HC Deb 25 April 1983 vol 41 cc689-706
Mr. Richard Wainwright

I beg to move amendment No. 8, in page 52, line 35, at end insert— '(1A) Subsection (2) of section 37 of the Finance Act 1975 shall be amended by the insertion after the word "transferor" of the words "to or for the benefit of a beneficiary where that beneficiary thereby becomes entitled to more than one-tenth of the value of all chargeable transfers made by that transferor".'. The amendment would have the effect, amongst others, of helping the Government to escape from a snare from which, during all these four years, they have not mustered the gumption to escape. Here we have a capital tax which is very much an instrument of state Socialism—not a libertarian or distributive Socialism, but the kind of Socialism that tries to maximise the holding of wealth by the state.

The purpose of the amendment is to shove the capital transfer tax markedly in the direction of a quite different capital tax — a tax upon the recipient's accession of wealth levied at rates according to his total wealth at the time he receives either the bequest or the gift. That is a totally different type of capital tax. An accessions tax is not a weapon for maximising the resources of the state. It is a tax being used as a lever to pressurise wealthy individuals to distribute their wealth as widely as possible and in relatively modest amounts.

The amendment would mean a considerable tax advantage in making gifts in large numbers of small amounts or making them to relatively poor people. The amendment, for example, would greatly reduce the tax on the transfer of a company from its few family proprietors to a large number of its workers. It would greatly reduce the tax on the gift by a landowner of his estates—to which he can have no moral claim, because he did not make the land—to his tenants, occupiers or other people living in the neighbourhood. I cannot understand why the Government have not cut loose from this Socialist capital transfer tax and, as they need the money, adopted an accessions tax. Last year, during similar proceedings on the Finance Bill, the Financial Secretary, as frank as ever, said: If we were starting from scratch now, I would tend to agree with the hon. Gentleman in other words, with me pleading for an accessions tax, as I am tonight. He went on, with a further degree of frankness, to give one or two reasons why the Government had never cut loose from this Socialist tax. He said that "the upheaval" that I was proposing would lead to great difficulties. People have made dispositions according to the existing tax. They may be giving some of their capital to their families to take advantage of the lifetime transfer rates."—[Official Report, 27 April 1982; Vol. 22, c. 802–803.] The right hon. Gentleman was saying that rather than disturb tax avoidance measures, which nobody disputes people are fully entitled to take but which they take at their risk, he would not change the system. I am sure that my fellow accountants, when asked to advise clients on the distribution of assets, always warn them that they run the risk that Parliament may alter the law and therefore the effect of their dispositions.

That is not good enough for the Government. They say that anything that interferes with dispositions that owners of capital have already made must be looked upon with grave doubt. The Liberal party differs from them. Parliament, which is meant to be sovereign, should not be hampered by the fact that some people have taken the risk of entering into tax avoidance schemes—however legal —on the basis of the law as it stands.

The perfect result, for the Liberals and for the alliance, of an accessions tax would be that the state would collect very little, except where the donor had chosen the wrong recipients and overlooked the fact that some of his workers had won the pools, for example, and become rich men, thereby attracting a higher rate of accessions tax. Apart from that, an accessions tax would encourage wealthy people to distribute their wealth widely during their lifetime so that little tax would be incurred.

This measure is not to maximise the resources of the Exchequer but to put pressure on wealthy people to contribute to the common weal, the better ordering of society and a more harmonious community by distributing their wealth widely now.

For those who say that this is all a pipe dream and that human nature is not like that, I am happy to cite recent examples of proprietors of successful businesses doing this. We may hear later in the debate of the striking example of the Baxi boiler company. A family, rich by its own exertions and brilliance, has made over the whole of the business for the benefit of 900 employees.

These things happen. Some of those who do not have family succession, or do not trust their family succession or beleive that it should be greatly privileged, are nowadays interested in making over their businesses to those who have contributed and shown their loyalty to them. The main obstacle is tax. In certain case, I agree that great ingenuity and enormous legal expenses can get round some of the horrors of capital transfer tax, but an accessions tax would be a positive invitation to people to engage in such distribution.

The amendment seeks to move capital transfer tax at least a small way towards an accessions tax. I readily concede that the amendment alone would not do that job. To introduce an accessions tax in the way that is so successful, for instance, in the Republic of Eire would require substantial legislation. If the Committee treats the amendment favourably, especially if the Government go a little further than they did last year and the Financial Secretary recognises the importance of escaping from the present Socialist measure that he and the Treasury are administering, we should be well on the way to an accessions tax.

