Finance Bill (Second sitting)

Simon Hoare Excerpts

Thursday 17th September 2015 Public Bill Committees

[Mr Gauke]

I can understand your making that point, Mr Howarth.

[Simon Hoare (North Dorset) (Con)]

I wonder whether my hon. Friend shares my view that those who usually call for higher rates of corporation tax have never themselves ever been involved in the running of a business.

[Mr Gauke]

My hon. Friend makes a very important point. Another point about corporation tax that can be lost in the debate is that, ultimately, the burden of all taxes falls on people. There is a lively debate on corporation tax about how much should it fall upon shareholders, in which case we are often talking about pension funds that pay pensions to ordinary people. Sometimes it could fall upon employees as a consequence of the fact that there is a reduction in investment as a consequence of corporation tax, which in turn means that productivity does not improve, and as productivity tends to drive salaries and wages, employees often suffer; or it could indeed be consumers who suffer from higher prices as a consequence of corporation tax.

Let us be clear that all taxes that we debate in this Committee are ultimately paid by people. They might not be writing the cheque or transferring the funds from their account, but ultimately all taxes are paid by people, and if one has an economically inefficient tax, the price that people pay for the benefit to the public finances becomes all the greater.

--- Later in debate ---

[Barbara Keeley]

I was not in anything like my current role at the time; I am afraid that I cannot explain the thinking of the former Chancellor.

To bring us back to policy priorities, there is much to be said about the technical detail of this legislation. Inheritance tax is already a complex tax to navigate, and the Bill creates a new level of complexity. The tax faculty of the Institute of Chartered Accountants in England and Wales has set out 10 tenets for a better tax system, one of which states that

“the tax rules should…be simple, understandable and clear in their objectives.”

This tax has never been that. The institute says of the clause:

“The measure is excessively complex; it would be simpler to just increase the nil rate band to £500,000.”

Why has the Minister chosen to implement the policy in its current form? There seems to be a simpler way of administering the tax.

Chris Williams of the Chartered Institute of Taxation said:

“The proposals add further complexity to an already complex system. The government has recognised that the problem of downsizing”—

to which the Minister referred—

“must be addressed but proposes only to allow for downsizing that takes place on or after 8 July 2015. Other problem areas include the need to define a main residence consistently throughout the tax system, and to recognise the diverse patterns of the modern family when attempting to restrict the benefit to children and descendants.”

I will come on to that, because there is an important point about what a modern family consists of.

The Mirrlees review, led by the IFS and funded by the Nuffield Foundation and the Economic and Social Research Council, noted that inheritance tax was a

“somewhat half-hearted tax, with many loopholes and opportunities for avoidance through careful organization of affairs.”

That is well known. It went on to say:

“This leads to charges of unfairness and makes a principled defence of the current inheritance tax difficult.”

I grant it that the Minister tried. With such a generous increase in the nil-rate band and such low estimated returns to the Exchequer, the question now is whether we should start revising this to a quarter-hearted, rather than half-hearted, tax. Is this policy a priority at a time when families and first-time buyers are struggling to get a home of their own? The average house price outside London is just over £183,000. The current nil-rate band is £325,000. That would be enough to cover the average value and include a buffer. Why has the Chancellor decided to introduce that additional residence nil rate band?

[Simon Hoare]

Why does the hon. Lady’s narrative automatically presume that because an estate is asset-rich, descendants are cash-rich? She referred to people trying to get on the property ladder—to pay the deposit, stamp duty, and so on. Take the widow who has stayed for years in the family home, which she bought reasonably cheaply in a part of London where property values have risen. It is the disposal of that asset on her death, and her descendants’ inheritance of it, as free of tax as possible, that allows those descendants, who may be in low or middle-paid jobs, to get on the property ladder. Why do the hon. Lady and the Labour party automatically exclude them from their thinking?

[Barbara Keeley]

I will come on to a very good reason why. I will answer the hon. Gentleman’s points. I ask the Minister why—I hope he does not lose this question—given the average house price outside London, the Chancellor has decided to introduce this additional band. There are wider questions, which I said I would come to, about the scope of who will benefit from the nil rate band.

The new tax exemption applies to lineal descendants. We welcome the clarification of who will benefit outlined in the Government amendment, and the apparent extension of the nil rate band to a lineal descendant’s spouse or civil partner in the event of the lineal descendant’s death. However, the Institute of Chartered Accountants has pointed out that it could be seen as discriminatory to allow the relief only to lineal descendants; many godparents, aunts and uncles are as close to, and their lives are as intertwined with those of, godchildren, nieces and nephews as are those children’s parents. That is the kind of family structure that we have these days.

[Barbara Keeley]

My hon. Friend puts that in an excellent way. Will the Minister clarify the Government’s position on why the policy will apply only to lineal descendants? It has the potential to raise house prices by making property an even more attractive investment for the wealthiest, which would make it even more difficult for ordinary working people to get on to the property ladder.

