Skip to main content

Taxation: Inheritance Tax and Capital Gains Tax

Volume 700: debated on Tuesday 22 April 2008

asked Her Majesty’s Government what plans they have for the future of inheritance tax and capital gains tax.

The noble Lord said: My Lords, I am grateful to have been given this opportunity to debate these tax matters. I draw the House’s attention to my interests, which are contained in the Register of Members’ Interests. I was given a similar opportunity in February last year to discuss inheritance tax, and I spent a considerable part of my speech discussing and recommending to the Government that the nil-rate tax band between spouses and civil partners should be transferable. I gave a series of what I thought were compelling reasons why this should be done. I am delighted that, six months later, the Government decided to adopt these suggestions.

I hope that the House will forgive me if I make a few general observations on international tax avoidance and evasion, and if some of what I have to say gives rise to a measure of optimism. I have given Front-Benchers notice of this. When a new President, whether Republican or Democrat, is elected in America, there will be considerable international impetus to bear down ever more strongly on international avoidance and evasion. I shall advert to that later.

It is one of the key principles, if not the key principle, of taxation that it should be fair. It is imperative to have a fair tax system, but one that recognises that we live in a worldwide or global economy. Individuals and businesses have opportunities, especially given the internet and other electronic means of communication, to set up and carry on their trade or profession wherever they choose. The level of taxation is an important consideration in their deciding where to carry on their businesses.

It is interesting to note that from 1979 to 1997, mainstream corporation tax was reduced from 52 per cent to 33 per cent—a massive 19 per cent reduction. The tax take in real terms rose enormously. More businesses were created, with opportunity for everyone, and far more jobs were created. There was more money with that measure and other tax measures in those years. There was more money for hospitals, schools and pensioners, and these are lessons that we should never forget.

In the last year or so, the Government have had one or two tax problems with their proposals. I gather than the planning gain supplement is unlikely to happen and that the Government are rethinking their announced measures to tax spouses, especially those who own and control businesses and make transfers between themselves. However, the most staggering tax blunder is the Government’s decision to abandon the 10 per cent rate of tax without any compensatory measures for the 5 million of the poorest of the working population who are adversely affected. I believe that the Government will be forced to make changes to these measures.

There was an outcry about the capital gains tax changes that were announced last year and which abolished taper relief. I shall refer to those later. Changes were made to soften the blow, but in addition there was considerable unease about the announcement of the taxation changes for non-domiciles. The Government had to make changes fast both to the capital gains tax and to the non-domicile proposals. It was interesting to hear a BBC programme on the non-domiciles by Rosie Millard last Saturday morning. It finished on the note that home is where the heart is, and certainly some of our non-domicile residents in this country seemed to have no great allegiance to the country other than it being a convenient and tax-efficient place to do business. There should have been a thorough and rigorous review of the tax status of non-domiciles that compared cost with benefit.

There is reason to be reasonably confident that major economies in the world are becoming more enthusiastic about dealing with international, corporate and individual tax avoidance, some of which is evasion or at least on the cusp of it. I believe in international tax competition as long as international conglomerates and individuals pay their fair proportion of tax in the countries in which they operate. In Britain, we have sensible attempts to tackle these problems. The genesis of these attempts was made decades ago. I remember the controlled foreign companies anti-avoidance legislation in the 1980s. However, the only way in which to tackle these matters is for the advanced economies of the world to work together, and there are encouraging signs that they are beginning to do so.

There are growing deficits in the major economies of the world, which makes it an auspicious time for us to face down and deal with international, individual and corporate tax abuse. Last year in the United States, three senators introduced the Stop Tax Haven Abuse Bill. The Bill will probably not become law. Nevertheless, one of the senators was a Republican and two were Democrats, one of whom was called Mr Barack Obama. One of the main thrusts of the Bill was to impose restrictions on foreign jurisdictions, financial institutions or international transactions that are either of primary money-laundering concern or, interestingly enough, impede US tax enforcement. There will be pressure to tighten up tax avoidance provisions in our series of double-tax treaties and, no doubt, in the OECD model.

In the Financial Times on 28 February this year, it was reported that the Indian Government were going to take steps to clamp down on international tax avoidance and evasion. Again, earlier this year, the German Chancellor, Angela Merkel, visited both Monaco and Liechtenstein and made it abundantly clear that Germany would take steps to deal with international tax evasion. The French Government have announced similar aims. There is a growing international will for co-operation in this endeavour, and a desire to crack down on international tax evasion, whether by individuals or companies. I applaud these endeavours.