10.45 pm
Mr. J. Grimond (Orkney and Shetland)

I rise to press the Government upon a matter that has already been raised by my hon. Friend the Member for Colne Valley (Mr. Wainwright) — the effect of the amendment and of capital transfer tax in general upon employers or owners of companies who wish to make over their companies to their employees.

The Government have introduced into the Finance Bill the concept of employee-controlled companies. I should declare an interest in that I am chairman of Job Ownership Ltd., which exists to promote such companies and cooperatives in general. The Bill makes certain concessions to employee-controlled companies where the control and ownership lie with 70 per cent. or more of the employees, but it does not cover companies owned or controlled by a trust of half the employees. At some point I hope that the Government will look at that matter.

It is clear from what the Government have said and from the Bill that they want to encourage employees to take a larger share in the wealth of the country in general and in their companies in particular, and, indeed, to exercise some control over those companies. The specific point arises that if any owner wishes to make over his company to his employees, he is caught not only by capital gains tax but by capital transfer tax.

As my hon. Friend said, Mr. Baxendale, acting with extraordinary generosity, has made over his company to his employees for £5.25 million. It is estimated that it would have fetched about £40 million on the open market. That negotiation took some time, and Job Ownership Ltd. was able to give some advice to Mr. Baxendale. I must at this point thank the Financial Secretary for his help over the whole procedure. No doubt, had he not been a Minister of the Crown, he would have been entitled to charge heavy fees for the advice that he gave.

Helpful as the Financial Secretary was, the company has not escaped capital transfer tax. If Mr. Baxendale's extraordinary example is to be followed—I am glad to say that it has received a good deal of publicity—the Government must look again at the impact of capital transfer tax as well as other matters, some of which I have mentioned.

The amendment would help in transfering a company to its workers. I am not certain that it would help where a company is made over to a workers' trust, but that can be put right at a later stage of the Bill. Certainly the amendment would minimise the impact of capital transfer tax, which would be an enormous advantage, and that should be dear to the Government's heart.

Whatever they may say today, I hope that the Government will follow the help and advice that the Financial Secretary to the Treasury gave in that case and remove the drawbacks that public-spirited owners still suffer if they wish to make over their companies to their workers.

Mr. Ridley

I am always happy to respond to an amendment of the hon. Member for Colne Valley (Mr. Wainwright) for an inheritance or accessions tax. It is becoming an annual event. This is the third time of asking and, I am afraid, the third time of our not starting from scratch.

The hon. Gentleman wants gifts on deaths which are less than 10 per cent. of the donor's total chargeable bequest to be treated at the lower lifetime rate. I should not like to dwell on drafting difficulties, but I am sure that the hon. Gentleman is aware that there would be great problems in dealing with the cumulation of earlier transfers and that the opportunities for collusion between inheritor and donor would have to be watched carefully.

Perhaps a more important point, which also applied to the hon. Gentleman's amendments on previous Finance Bills, is that one of the main vehicles for holding property is a trust. To apply such provisions to trusts would be a major and complicated task which would have to he solved satisfactorily. I shall not dwell on those points, because I know that the hon. Gentleman moved his amendment in the spirit of the principle rather than the detail. As I said last year, I have sympathy with his view that the tax should be an accessions tax. However, as the amendment is drafted, it is more like an inheritance than an accessions tax. I do not see how the accessions are cumulated, but that may be no more than a detail. I have always said that it has some attractions in principle.

Perhaps I can give the hon. Gentleman some new information about the extent to which people are motivated by the relative rates of capital transfer tax or death duty when they leave their money. The hon. Gentleman knows that we have a much lower rate of tax on lifetime transfers than on transfers within three years of death. However, in 1981–82, only £7 million of a total yield of more than £500 million came from lifetime transfers. The advantageous discount on a lifetime transfer did not motivate people to part with their assets before they reached the closing days of their lives. One knows people to whom such behaviour is second nature. It shows, however, that the motivation may not be as direct as the hon. Gentleman suggests.

Most countries have an accessions rather than a donor-based tax, but those countries find themselves under political pressure to make special reliefs for close relations. Indeed, the closer the relation, the greater the relief. That operation is exactly the opposite of what the hon. Gentleman suggested.

