§ If any person makes an insurance on his life, or on the life of any other person, with any insurance company legally established in the United Kingdom or in any British possession, or lawfully carrying on business in the United Kingdom, and the policy of insurance expressly states that such insurance is made with the primary object of providing for estate duty which may become payable on the death of the assured, and that so much as the holder of such policy or his legal personal representatives may direct of the capital sum payable thereunder will, on the death of the assured, be payable by the insurance company direct to the Commissioners of Inland Revenue for the purpose of being applied in or towards the payment of such estate duty then, to the extent to which such capital sum is so paid and applied, the same shall not be aggregated with any other property for the purpose of fixing the rate of estate duty, but shall form an estate by itself.—[Sir W. Davison.]
§ Brought up, and read the First time.
§ 6.50 p.m.
§ Sir W. DAVISON
I beg to move, "That the Clause be read a Second time."
Some of my hon. Friends and myself had put down another Clause, which stood first on the Order Paper to-day, having the same object in view, and we naturally think that it is a better Clause than the one which has been selected, but this Clause is, at any rate, a step in the right direction. As the Committee are aware, if a person insures for such a sum as will be required to pay the death duties on his estate when he dies, the amount of that insurance is added on to his estate and death duties have to be paid on the insurance money as well as on the estate. Further, by adding the amount of the insurance money to the estate the rate of duty is increased. Therefore, very few people take out insurances to cover death duties. It does not pay them to do so. If this Clause were added to the Bill it would benefit the State and benefit the individual. It would benefit the State by checking this annual raid on the national capital, for, after all, the capital of the State is only the capital of the individuals who compose the State. It would benefit the individual by preventing the break-up of estates by reason of the large payments of duty which have to be made after the death of the owner. During the last 880 seven years the State has made a capital levy of some £551,000,000 on individuals, an average of approximately £80,000,000 a year. This year the Chancellor estimates that the capital levy which he will make following the deaths of taxpayers will amount to £80,000,000.
In past years the Financial Secretary to the Treasury has usually been put up to reply to the plea for this just amendment of the law, because the Chancellor of the Exchequer has not wished to undergo the ignominy of defending it himself and, therefore, has astutely retired. We have generally been told that while the Chancellor has every sympathy with this proposal the loss involved would be too great. Last year the then Financial Secretary indicated that the loss would be anything up to £20,000,000. I took the trouble to go into the matter afterwards. I shook my head at the time, but there is not much object in shaking one's head in the House of Commons. I found that the Treasury had arrived at the sum of £20,000,000 by assuming that every person liable to estate duties—amounting to some 280,000,000, a year as I have said—took out an insurance for the full amount, and that all the duties on those insurances were lost to the State. As I have indicated, that is very misleading. People do not take out insurances, because it does not pay them to do so.
Hon. Members may have seen an interesting letter in the "Times" month or so ago from a gentleman who pointed out that he had just read in the Press that the National Exchequer was expected to benefit by nearly £1,250,000 from the estate of a Mr. X. He pointed out that this estate of 22,500,000 originally produced, at four per cent., an income of £100,000 a year. At present rates of Income Tax and Surtax the State derived from this income an annual revenue of £58,970 a year. By the death of the owner a sum of £1,250,000 would be taken away and the estate reduced by one-half. This reduced estate would bring in an income of £50,000 a year, instead of £100,000 as previously. Therefore, the State would have the taxation only on £50,000 a year instead of on £100,000, and that would mean that the State would receive £27,096 in Income Tax and Surtax in place of £58,970. There is a permanent 881 loss of revenue of £31,875 a year. It would appear that the revenue authorities do not calculate the enormous losses of Income Tax and Surtax which are suffered by using this individual capital as national revenue. If the money raised by death duties were applied to paying off debt there would be more to say for it; there is no justification for applying the money to the revenue of the year.