In early 2005, I was a member of a committee in the other place when we debated what I believe was the first information-sharing protocol with a tax haven country. There will be, and no doubt have been, further such measures. I also remind the House of last year’s amnesty, which was not quite an amnesty, for overseas deposits and holdings. Many hundreds of millions of pounds have been collected by this move. Tax fraudsters should beware, because I believe and hope that the net is closing in on them. Those who do not pay their rightful contributions are breaking the criminal law and ensuring that the rest of us pay more.

I understand that Ministers and Members of Parliament were surprised at the outcry that greeted the announcement of the recent capital gains tax changes and the abolition of taper relief. Some changes have been made in respect of what I call business assets, including the new £1 million relief. Since its inception in 1965, capital gains tax has contained special relieving measures for bona fide businesses which have been owned for a period of years. I cite, for example, retirement relief, which was phased out by the Finance Act 1998, which introduced the new generous taper relief.

The effect of the business taper was to encourage businesses to locate in this country and to encourage indigenous businesses to grow and to prosper here. On 16 June 1998, when we debated the introduction of taper relief in the other place, the Minister said that these changes are intended,

“to encourage all businesses to grow and to encourage entrepreneurial activity … We want to ensure that entrepreneurs themselves are in control of their companies and that they benefit from the wealth that is created in their companies”.

Finally, she said:

“Fairness is another important aspect of the reform. Abolition of retirement relief, together with the … changes we are making, will make capital gains tax a fairer tax”.—[Official Report, Commons Standing Committee E, 16/6/98.]

That was not said by someone from the right wing of the governing party—it was Red Dawn herself. No wonder the business community was up in arms about the changes by the Government, because the Government had broken a contract they had made with it 10 years previously. I look forward to hearing from the Government exactly how they envisage capital gains tax evolving in the next few years and their philosophy on that tax.

As I said earlier, I was grateful that the Government adopted a system of transferability of nil-rate bands between spouses. There are a number of changes that could be made to inheritance tax. I outlined some of those last year when I stressed that the main complaint about inheritance tax was its unfairness in so far as the very rich can afford to avoid it by making potentially exempt transfers, whereas millions of people—so-called middle Britain—are liable to pay the tax. I made the suggestion last year that the system of potentially exempt transfers should be reconsidered with a quid pro quo of a higher nil rate and far lower rates.

There are, however, some specific measures I would urge the Government to make—

My Lords, the 2006 trust tax changes were ill considered and unfair. I am not referring to the discretionary trust regime, but to the interest in possession trusts, and accumulation and maintenance trusts, created during a settlor’s life time. I quite understand that the Government were concerned that life tenants, often surviving widows, could have their income depleted by trustees appointing the income or even capital to others. This could easily have been dealt with by giving life tenants an absolute veto on such appointments. These interests in possession trusts are not set up for tax avoidance. They are set up in recognition of the fragility of marriage or to cope with vulnerable individuals and the young. The Inland Revenue’s market research into the use of trusts conducted in January 2007 made it abundantly clear that these trusts were set up for reasons other than tax avoidance. I would hope that the Government would consider reverting to the pre-2006 regime where a trust was taxed on death, transfer or surrender by the life tenant.

Another unfairness is the taxation of siblings who live together. They cannot marry and there are quite a few sisters and brothers living together who in appropriate circumstances should be allowed to transfer their estates, exempt on the death of the first, provided that the transfer is to the surviving sibling. This mirrors the relief available to the surviving spouse of marriage couples and civil partners.

Finally, many hundreds of carers in this country have similarly forsaken the opportunity of getting on to the housing ladder to look after their parents, their relations or even their friends. Their selfless, conscientious dedication and effort should be recognised in so far as a modest house in which an individual lives with his own carer should, if it is transferred to the carer, be free of inheritance tax. I look forward to hearing from the Minister the Government’s proposals on these and the matter of inheritance tax generally.

My Lords, I remind speakers please to keep to the agreed time, otherwise the Minister will not be able to respond to all the points raised in the debate.

My Lords, I am very grateful to the noble Lord, Lord Burnett, for raising this subject. I did not mind him running over time because he said a lot of things that I would say in agreement. He should be on these Benches, not his Benches, with the views that he has expressed on capital taxation. It seems to me that we need to have a lower, fairer, flatter, simpler tax system. Perhaps I may do something very unfashionable; that is, to praise the Prime Minister as Chancellor for some of the measures he implemented which were about producing a simpler and a more competitive tax system. Unfortunately, in respect of capital taxes and income taxes, he did only half what he needed to do, which is one reason why the Government are in such deep trouble in respect of tax. For example, it was a good idea to remove the 10 per cent band, which the then Chancellor introduced in the first place, in order to create a simpler tax system. But it should have been done in consort with raising the threshold so that those people who were no longer within the 10 per cent band did not face a doubling of the rate of income tax they paid on modest incomes.