The other strong political pressure is not to levy heavy or large rates of tax on enterprises where there is some economy of scale. Large privately owned companies and landed estates press strongly for relief, because the tax can damage such enterprises. That is another argument in the opposite direction, but I have no argument to fall back on other than the upheaval that the hon. Gentleman derided. We would need to start from scratch with a completely new tax. We would need complicated anti-avoidance provisions, new transitional provisions and a period of consultation, and we would have to go through all the hell that we went through when the Labour Government brought in capital transfer tax, with disastrous results in yields. However, that would not displease the Liberal party, which regards this not as a tax to raise money but as an instrument of social engineering.

I am grateful to the right hon. Member for Orkney and Shetland (Mr. Grimond) for mentioning employee-controlled companies. I tried to help Baxi, not because I have an interest in the company but because I believe that an extension of employee-controlled companies would be to the benefit of our economy. That is why we have introduced interest relief for employees who engage in buy-outs. The Liberal party and, I hope, the Labour party should welcome that provision. The Conservative party certainly welcomes it, because Britain is lagging behind in this regard. I assure the right hon. Gentleman that we shall consider his point that buy-out relief may not apply to trusts. If the shares in a company are given to an employee trust that controls the company, no capital transfer tax is payable on the transfer from the original proprietors to the employee trust. The touchstone in present law is whether the employee trust controls the company.

Mr. Grimond

The Financial Secretary will remember that, in the case of Mr. Baxendale, advantage had to be taken of last year's Finance Bill for the company to buy back its shares and to cancel some of them. I understand that capital transfer tax began to operate at that stage. Can the right hon. Gentleman clear up that matter?

Mr. Ridley

I should need to refresh my memory of the case. I am not even sure whether I am entitled to discuss a taxpayer's affairs in public without his permission, but I do not believe that what I said about capital transfer tax was wrong. There was another difficulty in that case which did not relate to capital transfer tax, but there was no capital transfer tax impediment in the straightforward sense. I assure the right hon. Gentleman that nothing in this clause will facilitate the matter, but we shall reconsider it later in Committee.

I hope that my remarks will help to show the Government's sympathy towards the future of capital transfer tax and of more employee-controlled companies. We have both objects in mind, but we hesitate to inflict upon an unsuspecting public another major change in capital taxes, with all its attendant complicated arguments.

Mr. Richard Wainwright

I am grateful to the Financial Secretary for his frank, helpful and understanding reply, because I have never claimed any perfect draftsmanship for this or for any of my amendments. He and the Government of which he is a distinguished member fail to explain why they persist, after their years in power, in hugging their Socialist chains. Capital transfer tax was introduced by the right hon. Member for Leeds, East (Mr. Healey) when he was Chancellor of the Exchequer to make the rich howl with pain. After four years of Tory Government, the tax remains. It is estimated that the tax will bring in a greater return during the present financial year than it did in the previous year.

11 pm

When the Financial Secretary goes on and on about the appalling complications of making a change and the difficulties and complexities of applying the new system to trusts, he is surely being disingenuous. The ordinary citizen need not be even remotely aware of these changes. The number of people involved in liability to capital transfer tax is even smaller than those who get caught by capital gains tax. Taxation is a world of great complexity and it calls upon professional advisers who do not find these problems difficult to construe and who are willing to engage in this work. I cannot lay any weight on the argument that the change to an accessions tax would be so inordinately complicated as to outweigh the great benefits that it would bring.

I take issue with the Financial Secretary when he states that most of the other developed countries in the world rely on an accessions form of tax rather than a donor-based tax. I wish that I could honestly point to a genuine accessions tax in full operation in any part of the world, except in the fortunate Republic of Eire. Other countries base their capital taxes more on the recipient than Britain does because it is common sense. Only a country as perverse as ours, with its mean approach to equity and fairness in taxation and wanting to run a bargain basement type of revenue service where the donor is much easier to catch — just as windows used to be much easier to tax because they could be seen and counted — would maintain a donor-based tax. The crudest possible approach says "Let's tax the person who can be most easily identified, caught, put into a corner and made to turn out his pockets." I agree that it is easier to catch the donor or his executors — they can be caught after the funeral when they are all on parade —than it is to catch the employees of the Baxi company who may be here today and gone tomorrow. However, mere convenience and expediency ought never to be the fundamental basis of a tax.