It would not be in order for me to expound at any length the serious effects of this duty on the estates of private individuals. Last year the hon. and gallant Member for Newbury (Brigadier-General Clifton Brown) drew attention to its disastrous effects on agriculture. Farms had to be sold, old farmers who had been farming them for years and did not wish to leave had to raise the money, which they could not afford, to buy those farms, and they were left, consequently, with not sufficient capital to run the farm properly and agriculture suffered in consequence. Farm labourers were also put off and servants dispensed with when estates had to be reduced in order to raise the money to pay these death duties. The same disastrous effects are to be seen in business, especially in the case of a small business, because not only has the directing head of it been lost but a large part of the floating capital is required to pay the death duties. People can insure against fire or other calamities, but for the reason I have given it is not practicable to take out an insurance for death duties. We are sometimes told that the State cannot differentiate between forms of saving, but this is not a saving, this is simply the paying of a sum of money each year in order to provide the amount which will have to be paid on death. Any individual who does that ought to be considered a thrifty and wise person, and I submit that what is wise for the individual is equally wise for the State. The Chancellor would benefit by getting immediate payment of the death duties from the insurance company instead of having to allow time for payment.
I would also point out that the Clause does not ask that the whole of the insurance shall be exempt from duty, but simply asks that the value of the estate shall be kept distinct from the insurance money so that the estate pays a lower 882 scale of duty than it would do if the insurance money were added to the estate. It is such a reasonable proposition that I cannot help thinking that the Financial Secretary to the Treasury, if he is not able to accept it this year, will see that steps will be taken to deal with it in the forthcoming year.
§ 7.1 p.m.
§ Brigadier-General CLIFTON BROWN
I am sorry I was not here to move the Clause, but it was proposed much better by my hon. Friend in his admirable speech. When this matter was discussed last year, the then Financial Secretary did not, I think, grasp the purpose of this Amendment. He rather answered the larger Amendment preferred by the hon. Member who has just proposed this one. The Financial Secretary said:The proposal is that insurance moneys, in so far as they are used to pay Estate Duty, shall not be aggregated…"—[OFFICIAL REPORT, 12th June, 1934; col. 1559, Vol. 290.]My Clause does not go as far as that. As my hon. Friend says, the Chancellor of the Exchequer will find that he has something quite certain. Last year, when the Financial Secretary made out that the difficulty was aggregating estates, and therefore the Treasury would suffer, he made the statement that it might cost as much as £20,000,000. I would like to ask how that sum would be made up if he accepted this much smaller Amendment? At present a great many estates are given away in the lifetime of the owners, and split up into three or four different parts for the various children, and already the Treasury loses by that means an amount of money. Suppose that instead of having to do that—and it is only the rich man who can do it—the rich man could insure his estate and earmark an amount which the Chancellor of the Exchequer would know he would be certain to get. The estate owner would be much less likely to split up his estate in his lifetime, there would be much more income to the Treasury from the bigger amount, and the owner would feel that his children were provided for by his insurance. The Treasury would not lose any more than it does at the present time, if as much.
The argument is not a rich man's argument. The Financial Secretary last year talked about millionaires' estates and the difficulty of aggregating them. 883 The rich man already gives away his estate in his lifetime and insures himself. It is the poor man who is the chief sufferer, because he is unable to insure or to take any means to provide against estate duties. The small man saves his £300 or £400 and buys a little cottage property and land. When he dies, even if the amount of his estate duty is small, there has not been enough money during his lifetime to provide both against death duties and to keep the property in a proper state of repair. Most of the sums come from these poor men whose property, when sold at their death, is in a worse state than it should be. There is many a working man who would willingly pay £1 or £2 a year into insurance during his lifetime and who would have more incentive than he has at the present time to keep his little property in a state of repair.
We have throughout the country a system of insurance against funeral expenses, old age and everything else, and I cannot see why there should not be insurance against death duties—this penal capital tax which does more harm to the poor farmer and the worker than to the rich man. I believe it would be very much to the advantage of the Treasury and of the country. It is ridiculous to say, as was said last year, that instead of getting £80,000,000 in death duties the Treasury would get only £60,000,000. There would hardly be any difference at all. The psychological effect of these death duties, especially on small people and cottage owners, is such that property deteriorates and real hardship is caused to people we want to encourage, those who have been saving money all their lives and putting their savings into cottages. I hope the Chancellor of the Exchequer will consider some form in which he can help to extend the insurance system we have in so many phases of our national life.
