TEN-YEAR CUMULATION PERIOD

HC Deb 15 July 1981 vol 8 cc1341-6

Mr. Robert Sheldon

I beg to move amendment No. 165, in page 79, line 13, leave out 'ten' and insert 'twenty' lb/> Under the capital transfer tax system there are two forms of taxation—one is based upon liftime transfers and the other on transfers on death. The Bill provides for lifetime transfers to have their rate of tax reduced considerably. There have been many debates about that, both in Committee and on the Floor of the House.

The amendment concerns the lifetime transfers where a new principle has been introduced, namely, to wipe the slate completely clean every 10 years. If a person inherits a large sum of money and acquires great wealth early in his life, he is able every 10 years to transfer sums of money. Because there is a provision for the free transfer of wealth between husband and wife, the transfer of even larger sums is possible when both the husband and wife pass on their wealth to their offspring or to somebody else.

That means that the effect of capital transfer tax is being eroded, and some would even say emasculated. For example, if we take into account that each of the spouses can bequeath £3,000 every year, the sums of money that can pass from one generation to the other during a long period can be very considerable. If a couple were to start their transfer of wealth at the age of 50, they would make three such transfers by the time that they reached their seventies. That is rapidly reducing the effect of capital transfer tax and is becoming similar to the old estate duty. The main disadvantage, as we all know, of the old estate duty was that it was a tax on the improvident, the unlucky and those who disliked their heirs. That is the sort of position that capital transfer tax is rapidly approaching.

What is the cost of the 10-year wipe off? Every 10 years, all the amounts that have been passed under capital transfer tax are ignored and one starts again. The forecast of the cost that appears in the Red Book for 1981–82 is nil, and that we understand. It will take time for the provision to take effect. No figure is supplied for the forecast for the full year. All we find is "i", which leads us to a footnote. We are told in the footnote that the cost cannot be estimated. That may be true, but it cannot be denied that it will be large and that over a long period it will be extremely large. We are witnessing a considerable reduction in taxation at a time when taxation has not been reduced for many others.

3.15 am

On a previous occasion the Minister of State said that capital transfer tax was not a perfect tax but that in time he hoped to eliminate some of its grosser imperfections. I think that he is going much further than that. He is limiting its operation as a viable and useful tax. Estate duty was easily avoided by the seven-year limitation, and CTT will be similarly avoided by the process of erosion which the hon. and learned Gentleman hinted was in its early stages. This is a major new step to retain the inequalities of wealth and to enable wealth to be passed on from generation to generation in the large sums that have been transferred in the past.

This will be happening under a Government who have failed to revalorise personal taxes and who have sought substantial revenue in many different ways. They have even turned their attention to smaller matters such as the sale of matches and lighters and activities such as Tupperware parties. No form of taxation has appeared too small for them to lay their hands on to get the money that they say they need so desperately. At a time when they are doing that, it shows insensitivity to hand out large sums to the big estates. The 10-year cumulation rule whereby we start all over again at the end of 10 years is of especial benefit to large estates that can plan the succession of property at an early age from those who have inherited wealth as opposed to those who have earned their wealth and typically will not have large sums to dispose of until they come to the later years of their lives. They will not be able to take advantage of this new provision in the same way as those who have inherited wealth.

The provision is wrong from so many different angles. Those who made their money by their own exertions will be disadvantaged in comparison with those who have inherited wealth. This is a major attack on an important principle. We understood that the Government would be accepting capital transfer tax and its major provisions. This is a major onslaught, and from what we have heard it seems likely that it is only the first of a number to come. There will be plenty of work for the next Labour Government in restoring the position.

Mr. Austin Mitchell

The amendment takes us away from the end of the pier show and the synthetic and dramatic performance of the Cleethorpes landladies' choral society that we had during the discussion on amendment No. 143 and to the central iniquity of the Budget. The Budget increased taxation on matches, lighters and chewing tobacco in the Government's dredging for revenue. That has been excused by the "We need the money" syndrome. The Government have hit the mass of the population by their failure to raise allowances. The people will have to pay for the deprivation which the Government have engendered. This Government of millionaires—we have Government of millionaires for millionaires by millionaires—have chosen to dole out substantial sums to the wealthy who should be paying their share of revenue to the Government. The Government dole out sums to those who have most.