Similarly, with the reform of capital taxes, the idea of getting rid of the complex system of allowances, indexation and the rest was brilliant. I say all credit to the Prime Minister. I also agree that the Government were right to get rid of the artificial distinction between different classes of capital gains, different business assets and other assets. But where it all went wrong was that they used a simplification measure in respect of capital taxation to raise another £1 billion or so of revenue and discriminated against people who had built up businesses with a particular view of the taxation system. It would be much better to have a short-term capital gains tax with a taper which tapered to zero over, say, a 10-year period, to encourage people to make savings—the savings ratio has halved since 1997 under this Government—and to encourage people to take a long-term view of investments.

I do not wish to add to the Government’s difficulties, but it is not on just the 10p threshold that they will face problems. The changes which the present Chancellor made to capital tax will create another enormous problem. As regards the 10p band, poorer people have ended up paying more tax and richer people have benefited. The same thing will happen because of the capital gains tax reforms. The Chancellor has introduced capital gains tax at 18 per cent. People paying marginal rates of tax of 40 per cent will be besieged by clever people in the City with schemes to enable them to convert income into capital gains. It is a well known fact that the Tories did not abolish capital gains tax, much as we would like to in principle, because of the problem of leakage. If you have a lower rate of capital gains tax than the marginal rate of income tax, people will convert income into capital gains. I confidently predict that we will hear a lot about loopholes for the next three or four years arising from the Chancellor’s foolish decision to make a change in the capital gains tax rate without having a proper taper and without matching the marginal rate with the capital gains tax rate.

The way around this is to introduce a short-term capital gains tax, tapering perhaps to zero over 10 years and starting at the marginal rate of tax. If one did that, there is also an opportunity to abolish inheritance tax altogether by bringing in capital gains tax on death, which would get over the noble Lord’s point that rich people do not pay inheritance tax. The people who pay inheritance tax are those whose main asset is over their heads. As we have seen in recent days, that for many people is a declining asset, but it is still substantial. By introducing capital gains tax on death, the main family home would be exempt, but any short-term assets which had not been held for 10 years or more would be subject to tax. We would then have a much fairer system, which would bring in revenue from people who are able to escape at present because they are able to order their affairs in such a way.

I should like to say a bit about inheritance tax because I note that the Fabian Society, in a sort of last gasp, has come out arguing strongly in favour of inheritance tax in principle. I think that it is a wicked tax. It is double taxation in that it is a tax on money that in the main has already been subject to tax, and it does something very wicked: it encourages people to spend rather than to save. If someone has finished their working life, paid their taxes, has a capital sum, and then spends the money on floozies and Ferraris, there is no tax to pay. If they save it to pass on to their children, there is a tax to pay at 40 per cent. We then wonder why savings have gone down and debt has gone up in our country.

I urge the Government to embrace the idea of a simpler, fairer tax system and look at what they have done in respect of capital taxes. At the moment their proposals will help those who have wealth and discourage those on lower incomes who wish to amass wealth and pass it on to their children, which is a basic human motivation. If we encourage people to save more and to take greater responsibility for their families in the long term, that must be good news for our country as a whole.

My Lords, I congratulate my noble friend on his choice of subject for the debate. For a number of years he has taken a deep personal and professional interest in the area of inheritance tax and capital gains tax. In the limited time I have allotted to speak, I want to focus on capital gains tax, and I appreciate the opportunity to be able to follow the noble Lord, Lord Forsyth, because a number of my points address almost precisely the areas he touched upon.

In endeavouring to frame an ideal capital gains tax policy, one is seeking to get the balance right between five aspects. First, there is the desire to encourage businesses to be creative in terms of wealth and job creation, and to encourage the development of more family businesses in this country. When, for the sake of argument, we compare ourselves with Germany, we see that the strength of the German economy is due in part to the fact that it has so many more substantial family businesses that are passed down from generation to generation. Secondly, we want a society that favours longer-term investment rather than the short-termism that I am afraid has dominated the UK economy over recent years, perhaps personified by hedge funds more than any other individual group. Thirdly, we want the ability to administer and calculate capital gains tax to be relatively easy. Fourthly, we want to encourage what I would call a savings society rather than one that focuses on debt and encourages borrowing. Fifthly, of course, there is the whole question of revenue raising. We must be conscious that the state has a responsibility to raise revenue from somewhere, and it is not unreasonable to look to capital gains to make its contribution.