§ 7.10 p.m.
§ Mr. TINKER
I hope the Chancellor of the Exchequer will give careful consideration before he makes any promise of this kind. Listening to the hon. Gentleman's argument, I was rather surprised to find that this is protection for the comparatively poor man. This is the first time I have heard it argued from that point of view. It has always been to protect the very rich man. I 884 have followed that line of argument—that the rich man wanted to protect his heirs, and by insurance arrange there would not be such a big demand on the estate. Now the hon. Gentleman has taken another point of view and says that a large number of men who own property desire to insure that at the time of their death their property is kept intact for their heirs. I think I am more in touch with that class of person than hon. Members opposite, and I have never been appealed to by my constituents for this form of protection. Certainly this afternoon has been an education to me, but I am not convinced yet. Therefore I approach the matter from the point of view of protection for the rich man, and that this is something which insurance companies are trying to get through the House. It would be a, great help to insurance companies and I can see, if this is passed, in the next few months insurance companies up and down the country saying what money can be saved by insuring with them. It is surprising that this matter should be brought forward in that light.
I want the Chancellor of the Exchequer on this occasion to stand firm, and not to offer any promise at all, even next year or the year after. As has been mentioned before on several Amendments, we have to have taxation from somewhere, and I have always advocated that death duties are the best means of getting taxation. Sometimes I think it is a misfortune for people to have wealth left to them, and that if they bad to fight their own way they would make better citizens. I remember when death duties were first brought in. It was then thought that everybody would be dividing up their estates and defeating the ends of justice. This may have gone on for a little while, but some of the people who divided up their estates lived a little longer than they expected, and when they applied to their heirs for some of the property back they could not get it. Some of their sons had married and the wives said: "We have got hold of it, and we are going to stick to it. Never mind Father!" Very few people now divide up their fortunes before death. They realise what it means. Once a fortune gets out of their hands they have no chance of getting it back. The Chancellor of the Exchequer need not be afraid if he resists this appeal, and I hope he will give no promise at all.
§ 7.14 p.m.
§ Mr. SPENS
After the speech we have just heard, I would like to say one or two things. In one sense I am a parent of this Clause. I believe I drafted it in Committee last year, or had some part in the drafting. The persons most hit by death duties are the small people who own small holdings, small property or small businesses and have no liquid resources. When they die their dependants are faced with a claim for £200 death duties. To pay that sum they have to go either to the banks or elsewhere to borrow the money rather than that the home or the business should be sold up. In due course that money has to be repaid, and the hardship on the family at present is very great. One of the greatest forms of assistance we could give to these small people would be to invent some means by which the demand for cash can be met with the least possible hardship. Some system of insurance is desirable for that purpose. I quite agree with the hon. Member that if some such scheme as embodied in this Amendment were adopted, the insurance companies to some extent would benefit, but so also would the people we are trying to help, and that is the point we have in mind. Those with liquid resources can look after themselves and make their own arrangements; it is those who have no liquid resources who require assistance.
The scheme is merely that a person should be allowed to insure for the approximate amount of death duties which they expect their estate will incur, and that, on their death, the small sum of money involved should not be aggregated with the rest of their estate for death duty purposes. In advocating among such small people that they should insure for, say, £500 or £700, one has to point out, if one is honest, that the amount of the insurance will be added to the value of their estate and will put up the rate of death duty which their estate will have to bear. Immediately they are told that the increase in death duties may be from £300 or £400 to £600 or £700, most of them drop the proposition like a hot potato. The suggestion in the proposed new Clause is that people who desire to keep their farm, holding or small business need not have to go to their bankers or to others and borrow for the purpose of paying death duties, and 886 that if a scheme of this sort were available for them it might be of assistance. Once people have got into the hands of their bankers, or whoever it is, sooner or later the debt has to be paid, and they may have to sell some essential field or part of their farm or business. That sometimes results in the break-up of their particular form of asset a year or two after the death.
