House of Lords, Inheritance Tax, Speeches

Inheritance Tax

Posted by LordSheikh

My Lords, I declare an interest as the chairman and chief executive of an insurance broking and independent financial advisory organisation. We are also involved in financial planning work for our clients.

The amount of inheritance tax revenue raised is small compared with other taxes. During 2005-06, inheritance tax was less than 1 per cent of total tax receipts. At present, only 38,000 taxpayers pay IHT, although the number of taxpayers who have to produce IHT returns is much higher.

Its proponents believe that it is somehow wrong for people to inherit large amounts of wealth and that therefore the state should take away a large proportion of it. Having said that, socially I feel prepared to accept the principle of inheritance tax. This tax used to affect the wealthy, but it is now affecting many property owners, which was not its original intention.

Since 1997, the threshold has not kept up with house prices, average earnings or inflation. Thereare now more people who will have to pay inheritance tax than ever before. In fact, more than 5 million households—21 per cent—in Great Britain are now valued at more than the current inheritance tax threshold of £285,000. A further 5 million are liable for inheritance tax when total household wealth is taken into account, making a total of four in 10—41 per cent—or10 million households. Most of those cases will be the average hard-working middle-class person.

Increasing house prices are the main reason for a greater proportion of estates qualifying for inheritance tax now than a decade ago. A recent survey found that 67 per cent of homeowners felt that IHT was unfair. Increasing the threshold to £295,000—and, potentially, £300,000 later this year—will not go far enough. Some calculations suggest that the threshold would be £390,000 if it had risen in line with house price inflation during the past 10 years.

Although inheritance tax contributes only a small percentage of total tax receipts, it still makes a valuable contribution to the Exchequer. To increase the yield for inheritance tax, the Government have introduced several anti-avoidance measures. Those include pre-owned assets tax (POAT), which levies an income tax charge on benefits received from assets given away, and last year’s changes to inheritance tax and trusts, which moved interest in possession trusts to the discretionary trust regime. These measures cause concern. They were introduced without consultation and, as a result, innocent transactions have been caught by the new rules.

A further point is that, under the current inheritance tax regime, many more individuals or their executors must complete complex forms on inheritance tax where there is no liability to tax. The administrative burden needs to be reduced. This matter needs to be taken up separately with HM Revenue and Customs.

I do not advocate the abolition of inheritance tax. I do, however, propose certain solutions that could be given further consideration. These will go a long way towards alleviating the pain to the average hard-working, middle-class person, without any major social impact on the amount paid by the really wealthy. Inheritance tax bears more heavily on the middle classes, such as people with wealth of between £300,000 and £1 million. The poor have so few assets that they will fall within the nil-rate band. The very rich can, to a large extent, avoid the tax by utilising concessions on lifetime gifts and relief for business and agricultural assets.

The effect and unpopularity of the tax could be reduced in the following ways. First, inheritance tax thresholds should be increased. They increased by14 per cent from 2001 to 2006. However, the threshold for income tax and NIC has risen by 24 per cent over the same period, suggesting that fiscal drag has been effective at increasing the amount raised. At present, nearly every householder in the south of England will be liable to inheritance tax, as the tax threshold starts at £285,000. I suggest that there should be relief on the principal private residence—or PPR—so that the first £250,000 of the value of the deceased’s principal estate can be exempt from inheritance tax.

Secondly, the rate of inheritance tax, at 40 per cent of the amount above £285,000, is very aggressive, and it would be fairer to have a graduated tax, such as 10 per cent from £285,000 to £385,000, 20 per cent on the next £100,000, and 30 per cent on the next £100,000 above that, so that the full rate of 40 per cent would not begin until £585,000. Thirdly, the number of categories of assets attracting relief should be increased, either directly or from associated tax rules such as POATs and the charges on transfers into trust. Fourthly, there should be an exemption from all periodic and exit charges for all term life assurance policies held in a trust that excludes the settlor as a possible beneficiary provided that the cash is paid out of the trust within two years of the settlor’s death. Fifthly, there should be an exemption from all pre-owned assets tax and inheritance tax implications for all pure term assurance policies held in business trusts.

I reiterate that these proposals merit further consideration and, after deliberation, can be accepted, altered or rejected. I would very much appreciate the Minister’s comments on my proposals.

My Lords, I, too, am very grateful to the noble Lord, Lord Burnett, for giving us a chance to have this debate. I am also very much in admiration of his altruism in doing so: not as a farmer, of course, because they long ago got out of paying any inheritance tax, but as a solicitor, because I am sure his wise advice is very highly valued in the market place, and good luck to him. However, I will be interested to hear from the noble Lord, Lord Newby, whether he too wants to see the proceeds of inheritance tax slashed. If he does, he will confirm the view that many of us have of the Liberal Democrats; it is the party which wants a lot more spending, but no taxes to pay for it.