Paul Johnson, the director of the IFS, has said that it is

“rather odd to give this special treatment to housing given that owner-occupied housing is already extremely tax privileged”.

He said:

“This will only increase the bias we have towards putting your money in a house, to inflating potentially the value of housing, without dealing with the lack of housing, which is driving up the value of private residences.”

Many of the policy’s features are similar to those analysed in a Treasury document that was leaked to, and published by, The Guardian. According to the estimates in the document, based on Budget 2014 forecasts, the policy would reduce the proportion of estates liable for inheritance tax from 8% in 2015-16 to just over 6% by the end of the Parliament, rather than increasing it to slightly more than 10%, as the current policy would have done. The document contains the argument that

“there are not strong economic arguments for introducing an inheritance tax exemption specifically related to main residences”.

A number of problems with the policy are set out in the document, such as the fact that it would encourage investment in owner-occupied housing rather than other more productive investments and that it would discourage downsizing late in life when that might otherwise be appropriate. Although the Government have made some provisions to prevent the downsizing problem, industry experts have said that the changes could lead to more people choosing to upsize later in life, which would have consequences for the availability of housing stock for other buyers.

I want to talk about the balance of the Government’s tax cuts, including changes to inheritance tax. Those changes will cost £24.6 billion over the Parliament, and they will be financed by five main sources, according to the Office for Budget Responsibility. Tax increases will raise £47.2 billion over the Parliament; we have talked about things such as insurance premium tax. Welfare cuts, including cuts to tax credit and many freezes, will raise nearly £35 billion. Other spending decisions will cut £8.1 billion. Cuts to departmental spending and to the BBC have been proposed. Various tax and spending decisions have indirect effects that will raise a further £14.2 billion.

The Budget decisions, interestingly, imply £3.5 billion of extra borrowing over the Parliament, on top of the £14.6 billion increase indicated by the OBR pre-measures forecast. Inheritance tax raised an estimated £3.8 billion in 2014-15, but house price inflation had been expected to drive the tax take up to £6.4 billion by 2019-20. Instead of the Exchequer receiving more revenue from inheritance tax, however, the policy is expected to cost it £940 million a year by 2020-21, when the additional family home allowance—like the existing allowance, it will be transferable between spouses—reaches £175,000 per person.

When they talk about borrowing, Conservative Members should bear in mind that if the Government had kept the existing allowance, they would have more than halved expected additional borrowing over the lifetime of the Parliament. In contrast, their position appears to mean more borrowing, when one of the Government’s specified aims is to do the opposite. It seems strange that in the debates we have had so far the Conservative party seems to be convinced that it is okay to increase taxes such as insurance premium tax and to make increases that hit very large numbers of people the main way to raise finances, while implementing changes to inheritance tax that will cost the Exchequer considerable sums of money.

Surely, keeping inheritance tax as it was would be better than increasing the insurance premium tax and making hefty welfare cuts. Those are the decisions that are weighed against each other. The Government are cutting a tax for the wealthier families in the country, while cutting tax credits for millions of those who are in need. That is what we are going to see over the coming years. We could say that this is a rather warped interpretation of Robin Hood: taking money from the poorest to pay for a tax cut for the richest.

To answer the point made by the hon. Member for North Dorset, this tax cut comes at the same time as the Government have decided to abandon a manifesto pledge to implement a £72,000 cap on care costs. In a written statement to the House of Lords on 25 July 2015, the cap on costs was described as an expensive new commitment. The cap—a pledge made by the Conservative party—was designed to prevent older people and younger people with disabilities from having to sell their homes when they went into care.

Here is the answer for the hon. Gentleman: why is it okay for people with care needs to have to sell their homes and have nothing to pass on, while the very wealthiest—the top 10%—are allowed to keep house values of £1 million? The Government have decided to abandon a cap, for which they had made legislation, on the grounds that it is too expensive, while they are opting to go with the introduction of the nil rate band for inheritance tax on properties, which will cost £1 billion by 2020. That £1 billion a year could have been an incredible investment in social care; instead, we are going the opposite way. We are talking about hundreds of thousands of pounds, if not millions. People who have to pay their own care costs will be under a huge burden and will have to give up their homes.

[Simon Hoare]

I would simply say to the hon. Lady that it is just about how an individual uses the asset. If someone needs to use their asset to pay for their care, that is what they must do. Greedy children will be hanging at the gate preventing them from putting up the “For sale” sign or whatever, but we just have to get used to using our residential assets better, as needs require.

[Barbara Keeley]

We were committed to a better way of funding social care, and in future we will be committed to even better ways.

I want to finish by questioning the Government’s priorities. It is a question not only of priorities, but of the unintended impacts of the policy. We talked about downsizing and the effect on the housing market. The clause may have a significant impact, which is why we tabled amendment 7, which would require a report on the effect of the inheritance tax changes on different UK regions and on housing prices. The Minister seemed to signal that he will not look at or accept our amendment, but it is very reasonable, asking only for a report. If he will not accept our proposal now, we will bring it back on Report.