The Financial Secretary repeats his sad lament that we cannot start from scratch, and all the attractions of an accessions tax must be forgone because, according to his lights, we are all prisoners of the Socialist system from which it is no longer reasonable to try to escape. That is a nihilistic approach to legislation. For the Government to say that because the Labour Government notched up more Socialism it is not possible to begin again and we have to swallow what has been imposed, is to deny the sovereignty of Parliament and the aspirations of reasonable people. What is "scratch"? The yield of capital transfer tax has, up to now, been a bitter disappointment to Socialists and the Treasury alike. It has not produced the great harvest of easily taxed wealth. I quote Budget-time estimates from the Treasury very cautiously these days, after the public sector borrowing requirement turned out to be much higher than the Government had thought, even a month before. However, the latest estimate of the yield of capital transfer tax for the fiscal year 1982–83 is only £500 million compared with over £30 billion from income tax. Even that well-known voluntary tax, corporation tax—which few people pay unless they are in an extraordinary industry —raised £5.5 billion. The figure for capital transfer tax is only £500 million, although it is expected to rise a little in line with inflation next year.

Therefore, we are virtually at scratch. Although records of accumulation go back to the time when the right hon. Member for Leeds, East introduced the tax, they are not central to the importance of that tax's yield. In the Liberals' view, capital taxation should be primarily regarded not as a revenue earner but as a lever and instrument of pressure on those who through sheer good fortune and accident of history—including two wars—happen to hold some of the clotted wealth that is the curse of this country. If they can be pressurised into distributing it as widely as possible, the fact that it raises a bit of revenue on the side will be virtually incidental.

I hope that the Financial Secretary will consult his Treasury colleagues, especially the Chancellor of the Exchequer, and find out whether the Government intend to go to the country admitting that they still have an unfinished agenda, and that one part of it is to get rid of this Socialist tax by turning it into something more Liberal and generous. However, in the meantime I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Question proposed, That the clause stand part of the Bill.

Mr. Cook

In an earlier intervention, in a flight of rhetoric, I rashly committed myself to the proposition that this Government had increased all forms of tax. In the interests of accuracy, I should make an exception of taxes on capital. According to a parliamentary answer that the Financial Secretary gave last year, taxation on capital is yielding a revenue of £600 million less than it would have done if the Government had failed to change the regimes on capital gains and capital transfer tax and on investment income surcharge.

Marx would have relished this Government, because they have increased taxes on labour while lightening the tax burden on capital. I always felt that the analysis of class conflict was outmoded in the complexities of modern society, but the Government are obliging even me to revise that view. Nothing is more revealing of the Government's commitment to the class struggle than their favourable treatment of taxes on capital. That treatment is repeated in the clause.

When the Chancellor of the Exchequer justified this clause in his Budget speech, he said: On capital transfer tax, I propose to increase the threshold and rate bands broadly in line with indexation" — [Official Report, 15 March 1983; Vol. 39, c. 152.] The extent to which the increases are in line wth indexation is very broad. Generally, the thresholds proposed in the clause are half as much again as indexation would imply. To take an example at the lower end, the reduction in liability for tax on an estate of £100,000 would have been reduced by 7.8 per cent. if the threshold had been uprated in line with indexation, but, as the press notice issued at the time of the Budget fairly pointed out, the increase in the threshold will reduce the liability to tax by 12.2 per cent. That is over half as much again as would flow from the requirement of indexation alone.

This casual, relaxed, laid-back form of calculating indexation is in stark contrast to the Government's approach on many other fronts. I should be surprised if pensioners were not more than delighted to settle for a broad form of indexation which resulted in a pension increase half as much again as would be required by indexation.

If the increase had come at the end of a period of stringency in relation to capital transfer tax, we should have let it pass without much comment. We are prompted to comment because this generous loose change, thrown in on top of indexation, comes at the end of a period in which capital taxation has been treated with unique generosity by the Government. In 1980 the Government doubled the CTT exemption level. That, said the then Minister of State, removed from the scope of CTT two thirds of those who had been liable to it.