Until the recent changes made to capital gains tax, as the noble Lord, Lord Forsyth, commented, the whole system had become unduly complex with its taper relief and indexation. There was a clamour from both professionals and investors to simplify capital gains tax because it had become almost impossible to calculate and administer. However, I have to say that the Government handled the changes in a very ham-fisted way. They seemed to rush into making changes with hardly any consultation. While I welcome the entrepreneurial relief on the first £1 million of gains taxed at 10 per cent, I would have thought that in making those changes the Government would have appreciated what they were actually doing by going ahead with capital gains tax changes without bringing in some sort of relief to encourage the establishment of businesses. But thankfully the Government did respond to pressure.

I have some sympathy with the Government because, had they announced in public that they were contemplating substantial changes to capital gains tax, there would have been considerable speculation and, in my judgment, enormous pressure on them to make an immediate announcement. In a way the Government were caught between a rock and a hard place. However, we have ended up in a rather ironic situation where capital gains tax on second homes has for many people been reduced from an effective rate of 40 per cent to 18 per cent. Whether a Labour Government are proud of bringing about such a reduction, I am not sure. Perhaps the Minister will indicate the Government’s thinking on that.

My preference, and again I align myself to some extent with the noble Lord, Lord Forsyth, is to bring back the differentiation between short- and long-term capital gains. I accept that short-term capital gains—those made in up to a year—should be taxed at the top rate, whatever it is. But for longer term gains—and we should be encouraging long-term investment—on assets held for over a year, I suggest a rate of 15 per cent. It should not be as high as 18 per cent or as low as 10 per cent, so 15 per cent would strike the right balance.

Finally, I want to comment on the Alternative Investment Market. I am all for encouraging the creation of new businesses through tax incentives. The previous situation was that stock held for two years by the 40 per cent taxpayer attracted only a 10 per cent capital gains rate and was free of inheritance tax held for over two years. It is illogical that old established public companies—I had a number in my own investment portfolio and they are declared in the Register of Members’ Interests—should purely by dint of shareholder vote be allowed to move across from the main market to the Alternative Investment Market and immediately enjoy the very attractive taxation advantage of the effective 10 per cent CGT rate and no inheritance tax if stock is held for two years. There was something rather odd in those advantages. The capital gains tax advantage has fallen away to some extent because the rate has gone up to 18 per cent, but the inheritance tax advantage remains in place.

My Lords, first I declare an interest as the owner of land, property and equities. The House last debated this issue in February 2007, part of it being inheritance tax. It is interesting to reflect on what was said then and what has happened since. Essentially, the Minister said then on behalf of the Government:

“We should not exaggerate the impact of inheritance tax”.—[Official Report, 1/2/07; col. 465.]

Perhaps he was concerned enough in private to help persuade the Government to make the key change in the Pre-Budget Report only a few months later which effectively doubled the exempt threshold to £624,000. Let us hope that, knowing his influence, the Minister’s well judged public concerns on an unconnected matter—the abolition of the 10p income tax rate—will be met by a change in Government policy too. Of course, the Government’s change of mind was also influenced by the Conservative Party’s well judged announcement that the threshold would be increased to £1 million if and when we get into power.

There have also been considerable changes to capital gains tax since February 2007. Initially, the joy for some people of the rate going down from 40 per cent to 18 per cent was tempered by the abolition of the 10 per cent rate for entrepreneurs. That is yet another example of the Government getting rid of a favourable tax rate that they themselves introduced. Only after a tremendous campaign by many business interests, and supported by notable Government spokesmen such as the noble Lord, Lord Jones of Birmingham, was the 10 per cent rate restored on the first £1 million of business gains. Nevertheless, buried in Table C6 on page 181 of the 2008 Budget Report is the real truth: the so-called CGT reforms are yet another stealth tax rise. Receipts from CGT are estimated at £4.8 billion for 2007-08, and £5 billion in 2008-09, although this last figure would have been even more at £5.4 billion, according to the 2007 Pre-Budget Report, had there not been the hue and cry over the 10 per cent abolition. Without this protest, the 18 per cent change would have represented no less than a 12.5 per cent tax take increase in CGT over the previous years.