Clause 90 is one of the chief ways in which that handout will occur. It is a handout of unknown dimensions as it wipes the transfer slate clean every 10 years. For example, over 30 years, it is possible for £150,000 to be passed on tax-free compared with only £50,000 without the change that the clause proposes. Our amendment softens the position by extending the period from 10 years to 20 years. It is right to do that because the concessions made to capital in the Budget are unnecessary and undesirable.

In this country we are still an unequal society. According to the 1978 figures, the top 1 per cent. of the adult population owned almost a quarter of the total marketable personal wealth. They owned almost half of the wealth owned in buildings and almost 70 per cent. of that held in the form of land and listed shares. Such differences which scar the country arise mainly through the inheritance of wealth, which will be strengthened and accelerated by the Bill unless it is modified by the Opposition's amendment.

Despite the huge gaps which scar the country, the proportionate yield from capital taxes has been declining partly because of cuts in the rates and partly because of expedients such as clause 90, née clause 89. Capital transfer tax or its equivalent at the beginning of the Second World War provided nearly 15 per cent. of Inland Revenue receipts. By 1948–49, it was down to 9 per cent. Now the proportion must be minute. Capital transfer tax raised 6p for every £1 of income tax in 1973–74. That proportion will be 1.6p for every £1 this year. There is no case for the concession which has been made by the clause.

If capital transfer tax had remained in line with income tax, it would be enough now to allow a cut in the standard rate of income tax by 1p in the pound. Capital transfer tax would be raising £1.6 billion if it had increased in line with income tax. Under this Government the income tax yield has increased by about 38 per cent., but capital transfer tax and estate duty together are up only 7 per cent., which is less than in line with the progress of inflation.

While the level of income at which families start to pay tax has fallen from 45 per cent. of average earnings to about 38 per cent. of average earnings, while the rate of tax they pay at the bottom level has increased from 25p in the pound to 30p in the pound, while the number of people in the poverty trap has increased by about 40 per cent. and while women between the ages of 60 and 64 are beginning to pay tax on their little pensions, as the Prime Minister put it, the really wealthy will pay less because of the clause unless it is modified by our amendment. They will pay less and less on the wealth which should bear its share, and which certainly has the ability to bear a major share.

Wealth should bear an increasing share of taxation on grounds of equity, economic stimulus, efficiency and keeping the money circulating. If there is a disincentive effect of taxation, it must be less when that taxation is applied to past acquisitions rather than to present effort. The disincentive effect of capital transfer taxation must therefore be less. Wealth should bear its share, too, on the most rational ground of all—that it confers privilege, advantage and power. It should therefore contribute substantially to the purposes of a society as a rent on those advantages which it has, particularly when the rest of society is having to face the kind of burdens that the Government are imposing because of the economic trap into which they have stumbled so enthusiastically as a result of the necessity to increase taxation and spending to pay for the depression and the unemployment they have generated.

Every concession, such as this one on the 10-year period, every little fiddle, every reduction in capital taxation, is building up a chorus of protest, a chorus of annoyance, a chorus of simple grievances, at seeing those most able to bear their share paying less and less and seeing all of this being done by a Cabinet of millionaires, furthering their own self-interest.

It is clear that measures like this are paving the way for the wealth tax that the next Labour Government will undoubtedly introduce on the bigger fortunes. Let there be no doubt about that. Such measures are paving the way for such a tax to be enthusiastically received by a nation that is being cheated and that sees its own wealthy people cheating it because they are not contributing their share to the burdens of the community. Those burdens are being substantially increased by a Government who are allowing the wealthy not to pay their share. The wider society knows this. By such actions the Government are building up a body of resentment that will make certain that our wealth tax, when it is introduced, is enthusiastically received.

Mr. Peter Rees

We have heard once before, in Committee, the speech that the hon. Member for Grimsby (Mr. Mitchell) has just delivered—

Mr. Austin Mitchell

Not from the hon. Member for Grimsby.

Mr. Rees

Indeed, from the hon. Member for Grimsby. I had hoped that his contribution would have been mellowed a little after the agreeable exchanges that we had in Committee Room 10. Sadly that is not so, and we have had some rather cheap gibes at members of the Conservative Cabinet.

The hon. Member might care to cast his mind back to the proceedings in the House on Tuesday, when a Ten-Minute Bill dealing with land-owning in Scotland was introduced. It seemed that a principal landowner was speaking from the Labour side of the House then. Be that as it may, I do not propose to descend to that kind of analysis of personal fortunes comprised in Westminster because I do not think that it advances the debate.