In 1981 and again in 1982, the thresholds for CTT were increased. In 1981 the largest mine of all was sprung under the edifice of the CTT regime when the Government abolished the cumulative principle on which CTT had been founded and introduced a 10-year bar which enabled the slate to be wiped clean every tenth year. That change did not pass without comment outside or inside the House. The Institute of Fiscal Studies, in its journal, was prompted to produce an article with the fitting headline: Capital Transfer Tax:—Obituary". It opened with the statement: In the Budget of March 1981 the Chancellor made changes which will produce a dramatic reduction in the real burdens of most potential payers of Capital Transfer Tax (CTT). Even without sophisticated tax avoidance, over 99 per cent. of wealth owners will now be able to pay zero CTT when they hand on their assets. In the same period The Times said of the 1981 change: When the Chancellor announced his & CTT changes everybody in this office had that warm, comforting feeling experienced when recognizing an old friend. It seemed that CTT had at last been converted back into estate duty". The great advantage of estate duty and the reason why CTT was supposed to remove the time bar incorporated in it was that it could be avoided by the wealthy and well-advised. The Financial Secretary said in Committee: I did not like the previous system of estate duty at penal rates, but it was possible to avoid it." —[0fficial Report, Standing Committee A; 29 January 1975, c. 467–8.] Some people connected with the present Government would like CTT to be abolished, so it need not surprise us that it is chipped at year by year, bit by bit. Pressure, which is influential in other areas, comes from Walter Goldsmith, the director of the Institute of Directors. He is committed to a campaign to abolish CTT and has said, in support of the abolition of capital taxation: The high concentration of large fortunes alleviates the much more serious problem of the high concentration of political power. If I understand Walter Goldsmith correctly, he sees in plutocracy a safeguard against the excesses of democracy.

Despite the pressures, the Government have not yet screwed up their courage to abolish CTT. Instead, they have contented themselves with chipping at it piecemeal, which has had an impressive effect on the revenue from the tax.

In 1979, at 1982 prices. the revenue from CTT was £552 million. According to the Red Book, in 1983, again converted to 1982 prices, it is expected that CTT will yield £505 million. In other words, there has been a drop in CTT revenue of 10 per cent. at a time when the revenue from nearly every other source has increased in real terms.

11.15 pm

When we debated this matter on Second Reading, the Financial Secretary produced the remarkable observation that since 1978–79 the burden on the smaller estates had been reduced while the burden on the large estates had been increased. I have compared each of the different bands proposed in the Bill with the thresholds in 1978–79. All thresholds have been uprated by more than is required by indexation our estates of up to £700,000. Only those above have been made liable to a burden increased by the failure to uprate fully in line with indexation.

The Inland Revenue statistics, although they do not give a cut-off at £700,000, tell us how many estates were last year left in excess of £750,000. A grand total of 143 estates were made liable to tax at figures in excess of £750,000.

I freely concede to the Financial Secretary that the burden on those 143 estates is now heavier than if the thresholds for them had been fully indexed. I request him in return to concede that the burden on everyone else liable to CTT—well over 95 per cent. of the total—has been lightened by what has happened to the thresholds over the past four years.

I have some difficulty following the other point that the Financial Secretary advanced on Second Reading, as well as last year when we debated a similar clause. It is that, if we go back to 1975 and uprate the thresholds proposed at the time of the introduction of CTT, we find that in real terms these new thresholds are lower than those proposed in 1975. As the Minister must be well aware, because he sat on the Committee that considered that Bill, the thresholds for CTT were deliberately set at a high level because of the introduction of the cumulative principle. It was therefore considered that, as CTT would be more onerous than estate duty, it was only right and proper that the CTT thresholds should be higher than the estate duty thresholds. Indeed, there is a substantial discrepancy between the last estate duty thresholds in 1974 and the first CTT thresholds in 1975.

However, in the interval since 1975, the Government have converted CTT back into estate duty by restoring the idea of a time bar—a period in which one can concede one's estate without liability to the death duties and without it becoming a cumulative charge. As they have restored that period and made the tax much more like estate duty than CTT as envisaged in 1975, the more appropriate comparison—if we are to delve back into history — would be not with the CTT thresholds introduced in 1975 but with the thresholds as they operated in the last year of estate duty in 1974. If we go back to those thresholds, we find that the thresholds proposed in the Bill are at a much higher level than would be required had we merely indexed the thresholds that applied in the last year of estate duty. In other words, the thresholds proposed in the Bill will result in a less onerous tax than estate duty.