I urge the merits of this scheme upon the Chancellor of the Exchequer. There may be objection on the ground of expense, but the Clause is worded so that it shall apply only to insurances taken out in the future for the special purpose of death duties and to the extent to which the money is actually employed in the payment of death duties. Calculations made in the past cannot give us a true basis on which to estimate the effects of such a proposal. I therefore ask the Chancellor to consider such a scheme, and perhaps to confine its application to estates of under £20,000 or £25,000. We could soon see whether it would assist in a great many of those cases.
§ 7.19 p.m.
§ Mr. COOPER
The hon. Member for Leigh (Mr. Tinker) will be glad to hear that the Government are opposed to the principle of the proposed new Clause, although the reasons for that decision are not precisely those which he gave. The speech of the hon. and learned Member for Ashford (Mr. Spens) will have shown the Committee that the proposal is not designed solely for the benefit of the very rich. A genuine grievance and hardship exists at the present time, and it does not hit only the enormously rich people; but the Clause as drafted is not confined to the small estates. Although the hon. and learned Member did not say that the scheme would apply specifically to the small estates, the scheme would actually apply to all the biggest estates in the Kingdom and the loss of revenue might be enormous. The encouragement to people to insure would be great, and would increase as persons approached nearer to death. The insurance premium would be come of comparatively no importance, but the loss to the revenue might be something like £15,000,000 or £16,000,000. At the present rate of insurance it would, in the present year, be £1,750,000, and that sum would be too big to be considered.
887 If hon. Members would consider one example, they might see the kind of result the proposed new Clause would have. Consider an estate valued at £1,050,000, which is at present liable to a duty of 40 per cent. If the estate included a policy amounting to £355,000, the obvious effect of the Clause would be to tax the estate as though it were two separate estates, one of £695,000 and one of £355,000. They would come into two different categories. Duty on that estate would amount to £355,000 to the revenue, made up of a duty of 36 per cent. on the larger half of the estate and 30 per cent. on the smaller half, and on that particular estate there would be a loss of duty of £65,000. That is only on one estate, and hon. Members can imagine the gain that persons could achieve by insuring. The practice would become universal. It would be possible for the owner of an estate to take out on the eve of his death a policy for £355,000, and for that amount to be drawn upon his death, at a few days' notice.
§ Sir W. DAVISON
Does the hon. Gentleman suggest that any insurance company in the world would allow a man to take out a policy for £355,000 in those circumstances, without an enormous premium which nobody would be prepared to pay?
§ Mr. COOPER
Certainly. Any company would take it on, because there would be a certain gain. Hon. Members seem to forget that, as the law stands, there is a considerable advantage in taking out insurance policies. Life assurance is already the subject of special relief from the standard rate of Income Tax. There is already considerable encouragement, and although the proposed new Clause provides that policies of insurance should expressly state that such insurance was made with the primary object of providing for Estate Duty and it would be perfectly simple to put such a clause into every policy taken out, I cannot see that it would provide any effective safeguard that the policy was to be used for a particular object.
I am not denying that there are hard cases such as those which have been referred to, but I am quite sure that the Clause is not the way to deal with them. Suppose there were two people owning estates of the same size, and one person 888 found it convenient to take out a large insurance because he had sufficient assets to do so and the other could not afford to do so. Those two estates would be charged Estate Duty on entirely different principles. That is not the right way to deal with the particular problem. I admit that there is a problem, and if the hon. and learned Gentleman and his Friends can think of a better way of dealing with it, I shall be only too glad to examine their proposals. The proposal now before us might result in a tremendous loss; certainly there would be a very considerable loss to the revenue.
§ Question, "That the Clause be read a Second time," put, and negatived.