Finance Bill

Like the hon. Member for Falmouth and Camborne (Julia Goldsworthy), the Opposition recognise the concern felt by many across the country about the increase in the number of people caught in the inheritance tax net since the Chancellor took up residence in No. 11 10 years ago. Under this Chancellor, inheritance tax is no longer confined to the wealthy and now impacts on those on middle incomes, too. The hon. Member for Falmouth and Camborne has already told us some of the figures, and I shall add a few more. The Inland Revenue figures show that the revenue raised by inheritance tax has more than doubled under Labour, rising from £1.6 billion in 1997 to £3.6 billion last year. The Treasury expects the tax take to rise again this year to £4.1 billion. The proportion of estates liable to inheritance tax has tripled from 2 per cent. in 1997 to 6 per cent. on the most recent figures, and, as we have heard, the number of estates paying inheritance tax has more than doubled from 15,000 10 years ago to 35,000 this year. Many people are anxious about the potential for a further increase in the number of estates affected by IHT with the growth in house prices. Halifax has carried out some extensive research on inheritance tax and has calculated that house prices have increased by 199 per cent. since 1995-96, which is far ahead of the increase in thresholds. It believes that the number of owner-occupied houses valued over the current £300,000 threshold is double what it was five years ago and now stands at £2.3 million or 12 per cent. of owner-occupied homes. Particular concern is felt about inheritance tax in London and the south-east because of the high property prices. The average London property price went over the IHT threshold at the end of 2006. The Halifax research tells us that one in 10 postcodes have an average property price over the current £300,000 threshold, which is double the number five years ago. Scottish Widows has also published research about the increase in the number of home owners whom it believes now face the prospect of an IHT liability on the basis of their current net worth. A Grant Thornton study has projected an increase in the number of estates paying inheritance tax to 45,000 or 50,000 by 2009, assuming that asset prices continue to grow at their long-term average rate. As I said in Committee, the Conservative party is not making promises on changes to the inheritance tax rates, bands or thresholds. We are not making uncosted, up-front tax cut promises on IHT or any other tax, because we fear that the public finances will have deteriorated so much by the time of the next general election that the nation will not be able to afford tax cuts. I know that that will disappoint those who want radical changes to, or the abolition of, IHT, but I hope that they recognise that economic stability is even more important than tax cuts and that a Government led by my right hon. Friend the Member for Witney (Mr. Cameron) will not risk that stability. Nevertheless, we are, of course, happy to examine the options for tax reform. In this area, as in any other, it is important that all parties seek to address the issues in a thoughtful and considered way. With that in mind, I have listened with care to the changes to inheritance tax proposed by the hon. Member for Falmouth and Camborne. Given the Liberal Democrats’ commitment to increasing thresholds for IHT, it is bizarre to table an amendment that would delete a clause that increases those thresholds, which is what amendment No. 38 would do. Then again, the Liberal Democrats are not always known for their consistency. I also recognise, however, that there is some concern about the fact that the potentially exempt transfer system, which deals with lifetime gifts, gives the wealthy opportunities for reducing their IHT bill that are not open to many people on middle incomes whose major asset is the home in which they live. We are certainly open to considering reform of the PET rules, but we would approach that with caution. It is suggested that it would be possible to fund lifting the IHT threshold via an extension of the seven-year rule for potentially exempt transfers, but that would be risky. It is not clear how the change would work in practice, as we do not have a Liberal Democrat amendment to consider. Even more importantly, it would be difficult to predict what, if any, additional revenue would be raised simply by extending the relevant period. It would be impossible to guarantee that enough extra revenue would be raised to fund a significant increase in the threshold. An extension would have an impact on behaviour that would not be easy to predict. In many cases, extending the PET period might well simply prompt people to shift back their lifetime gifts, and the result would not be a huge additional revenue accruing to the Exchequer. I am also concerned about the practical constraints that we would have to address to ensure that such a reform worked. The further back the rules permitted the Revenue to go in looking at lifetime transfers, the more difficult it would be to prove that they occurred and to establish what happened. Moving to a 15-year period would make it difficult for HMRC to keep track of records sufficiently and to be able to enforce the change effectively. I understand that in the past the Treasury and HMRC have given some consideration to a change along the lines of that suggested by the hon. Member for Falmouth and Camborne, but have dropped it on the grounds that it would give rise to several administrative difficulties and costs and yield uncertain returns. If reform of the PET rules were used to fund changes or increases in thresholds, it would have to be borne in mind that any additional revenue would not accrue to the Exchequer for at least seven years, so any changes to the threshold that were to be funded by that method would have to be postponed as well. There is a broader point to make, and I value the opportunity that the Liberal Democrats have given us to consider these issues. It would be a mistake to tinker with just one aspect of how IHT works. If workable reform is to be seriously considered, we need to examine how the IHT rules work as a whole and consider all the options rather than just the PET regime in isolation. The Institute for Fiscal Studies is working on the Mirrlees report, which will include a study on IHT in its project to increase efficiency and fairness in the tax system. In view of the importance of considering a range of issues to do with how IHT works, I mention one further matter that I drew to hon. Members’ attention in Committee, where it was dubbed ““the sister problem””. It relates to long-term cohabitees. Some categories of people cannot use the exemption that exists for transfers between husbands and wives or civil partners. Examples might include people who have lived with and cared for an elderly parent for many years, people with learning disabilities who might similarly have lived with parents over a long period in the same home, or two siblings sharing a home. I drew the Committee’s attention to the case of my constituent, Ann James, who lives with her sister in a house that they have jointly owned for many years. She is very worried that the house will have to be sold should she die before her sister or vice versa. In assessing the options for IHT reform, the House should bear in mind the situation in which Miss James finds herself. This debate has given the House a useful opportunity to examine and highlight the anxiety and resentment that many people feel about the expansion in the scope of inheritance tax during the Chancellor’s years at No. 11 Downing street. It has also given us a chance to explore important issues to do with the operation of the tax and the options for reform. The Opposition will continue to work for a wide-ranging reform of our tax system as a whole to make it fairer, simpler and more efficient, and will of course include in that process consideration of IHT.