One might well ask, "Why stop there?" If we are to search for the most appropriate base year for comparison, why not go back to the start of estate duty? Why not go back to 1894, a year in which I suspect many Conservative Members would be instinctively more at home? In 1894, the exemption level proposed by Lloyd George in the Bill which introduced estate duty was actually lower in real terms than the exemption levels provided in the Bill before us. In short, we are now considering a less progressive tax on wealth than the one Lloyd George introduced 100 years ago.

The reason why he introduced that tax and the reason why a tax on the transfer of wealth has been part of our tax system and the tax system of virtually every other major industrialised nation is that the principle of taxing wealth is as old as taxation itself. Even before estate duty there was a tax on estates through probate duty. Perhaps some Conservative Members would be even happier in 1694, the year that probate duty was introduced. The reason why it was introduced and the reason why many other tax systems have adopted a tax on the transfer of wealth is that wealth represents a taxable commodity. It represents a large sum of available money that is mobile, at least to the extent that it transfers ownership. Secondly, it has a taxable capacity which, in the hands of the donee, is entirely arbitrary. The mass of taxpayers would be offended if they found that they were taxed on every pound they earned by labour while others were not making a fair contribution by their purely arbitrary accession to wealth through good fortune or the accident of birth.

These arguments have weighed with Chancellors and the Treasury for centuries. The present Chancellor swept them all aside in his Budget speech with the brief statement that capital taxes can suffocate enterprise. Inheritance has nothing to do with enterprise. Elderly wealthy couples are not scouring the country in search of people of enterprise to whom to pass on the family wealth. By and large, with due respect to the hon. Member for Colne Valley (Mr. Wainwright), there is a tendency for wealth to be kept in the family. The sole enterprise that is required of the heir is the good sense to be born to wealthy parents. Nor is there any correlation between the enterprise of the parent at death and the wealth of the parent at death.

I would not wish to disturb the prejudice of Conservative Members by anything so crude as the facts, but if they refer to the original research in this area they will find that every major research paper on inheritance and wealth at death has come to the conclusion that the prime reason why people die wealthy is that they were born wealthy. The most recent research by Harbury and Hitchens in 1979 concluded that two thirds of large estates were left by people who had inherited large estates. Of the remainder, one in twelve died wealthy because they had married wealth. One might say that that represents enterprise of a sort. It is impossible to conceive what economic advantage there is to the wider economy by perpetuating this type of inequality through the accident of birth or the good fortune of marriage. On the contrary, it is only too clear what damage is done to the economy by concentrating capital in the hands of those who are chosen by accident of birth rather than on the basis of ability. Keynes observed in a celebrated quotation that one of the major reasons for the weakness of capital was that the control of capital was too much in the hands of third-generation men.

We have intervened at this point in the proceedings of the Bill to give the Committee an opportunity to pause for reflection on what is proposed in the clause on capital transfer tax and to consider the generosity of treatment that is proposed for the capital transfer tax regime. It also provides an opportunity, which I hope the Financial Secretary will take, to explain what it is that the Government have in mind for the future of capital transfer tax.

The hon. Member for Colne Valley twitted the Government for having failed to do away with a tax that caused Conservative Members—certainly the Financial Secretary —to to howl when it was introduced. After a break in the Committee's sitting, the hon. Gentleman said: The break that I have had has brought me back more resolute to fight this tax, not only while the Bill is going through the House but after it is law, and on every conceivable occasion after it has become law until it is repealed and off the statute book altogether, forgotten, dead and buried for good." —[Official Report, Standing Committee A; 29 January 1975, c. 467.] That may or may not be a valid point of view, but it is a curious view to come from a member of a Government who have been in office for four years and who have allowed the tax to survive. There is a perfectly fair and reasonable question to put to the Financial Secretary, who promised that he would not rest until the tax was repealed, "forgotten, dead and buried". Is it the Government's intention to repeal the tax? If it is not, what do they have in mind for it? Do they propose to let it atrophy by successive turns of the tourniquet as each year they introduce a Finance Bill to chip away at the manner in which the regime operates?

Secondly, I ask the Financial Secretary to explain to the Committee and to the country, even at this late hour, how he can justify once again reducing the tax on the most wealthy section of the population to the 24 million taxpayers who find that as a result of the changes in the past four years they are paying more in tax on income.