So let us now look at the two taxes as they stand. The inheritance tax exemption for 2008-09 now stands effectively at £624,000. However, as the noble Lord, Lord Burnett, rightly said in February 2007, unmarried siblings living together do not benefit from this change, neither do relatives and others who give live-in care for the elderly and the infirm. Despite the change to IHT, problems remain with the concept of the tax, many of which have been referred to by previous speakers in the debate.

The Minister said in February 2007,

“No Government recognise the concept of inheritance tax being double taxation”.—[Official Report, 1/2/07; col. 466.]

With the greatest respect to him, if you have paid out of taxed income or capital for an asset and then are taxed again at death, surely this can only be double taxation. It is not the same as his analogy between income tax and VAT.

Other concerns mirror those of the noble Lord, Lord Burnett. As he said in February 2007,

“there is considerable pressure on the elderly to gift assets early to avoid the tax and they do so far too early for their own good”.

The tax also militates against savings and investments. It encourages individuals to spend money rather than save it just to be taxed. I am not sure whether this represents official Lib Dem policy but, as the noble Lord, Lord Burnett, stated,

“we should encourage the entirely natural and praiseworthy ambition of most of us to work hard and save money to pass these assets and cash on to our children and grandchildren”.—[Official Report, 1/2/07; col. 452.]

I agree with him also that the rate is too high, but rather than just alter the rate I would wish to do something more radical, as other speakers have suggested. The report of the noble Lord, Lord Forsyth, Tax Matters, suggests the abolition of inheritance tax and its replacement by a short-term gains tax. I support this idea. The suggested abolition is not only a Conservative idea but was also proposed by the former Labour Cabinet Minister Stephen Byers. In an article in the Sunday Telegraph in August 2006 he said:

“It would be difficult to overstate the political impact of abolition of inheritance tax by a Labour Government”.

The Government should grasp the nettle. The move is costed in the Forsyth report at £2.6 billion but how would this be paid for? I would suggest two areas: first, by tightening-up the operation of the tax credit system more efficiently you would stop the over-payments, which I understand are running at some £2 billion a year; the rest of the sum I would make up by charging the carry interests on private equity funds to individuals’ income tax rather than CGT rate. I cannot see any reason why the interests should be charged to capital gains tax. It would be a generally popular measure. In my view, the sector still pays too little tax compared to directors of its quoted rivals.

Let us now turn to capital gains tax as a whole. The Government have cut the headline rate for some from 40 to 18 per cent. They have taken away the huge advantage of indexation and taper relief. This means, in effect, that long-term assets will in many cases be subject to more tax than previously. I believe this in essence to be wrong. It is much more equitable to follow the logic of the Forsyth report and levy a heavier tax on short-term gains, tapering the rate down to nil after 10 years. This is not just because it would favour me personally; the new 18 per cent regime favours short-term speculators. As other speakers have mentioned, the CGT regime should be more like France and Germany, where no CGT is payable if you hold assets for a longer period.

In view of the fact that the receipts from IHT and CGT amount to less than 2 per cent of net tax revenues, there is no reason not to be radical about the reform. Clearly capital gains tax is necessary to avoid individuals turning income into capital, especially in the short term, and avoiding the tax altogether, but I do not believe IHT is necessary and it should be abolished.

My Lords, I, too, congratulate my noble friend Lord Burnett on securing the debate. He made a useful contribution when he referred, particularly, to some of the problems he sees in the inheritance tax and capital gains tax regimes. Two Conservative Peers have given their views and although the noble Lord, Lord Forsyth, believes inheritance tax is wicked, even he would replace it with a capital gains tax on death. There is a general view that it is perhaps right that capital should be taxed, whether as an inheritance or as a capital gain. My noble friend could not resist the opportunity to refer to the 10p income tax rate and the non-domiciles—I, too, will not be able to resist saying something shortly—but those are other issues in our tax system at the present time.

The noble Lord, Lord Forsyth, took the view that we should be looking at capital gains and felt that there was a sense that the present position was anti-business; that we should be looking particularly at the short-term gains rather than the long-term gains. My noble friend Lord Lee was also concerned about short-termism and about looking at both the short term and long term as far as gains are concerned, yet again acknowledging that revenue raising was important.

The noble Lord, Lord Northbrook, and my noble friend Lord Burnett referred to families that are other than straightforward married couples and the problems that this can raise, particularly with a shared house, and all that that means for inheritance tax.

The noble Lord, Lord Northbrook, on looking at the small print, found this figure of £4.8 billion, and £5 billion for next year. I think it will be a little more than £4.8 billion because many people have been rushing to pay. The regime lasted until 5 April, a few weeks ago, and therefore the Government’s coffers may well be higher.