I read only the Racing Post these days, because it is the only newspaper where the facts can mostly be trusted. I do not know whether the noble Baroness, Lady Noakes, agrees with that. But I have read some of the coverage of this issue in the Daily Express and the Daily Mail. In one of them, I saw inheritance tax referred to as a “death trap”. I am afraid that I recognise only one death trap; namely, the death trap that is summed up in the shorthand phrase, “You can’t take it with you”. This is not a tax on the people whose estates it is paid on. I readily accept that it is a tax on their successors and for that reason, it is a rightful tax.

Given the time of night, I shall make a few observations in a somewhat staccato fashion. First, as a former member of the Royal Commission on Long-Term Care of the Elderly, I am more and more struck by how much we have become two nations in old age, despite all the endeavours of the Chancellor of the Exchequer to deal with it. Many old people are not well off, but a section of old people enjoy unparalleled prosperity in old age. They often benefit from past final salary pension schemes and can cash in now, through equity mortgages, on the values of their houses. Of course, as life expectancy goes up, they live for many more years in considerable comfort. Anyone who doubts me should pick up the holiday sections from any of our large Sunday newspapers and look at the number of holidays costing £10,000, £20,000 or £30,000 for trips around the world and so on. Of course, I do not resent people having this money, but it is reasonable to say that if anyone is deserving of tax breaks in our country, it is not these people but others who are harder pressed.

Secondly, all parties now are agreed on equality of opportunity as being a goal of our society. Substantial inheritance is an arrow through the heart to equality of opportunity. It grants some people huge opportunities that are not open to others however much they strive and try. The other day I noted the very wise words of Hank Paulson, the US Treasury Secretary. He is a former head of Goldman Sachs, so I assure the House that he is not short of a dollar or two. Very wisely, he said that he loves his children too much to give them a big inheritance. If children are given big inheritances, they lose pride in their own achievements and the incentive to succeed. I think that £300,000 between one’s kids is quite enough. I certainly will take no measures to avoid paying my share of inheritance tax on my money which exceeds that threshold.

As a former practising economist, my third point is that by common consent in this country capital is taxed very lightly and income is taxed reasonably heavily, which would be a common view among economists. I will not go into every feature of it, but inheritance tax is one of our few substantial taxes on capital. We do not have, for example, wealth tax, or gift tax, to which the noble Lord, Lord Campbell-Savours, referred. Therefore, I regard it as part of redressing that balance.

Sadly, however, inheritance tax has been undermined by the many avoidance measures spoken of so eloquently by the noble Lord, Lord Burnett. We have gifts inter vivos, schemes to enable couples to claim two allowances rather than one, and you can have 10 years to pay off the money inherited from the value of someone’s house. All these and many more are ways of avoiding the tax. It is true that the very rich do not pay the tax unless they do not trust their children to give them the assets during their lifetimes. I regret that and should like to see an inheritance tax, whatever the threshold and the rate, that basically is payable on whatever you are worth when you dieand for the methods of avoiding it before you die to be cut off.

My fourth point is one that surprised me when I did my research. This debate and the debate held in the popular newspapers are conducted as if inheritance tax is on the up, suggesting that more and more people are paying it. That is true over a very short period, but it is not true over the long term. I have checked the Inland Revenue statistics. In 1938-39, 153,000 estates were subject to inheritance tax. By 1968-69, that figure had almost halved to 81,000. By 2006-07 it has declined to 35,000 estates, though I accept that in recent years there has been some rise as a result of the house price boom. This is not a tax that is becoming increasingly onerous; it is one that is affecting fewer and fewer people over the long term. We heard in the debate last week that the Treasury predicts that it will continue to be the case that 94 per cent of estates do not pay inheritance tax.

That brings me to the theme explored by both the noble Lord, Lord Burnett, and the noble Lord, Lord Sheikh. They suggested that this is a tax that hits middle England. If 94 per cent of the population do not pay it, only 6 per cent of the population do. Perhaps it is right that they should pay it, perhaps it is wrong; but whatever that 6 per cent is, it is not middle England. It is a small percentage of those at the top. I understand that when these matters are considered in Fleet Street, that percentage is heavily represented, as it is in this House. I am sure that the noble Lord,Lord Burnett, is going to pay inheritance tax, as will the noble Baroness, Lady Noakes, despite her accountancy skills. I will pay quite a chunk, although in my case if not theirs I shall do so quite willingly. This is not a tax on middle England, it is a tax on the relatively wealthy.

I close with a final observation that might give the House some pause for thought. For every family that pays this tax, at a rough guess there are some six to eight families who have no assets at all. Something like 40 per cent of the population have no assets to their name. That is a staggering fact. Here I refer back to the previous debate. We should give more of our time to thinking about the ways we can help that 40 per cent than on thinking about getting rid of this modest impost on the very rich.

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