It has long been observed that the tax receipts from wealth are ludicrously out of proportion to the tax receipts from the tax on income. Over the past four years the Government have tilted that proportion even further in favour of wealth and in favour of taxing and receiving revenue from income. Before we pass the clause, which carries that process one step further, it, is only reasonable to invite the Financial Secretary to attempt yet again, perhaps more successfully then on previous occasions, to justify the Government, who have put so much more tax on those who earn a living, carrying through a clause that will result in an even lighter tax burden on those who inherited wealth.

Mr. Campbell-Savours

I hope that the Financial Secretary will take the opportunity that is provided by the debate to answer the demanding question put to him by my hon. Friend the Member for Edinburgh, Central (Mr. Cook). The comments that he made in Committee when the Labour Government were in office showed that his real intention was to get rid of capital transfer tax. It would be good to hear today whether that is still his intention.

The hon. Member for Colne Valley (Mr. Wainwright) persisted in his contribution to the debate on the previous amendment—I am sure that he will do so again if he manages to catch your eye, Mr. Armstrong — in referring to capital transfer tax as a Socialist tax. I found that amusing, especially as the tax has become voluntary. One has to have a social conscience these days to be prepared to pay it. Most people seem to conduct their affairs in such a way as to avoid it. If it were the Socialist tax that the hon. Gentleman believes it to be, I assure him that the amount drawn from it would be substantially greater that it is now. If we were to proof the level of tax take against total revenue receipts in 1974—the time of its introduction— with today's arrangements, the take from capital transfer tax would be nearer £2 billion, as against the £500 million to which the hon. Gentleman referred, and it could have funded the £850 million for the cost of the 25 per cent. band introduction for which we were pressing in an earlier amendment.

11.30 pm

The hon. Member for Colne Valley referred to the accessions tax, but he did not say whether it was his personal policy or that of the Liberals or the alliance, and I hope he will tell us that. There has been a marked trend since 1979 to switch from wealth taxes, estate duties—capital transfer taxes in their current form — and corporation taxes to direct taxation. The switch has been so great that it is now worth 7p on the standard rate of income tax. That, in some people's view, is the price the public have had to pay for the introduction of this switch from capital taxes to direct taxation.

That has occurred since 1979 under a Government who have committed themselves in various general election statements and in their manifesto to a reduction in direct taxation. I fought a by-election in 1976, when the matter of crucial concern was what were perceived to be the high levels of taxation under a Labour Government. There has been a substantial increase in the tax burden falling on those constituents. Would any Conservative Member care to intervene to try to justify that increase on the basis of the statements that were made at the last general election?

In many ways in the far fairer Britain of yesteryear, capital taxes were a greater contributor to public revenues. Sandford, Willis and Ironside in 1973 said that in its heyday as a revenue yielder just before the first world war, death duty— which was the principal form of capital taxation at that time — contributed more than 16 per cent. of central Government revenue from taxation. In those years capital taxes played an important part in financing the beginnings of the welfare state which the people have come to accept today. In other words, capital taxes were paying in many ways for the foundation of the welfare state. Even in 1948 they still contributed 9 per cent. of public revenues. Today, the gross from capital gains and capital transfer tax is as low as 3.3 per cent. and steadily reducing, although I am told that in the coming year there may be a marginal increase in the take from capital transfer tax.

Some say that the decline is due to a switch from personal to institutional wealth. Others say that there is a declining share of wealth owned by the richest families in the land. However, the real answer, which we all know to be true, is that the tax has become voluntary. It now requires a social conscience before anyone is willing to pay that tax. In successive Budgets and Finance Bills since 1979, the Government have widened and increased the opportunities for those who do not wish to play their part in contributing to tax revenues by using whatever schemes are available.

When estate duty was originally introduced, it had one big loophole—the lifetime gift arrangements under the legislation before 1974. It was with the intention of closing that loophole to some extent that capital transfer tax was introduced in a form applicable to lifetime transfers, although the time bar, to which my hon. Friend the Member for Edinburgh, Central referred, has partially restored that loophole.

Capital transfer tax included concessions on transfers between spouses and on agricultural land transfers. Taken collectively, those concessions turned out to be substantial. By the 1982 Budget, according to the Financial Times, all those concessions plus the raising of the threshold have meant that the capital transfer tax has declined as a proportion of GNP and that all but the wealthiest can almost escape tax entirely. For 1982–83, even the absolute amount of tax was expected to fall. Indeed, it did fall.