The debate concerns plans for the future of inheritance tax and capital gains tax. It is interesting—the noble Lord, Lord Northbrook, mentioned this—that the Tories met at their conference on 1 October and said that they were going to change inheritance tax and have a £1 million threshold rather than £300,000. Lo and behold, nine days later the present Chancellor put out a statement that the £300,000 would be doubled to £600,000. Today it is £312,000, which can also be doubled. That may or may not have been right, but it surprises me that a big change in policy can occur in nine days; it is a wonder. Of course it may have been a fluke and it might have been going to happen anyway. We do not know that, but it might.

Similarly, an announcement was made about capital gains tax and the 18 per cent figure, but no taper relief and no indexation. But indexation is still retained for companies. Then people went on about family companies and so on and we get this late change and a £1 million life time allowance. Again I ask whether this has been thought through. The question that has come out is whether the capital gains tax regime is right and good to encourage the long-term investor. People have always taken the view that we should tax get-rich-quick merchants and short-termers, but it is important for the country and everyone that there is long-term investment. I hope that when the Government consider the future of these taxes they will think about the long term.

The related matter that I wanted to raise was the whole business of intestacy, because the provisions regarding it are related to inheritance tax. On 8 September 2004 I asked an Oral Question on the subject, which the noble Lord, Lord Filkin, answered. He said he was going to consult. Then there was something of a delay. By 25 January 2005 it had not happened and the noble Baroness, Lady Ashton, had taken his place. Eventually a document was published on 7 June 2005—nearly three years ago. What do your Lordships think if we alter the intestacy figures from £125,000 to £350,000 and further changes? Still nothing has happened. I contrast that period of nearly three years with the nine days for the inheritance thing following that Tory conference.

The major part of someone’s capital is their house. My main concern is that this discussion about capital taxation involves the appalling position where someone could die without a will and only £125,000 can be guaranteed to the surviving spouse, plus half the rest only as a life interest, and the children get the rest. Of course most families would tend to sort that out, but if there are rapacious children about, that may well not be the case. Where capital taxation is concerned, this further issue should be taken into account.

In the past century there were only seven changes in the intestacy rules, while I suspect that the capital gains tax relief changes every year. When we change the intestacy rules and we look at the figures, they should be linked in some way to inheritance tax reliefs. That would be one way in which we would not have to constantly be looking at this issue: link it to something that is already going to be there.

My Lords, it is a pleasure to be taking part in this short debate, especially as the noble Lord, Lord Burnett, has again demonstrated his great expertise in tax matters. He surprised me a little with his digression into international tax avoidance. I also note that practically every noble Lord wanted to talk about the abolition of the 10p rate. I shall not be dealing with either of those matters tonight, but the Minister knows we will be returning to the 10p rate later this week.

The noble Lord, Lord Burnett, claimed credit, to some extent, for the Government’s adoption of his idea of the transferability for tax-exempt amounts between spouses.

My Lords, I am grateful for what the noble Baroness has said, but it was not my idea. It was my suggestion, but many other people have had that idea as well.

My Lords, the noble Lord is quite right that he was the person who brought it to your Lordships’ House, and he must therefore take some credit for it. I was going to go on to say that my own party claims the main credit for last year’s PBR changes to inheritance tax, when my honourable friend George Osborne announced his policy of increasing the tax threshold to £1 million and pushed the Government into their own changes.

We all remember those heady days last September, when the Prime Minister was set upon an early general election and the date of the PBR had been announced as the launch pad. But we announced our policy one week before, and it was hugely popular. The Prime Minister bottled out of an election, and all the talk was that the Treasury spent the whole of the weekend rewriting the PBR. This rushed policy making led to the most chaotic set of tax changes that I can ever recall. The changes were driven by politics, not principle—I think the noble Lord, Lord Shutt, would agree with that analysis—and as the Government sow, so shall they reap.

The IHT changes were accompanied by changes to the taxation of non-domiciled persons and to capital gains tax—all controversial and imperfect. I shall be talking later about capital gains tax; for now, I shall merely recall that the measure aroused the intense anger of the business community and led to the partial climbdown in January.

So far as inheritance tax is concerned, the Government’s proposals are useful in allowing married couples to avoid the nil-rate discretionary trust route, but that is about all. Our proposal for a £1 million exemption would remove 98 per cent of estates from the possibility of an inheritance tax charge. The Government’s changes still leave significant numbers of people worried that they will fall into the charge in respect of their home, as other noble Lords have mentioned. As the noble Lord, Lord Burnett, and my noble friend Lord Northbrook have reminded us, the proposals do nothing for non-married persons sharing a family home: siblings, people caring for relatives or the disabled, or unmarried partners.