I say to the hon. Member for Grimsby that the country will note his full-blooded adoption of a wealth tax and will draw its own conclusion about the kind of Labour Party and the kind of Labour policies with which it will be confronted at the next general election.

The right hon. Member for Ashton-under-Lyne (Mr. Sheldon) displayed an understandable pride of paternity. One recalls the notable part that he played in devising, introducing and commending capital tranfer tax to a rather sceptical House some six years ago. I cannot say that over the years acquaintance and familiarity with the tax have made it any more endearing to the country as a whole, although it may have endeared itself more to the Labour Party .

The right hon. Member and his hon. Friends underestimated the damage that a tax of the kind that they devised, at the rate that they proposed, would have done to the business and agricultural structure of the country. There would have been a dissipation of wealth, or the transfer of wealth from private hands to the State. I do not believe that, on the record of this country since the war, the State cart be regarded as a better steward of the assets of this country overall than the individual members of it. Of course, there will be variations, but that is a proposition that I hope will command the support of my right hon. and hon. Friends.

If I have reservations about the measures, it is that perhaps they do not go quite as far as the target that we set ourselves in the manifesto on which we fought the election. I will surely carry the Opposition with me on this. Manifesto commitments must be treated with great respect by the whole House. After all, that is a cardinal article of faith of the Labour Party, and Labour Members must concede that we, too, must be punctilious in fulfilling the obligations mat we so willingly assumed.

3.30 am

Mr. Cook

I am grateful to the hon. and learned Gentleman for saying that he places the same importance—indeed, elevation—on manifesto commitments as we do, so perhaps he could tell us when he hopes to carry out the Conservative manifesto commitment to raise tax thresholds to let the low-paid out of the tax net.

Mr. Rees

The hon. Gentleman will recall that in our first Budget we valorised the thresholds twice over—if I may put it in that inelegant way at this hour of the morning. That is something on which we can look back with considerable satisfaction. The fact that this year we were unable to achieve that target does not mean that we shall not revert to the problem. I believe that we shall do more—and substantially more—than the Labour Administration could ever claim credit for, even with the compelling assistance of the Liberal Party and the Conservative Opposition. The hon. Gentleman must contain his patience a little longer. He will see that we shall go to the country with a creditable record in that regard.

As I said, it was our manifesto commitment that we would humanise—we would not abolish—capital transfer tax. I give that minor reassurance to the right hon. Member for Ashton-under-Lyne. We would endeavour to smooth off the rough edges. My hon. Friends may well tell me that many remain to be smoothed off, but at any rate we have made a modest start.

The right hon. Gentleman raised the question of cost. The cost will be negligible. If the right hon. Gentleman looks at the Red Book, he will see that the amount of capital transfer tax forgone this year will be about £5 million, which I am sure the whole country will recognise as not at all excessive. Even in the year after it will be not more than about £20 million. I do not feel, therefore, that we have concentrated unduly or that our fiscal measures have been at all out of joint.

The underlying theme of the 10-year accumulation period, as opposed to the 20-year period that the right hon. Gentleman and his hon. Friends propose in amendment No. 165, is to encourage the free transmission of wealth between the generations. That must surely be a theme that the right hon. Gentleman also has at heart. I recall that in the middle of the Committee stage in which capital transfer tax was commended to the House he thought fit, with his right hon. Friends, to change the whole structure and to encourage gifts inter vivos, so we are taking the theme only a little further. I am sure that on reflection the right hon. Gentleman will realise that he should ask leave to withdraw his amendment and support the position that we have taken up, which is in harmony with the thinking of the Labour Party in 1975.

What the Labour Party will be proposing for the country in later years by way of a wealth tax and a sharpened capital transfer tax—I do not understand how it can be called a softened capital transfer tax, which was the phrase used by the hon. Member for Grimsby—I leave to the hon. Gentleman to explain in due course. We believe that wealth can be more productively employed in private hands, so that we should scrutinise, soften and reduce the rigours of capital transfer tax and, indeed, of other capital taxes. Proportionately we now derive less of our revenues by way of capital taxes than we did in 1945 because there has been a greater diffusion of wealth and incomes, which is something that the hon. Gentleman should welcome.

I hope that on that basis the Labour Party will feel that the subject has had an airing, will recognise that perhaps some of its sentiments are a little extreme, and will feel able to ask leave to withdraw the amendment.

Amendment negatived.