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Taxation: Inheritance Tax

Volume 684: debated on Monday 10 July 2006

asked Her Majesty’s Government:

What assessment they have made of the future effect on families resulting from the imposition of a 40 per cent level of inheritance tax on properties of average value in London.

My Lords, inheritance tax is currently paid on around 6 per cent of estates on death. The Government have announced increases in the tax-free threshold to £325,000 by the end of the Parliament. Moreover, despite rising house prices across the country, evidence shows that in every region, including London, the majority of properties are below the inheritance tax threshold.

My Lords, does the Minister acknowledge that the yearly increase inthe inheritance tax threshold is lagging far behind the spiralling value of many homes in London and, indeed, elsewhere? Does he also acknowledge that that creates enormous difficulty? He mentioned the figure of 6 per cent. I know of many cases of families who have worked very hard for their family home who are having to sell it because they do not have other resources adequate to meet the tax, or else they have to pay it in lump sums as they go, again causing great hardship to family life.

My Lords, I believe that the noble Baroness’s assertion is potentially misleading: it depends over which period the comparison is made. For example, between 1986 and today, the average increase in house prices has been £155,000, while increases in the inheritance tax threshold have totalled £204,000. For some people buying or owning property now, the event of inheritance tax will arise potentially 30, 40 or 50 years in the future. The value of houses today is not necessarily equivalent to what would fall into their estate because there could be mortgages attached, some people may look to trade down over a lifetime and some may enter into equity release schemes.

My Lords, while one must have some sympathy with the concerns articulated by the noble Baroness, Lady Miller, is it not the case that, were investment in owner-occupied homes—already free of capital gains tax—to be further privileged by being exempted from inheritance tax significantly up the scale, the effect would be to fuel house-price inflation and divert more capital from investment in industry and other productive assets that are in the interests of everyone?

Yes, my Lords, I agree. If you picked out any particular asset to give it a privileged treatment for inheritance tax purposes, it would have the impact of distorting the market, as my noble friend suggests.

My Lords, does the Minister accept that we are in a highly unsatisfactory situation in which the very rich can avoid inheritance tax altogether by careful planning, whereas the merely affluent are increasingly being caught by it? Would the Government consider including lifetime gifts in the taxable sum so that the threshold could be raised, the rate of tax cut and avoidance made much more difficult?

My Lords, it is important that avoidance is tackled throughout our tax arrangements—the Government have been diligent in doing that. As to potentially exempt transfers, we have tabled no proposals to change the rules. Obviously the tax system is a matter for the Chancellor at the time of the Budget. I understand that the issue is getting some attention from the Liberal Democrats, and I can understand why they are, I think, some £20 billion short on their tax plans.

My Lords, I am not sure that the noble Baroness has interpreted correctly what I might have said or was seeking to say. It is important that we have rules for taxing capital that passes on death or by way of gift—it is a matter that successive Governments over 100 years or more have addressed—and it is appropriate that the system is fair. As it is, there is a range of reliefs available under inheritance tax, one of which has just been referred to. There is the spouse exemption, business property relief, agricultural property relief and others—a generally generous set of reliefs is available. Only some 6 per cent of estates pay inheritance tax—about 37,000 estates each year. That has been a broadly stable statistic over a number of years.

My Lords, does not the very existence of inherited wealth grossly distort the property market by artificially inflating prices and denying those who do not receive inherited money equal access to the property market with those who do? I say that as someone who, on principle, rejects and refuses to receive any inherited wealth whatever.

My Lords, it is right that there should be arrangements to bring inherited wealth within the tax net. That seems to be entirely appropriate, and it is what inheritance tax does. Of course, irrespective of the inheritance tax system, household wealth has increased under this Government by something like 60 per cent in real terms since 1997.

My Lords, what plans do the Government have for trust funds that have been set up to pay inheritance tax? There is some concern that they would be eligible for capital gains tax. Considering that those trust funds are set up for the sole purpose of making sure that the Chancellor receives the money for inheritance tax, would that not be rather unfair?

My Lords, the noble Lord might be referring to the current changes in the Finance Bill. The thrust of those changes is to make sure that interest in possession trusts and accumulation and maintenance trusts in particular are not exploited, as they have been in the past, for tax avoidance purposes. Apart from the more targeted exceptions in the legislation, the thrust of those arrangements is to align the system with the mainstream system for trusts, which is what discretionary trusts attract.

My Lords, what is the Government’s estimate of the increase to that 6 per cent, or 37,000 estates, as a result of the recent increases in house prices? A considerable increase must be anticipated.

My Lords, that depends on a number of factors. I stress again that part of the problem with the current debate is that people assume that current house prices immediately fall into the tax net. That is quite apart from the fact that there is a threshold below which tax is not paid—tax is paid only above the threshold. It depends on what people do over their lifetime with their assets—you have to take the long-term view. Historically, about 6 per cent of estates have fallen into the inheritance tax net. With regard to the extent to which capital taxes are featured in our system, it has been below 0.3 per cent of GDP over something like 30 years, or 1 per cent—or slightly less—of total tax take over 30 years.