There are many in my party, led this evening by my noble friends Lord Forsyth and Lord Northbrook, who would seek to abolish inheritance tax entirely. As they have said, it discourages saving and represents double taxation. We certainly do not rule that out, but the state of the economy when we come to power will be our first concern. Once we have dealt with that, we can then move on to the very long list of taxation wrongs that need to be righted by a Conservative Government.

I return to capital gains tax. The Prime Minister earned much of his reputation for being pro-business when he was Chancellor by his introduction of the taper relief, which gave a 10 per cent rate. His successor has squandered all that good will. The new lifetime entrepreneurs relief, which he was forced into, is a pale shadow of the supportive capital tax regime that it replaced and will leave many entrepreneurs within the charge at the full rate. The Chancellor also turned a deaf ear to the hundreds of thousands of ordinary employees who will lose out with regard to their holdings in employee share schemes. There is no transitional relief, no transitional period, no grandfathering of reliefs already earned. It took until January, as I said, for the Chancellor to reveal the entrepreneurs relief.

In the few weeks running up to the end of the tax year, we saw the inevitable rush of people selling ahead of the 80 per cent hike in the capital gains tax rate for business investors—including the noble Lord, Lord Sainsbury of Turville, who, according to press reports, saved £27 million in tax by so doing. We do not criticise any of those who sold last month, because they were merely acting rationally.

At first sight, the Chancellor swept away a complex capital gains regime which owed much to history—it had 1982 re-basing; it had indexation; and it had taper relief—and that made the calculation of capital gains tax on long-owned assets very difficult. The flat rate of 18 per cent is much simpler in concept, but there is a problem with it. The previous regime, which owes its origins to the reforms introduced by my noble friend Lord Lawson of Blaby when he was Chancellor, taxed capital—once you had taken the reliefs—at the same marginal rate of income tax. That significantly reduced the incentive to shift income gains into capital. I completely agree with my noble friend Lord Forsyth that we can expect to see in subsequent finance Bills great swathes of anti-avoidance legislation on top of that which exists already, aimed at schemes designed to turn 40 per cent income into 18 per cent capital gains.

We have seen all this before: the Government introduce a relief or a reduced rate of tax for apparently good reasons. They are then used in a way for which in the Government’s view they were not intended, and so anti-avoidance legislation follows—often several generations of it. The result is something which starts simple and ends up generating its own huge amount of complexity.

The Government have made a mess of their capital gains tax and have upset the business community. Their IHT changes have not taken away anxiety about inheritance tax bills from enough people. It was no surprise to us that eight out of 10 respondents to a poll in the City last month thought that the current Chancellor should go, and that a recent YouGov poll showed his approval rating at minus 42.

My Lords, I join all noble Lords in thanking the noble Lord, Lord Burnett, for introducing this most interesting debate, although he will recognise that including inheritance tax and capital gains tax in the Question has provided quite enough to bite off in the hour that we have available to us, and for a ministerial response of just over 10 minutes, without him then introducing some interesting reflections on other aspects of taxation. He will forgive me if I do not comment on those too much in circumstances where I want to concentrate on the main issues of the debate.

However, a number of noble Lords, including the noble Baroness, Lady Noakes, who indicated that she might return to the issue later in the week, reflected on the tax package and the abolition of the 10p rate. I emphasise that I am not prepared to accept—I hope that I will have the opportunity later in the week to demonstrate it—that easy canard which has been reflected in several speeches this evening, including that of the noble Baroness, Lady Noakes; namely, that the poor have suffered from the Budget because of the abolition of that tax rate. We have introduced a wide range of compensatory measures, particularly in terms of tax credit changes, to ensure that the bottom deciles, the poorest-off in the population, gain from this Budget as they have gained from preceding Budgets under this Government. It is quite clear that a section of the population has not gained, and that is the one to which the Chancellor is now addressing the major part of his concentration.

My Lords, the noble Lord provokes me so much. He has chosen to major on the 10p tax rate. Will he remind the House how many individuals lose out after compensating changes from the abolition of the 10p rate?

My Lords, we will return to that matter in detail later in the week. The noble Baroness and one or two other noble Lords were generalising in saying that the poor have suffered from the Budget as a result of this change. I emphasise that the poorest section of the population did not lose out, and she will recognise the categories into which they fit. I will have the time to expand on that later.

