10% of UK households hold half the wealth of the entire country, while the bottom 50% of households hold less than 10%. In that environment, those with the broadest shoulders should always be asked to pay a fair and reasonable share. We can begin that process today by voting for amendment 122.

Photo of George Howarth George Howarth Labour, Knowsley 3:30 pm, 6th December 2018

I hope that the Minister is not anticipating the tumbrels rolling at the end of his speech, as in the French revolution.

Photo of Mel Stride Mel Stride Financial Secretary to the Treasury and Paymaster General

Very good. There will be no singing of “The Red Flag” on this side, Mr Howarth.

Photo of Mel Stride Mel Stride Financial Secretary to the Treasury and Paymaster General

Maybe. It is a pleasure to serve under your chairmanship, Mr Howarth. I will turn briefly to points raised by the hon. Member for Stalybridge and Hyde.

Photo of Robert Syms Robert Syms Conservative, Poole

There is a sort of revolution going on in Paris as a result of high fuel duties, which of course the Opposition want.

Photo of Mel Stride Mel Stride Financial Secretary to the Treasury and Paymaster General

As my hon. Friend pointed out in his remarks on earlier clauses, we have frozen fuel duty for nine successive years—but perhaps we had better get back to the matter in hand, revolutions and fuel not featuring particularly in clause 65.

First, the hon. Member for Stalybridge and Hyde feels that this tax is seen as one of the least fair. It is certainly true that it is one of the least popular taxes; I would accept that. However, it only typically applies to about 4% or 5% of estates, although the public generally assume that it applies much more widely. That, of course, is a consequence of the policies we brought in to extend the thresholds, which we have been discussing. As the hon. Gentleman suggests, it brings in about £5 billion a year and, in terms of its fairness across the range of different wealth levels, I can inform him that 70% of inheritance tax is raised from those with estates valued at over £2 million, so the vast bulk of it comes from those who are significantly wealthy.

The hon. Gentleman quite rightly raises the general question of keeping taxes under review and looking at inheritance tax. He gave various examples of the work of others in that respect and made various suggestions. He will be aware that the Office of Tax Simplification is reviewing inheritance tax, and has already reported on the administration and guidance relating to it, with which there are various issues. In the spring of next year, it will also report on the policy area itself, and we will look with great interest at the report when it comes out. [Interruption.] May I correct something I have just said? Perhaps I am bad at reading handwriting here. The 70% relates to those with an estate of over £1 million, rather than £2 million.

The hon. Gentleman raises perfectly legitimate questions that we should be asking about the reliefs associated with agricultural land and woodlands, and the different approaches that those who can afford advisers and so on may seek to take to lower their inheritance tax. All those things will make for interesting debate and consideration when the OTS reports back in spring.

The Government are introducing these changes to clarify the working of the downsizing rules, and to provide certainty about when a person is treated as inheriting property. The residence nil-rate band reduces the burden of inheritance tax for families by making it easier to pass on the family home to children or grandchildren, and the band is an additional threshold available when a residence is being passed to a direct descendant. As the hon. Gentleman set out, the value in 2018-19 is £125,000. That will rise to £175,000 by 2020-21. Any unused threshold can be transferred to a surviving spouse or civil partner. The unused threshold is also available when a person has downsized to a less valuable property and passes on the proceeds from selling their home, instead of the property itself, to their children or grandchildren.

The Government announced those reforms in 2015 to ensure there would be an inheritance tax threshold of up to £1 million for married couples and civil partners by the end of this Parliament. That was a manifesto commitment, which I am pleased we have delivered, but it is right that we make changes to the legislation where necessary to ensure that the policy works as intended.

The changes made by clause 65 will correct two areas of the residence nil-rate band. First, the downsizing provisions were introduced to ensure that people would not lose access to this additional nil-rate band by, for example, moving house to meet their long-term care needs. However, the wording in the current legislation means that these provisions could apply in an upsizing scenario. That was never the intention and the changes will correct it.

Secondly, we believe that the additional threshold should be available only when the family home passes directly from an individual to their direct descendant on death. The changes will correct an anomaly in the legislation whereby the threshold could be available for a family home passed into a trust, where the direct descendants do not inherit the property. While the changes are important for revenue protection, we expect them to affect very few estates.

There has been one amendment proposed to this clause, which proposes reviewing and laying a report on the revenue effects of the changes. Amendment 122, however, is not necessary. The clause corrects the working of the residence nil-rate band and has no impact on wider inheritance tax policy. Consequently, there will be no revenue effects as a result of the clause. I therefore ask that the amendment be withdrawn and commend the clause to the Committee.

Question put, That the amendment be made.

The Committee divided:

Ayes 7, Noes 8.

Division number 38 Finance (No. 3) Bill — Residence nil-rate band

Aye: 7 MPs

No: 8 MPs

Ayes: A-Z by last name

Nos: A-Z by last name

Question accordingly negatived.

Clause 65 ordered to stand part of the Bill.

Clause 66