The noble Lord, Lord Forsyth, played entirely fair, although he was as controversial as ever, by concentrating on the significant issues which the noble Lord, Lord Burnett, emphasised in his speech—inheritance tax and capital gains tax, and it is those which I must address. It is of course true that the changes to inheritance tax were not the product of immediate thinking within the Treasury; we have clear records of work on potential changes to inheritance tax which long preceded the autumn of last year. It is not conceivable that changes can be effected in those terms without necessary preparation. The Government have made it clear that these concepts were before the Chancellor well before they became public in the autumn of last year.

We were concerned to respond to what the noble Lord, Lord Burnett, described in his debate last year as the advantages of simplification of the tax system. I know that the noble Lord, Lord Northbrook, has waxed eloquent on this matter in the past, to say nothing of the noble Lord, Lord Forsyth, and the noble Baroness, Lady Noakes. The noble Lord, Lord Forsyth, was entirely fair in his recognition that that principle underpins changes to inheritance tax and to capital gains tax. Through a process of simplification, there are bound to be rough edges to the policy and a consequential impact on the wider society that the Chancellor has to take into account. The noble Lord, Lord Northbrook, suggested that I commented on the limited impact of inheritance tax last year in the debate that the noble Lord, Lord Burnett, introduced. That is certainly so; at that time we thought that in the analysis about 6 per cent of households paid inheritance tax, whereas we now regard it as being about 4 per cent. So I am entirely justified in indicating that the role of inheritance tax can be greatly exaggerated.

As for the concept of fairness in society, I must say to the noble Lord, Lord Forsyth, that it would be a bold Conservative shadow Chancellor indeed who actually campaigned in an election for the abolition of inheritance tax and was able to sustain the argument that it created fairness in society. That would be a difficult one to present. I hear what the noble Lord says about there being other ways in which to handle the matter—but I noted that the noble Baroness, Lady Noakes, speaking from the Front Bench, had her reservations about such a radical proposal. That reflects the fact that the Labour Government have got the issue right and that we need to take into account the fact that property prices in the past decade have enhanced the assets of the nation, with a greater number of people falling within the framework of inheritance tax. Nevertheless, the tax is fair—and it is also progressive, because it bites more heavily as the assets that are being taxed are affected. Therefore, the Opposition would have a difficult job of sustaining the argument that the noble Lord, Lord Forsyth, put forward with his usual eloquence and in the most interesting way.

On capital gains tax, once again the Government are being challenged on doing what they are constantly being prayed to do on opposition Benches—simplifying the tax system. It will be appreciated within that framework that at 18 per cent Britain has a highly competitive rate of capital gains tax. There is no mention in this debate—although the noble Lord, Lord Burnett, sought to extend this issue with regard to certain aspects of international comparisons—of the extremely favourable taxation position that Britain has on taxes on entrepreneurs and asset holders. The only way in which we have been able to build up the strength of the economy over the past decade is to be internationally competitive in those terms.

I hear the challenges about the costs that certain processes of simplification have inevitably brought about and the difficulties consequent on that that need to be worked through, but I maintain that the Chancellor’s position is one that responds to what the noble Lord, Lord Lee, emphasised: the general clamour for simplicity and the recognition that people should know the basis on which they are subject to taxation.

It will be appreciated that the new straightforward rate is complemented by focused tax relief for entrepreneurs, which is available on the disposal of a trading business or shares in a trading company, provided that the person who makes a disposal is an officer or employee of the company and has a minimum 5 per cent stake in the business. In these cases, the entrepreneurs’ relief reduces the effective tax rate to 10 per cent for the first £1 million of gains. That is a recognition of the necessity of giving support to entrepreneurs building up a business—and I think that the Government’s recognition of that necessity has been widely appreciated.

The noble Lord, Lord Shutt, has to a degree thrown me over the question of intestacy, largely because it is not a Treasury issue. The responsibility for rates of intestacy belongs to other aspects of the Government. I hear what he says and understand his complaint. I will write further to him on the matter. I hear his anxiety about the fact that only £125,000 is guaranteed whereas under inheritance tax we are talking about something much higher. I hope that he will appreciate that within the framework of this debate it is difficult to make relevant a discussion on intestacy. He has raised an important issue and deserves a reply. I guarantee to reply to him on that detail.

In summary, this has been a most challenging and interesting debate. My humble 12 minutes has been cut down to 10 because of the contributions of others in the debate. We have all enjoyed those contributions; they have been well worth while. I apologise if I have not covered every issue and will write to noble Lords accordingly.