The Treasury expects the take from capital transfer tax in the current financial year to be £465 million. That compares with the take from capital transfer tax almost 10 years ago, in 1973–74, of £470 million. The difference is that whereas in 1973–74 the tax provided 5 per cent. of all tax revenue receipts, the £470 million today provides only 1.2 per cent. of total tax receipts. Therefore, the receipts to the Exchequer have fallen to about one quarter of what they were 10 years ago.

The position in this year's Budget has been only further entrenched. By raising capital transfer tax thresholds by more than the rate of inflation, the Government have further strengthened the position of the better off in society in their attempt to avoid their social responsibility to make a reasonable contribution to the cost of the social wage. Why were the pensioners treated differently? Why were they required to comply broadly with inflationary increases in their increases? The arrangements for increasing the threshold of capital transfer tax were substantially greater than the level of inflation. Do the Government treat the pensioners as far less important in the economic stakes than the better off in society who can benefit from capital transfer tax concessions? Do they believe that pensioners are to be treated as second-class citizens compared with the better off in society?

The Government sought to justify that unfairness in the system in 1982 when a Treasury Minister said: The Government believe that there is no case whatever for maintaining a system of capital taxes which by holding back business success and penalising personal endeavour does economic and social damage. What evidence is there to suggest that reductions in capital transfer tax have increased business incentive or business endeavour? There has been a steady, relentless decline in business activity in the past 12 months. In my experience, the people who have gone into small businesses or other commercial endeavours in that period did not take the decision to do so on the basis of capital transfer tax concessions provided by the Government in the past three years. Indeed, most of them in very difficult circumstances had to go to banks to raise capital. I do not know of one constituent of mine or of any of my hon. Friends who has felt inclined to go into business as a result of reductions in capital transfer tax.

It seems, indeed, that the only people to have benefited from the concessions have not invested in British industry at all. The funds exported for investment abroad have come in the main from beneficiaries of the tax advantages. Those people are not investors in British industry, let alone investors in the regions of high unemployment. If the Government wish to meddle with the tax system, they should do so in a way that will directly benefit constituencies in which unemployment is high.

How do the Government know that capital transfer tax cuts are a greater incentive than other forms of tax reduction? I suggest that other forms of tax reduction would have far more effect in attracting people to small businesses and other industrial activities than the arrangements for capital transfer tax introduced by the Government in the past three years.

Capital transfer tax reductions have further reinforced the divisions that the Prime Minister and the Government have created in society. They have created a society based on two nations. In the general election, which many of us believe will be called in June, the Government will have to justify to the British people the divisions that they have successfully and effectively created in our society through the tax system.

The Financial Weekly put it most succinctly in 1980 when it said: At a moment when the Chancellor is telling the nation that it must carry on with its strict monetarist diet of bread and water, he would announce that the wealthiest section of it could not merely carry on eating its cake, but have a dollop of cream on it. Conservatives are not deeply devoted to equality, but neither unless they have entirely forgotten the principles of Disraeli are they deeply devoted to widening social division. And Conservative MPs undoubtedly number more of the low paid and unemployed among their constituents than they do payers of these capital taxes. That is a point. There are more constituents of Government supporters who are beneficiaries under other forms of tax advantage than there are from the current arrangements for capital transfer tax.

11.45 pm

It is significant that I have been sitting in the Chamber since 25 minutes to four and before that for Question Time, and no Conservative Back Bencher has spoken in the past eight hours and 10 minutes of debate. The only contributions have come from the Treasury Bench. The reason is that Government supporters know that what they have done by way of capital transfer tax concessions to the better off and what they have done in refusing to accede to the requests of the Opposition on the 25 per cent. rate band is unacceptable to their constituents as well as to ours, and they know that their party's record on taxation is utterly indefensible.

Workington taxpayers—my constituents—are paying for benefits which are received only by the better off. Only a very small group of select people benefit from the tax arrangements introduced by this Government. My constituents object strongly. I object strongly. The Labour party objects strongly. Millions of people object strongly. The Government persist, because they have no intention of showing any sensitivity to the wishes of the people.

Mr. Richard Wainwright

The marathon silence of Government Back Benchers does not prevent this from being a debate and, since the Committee is engaged in debate, there are two aspects of the very interesting speech by the hon. Member for Workington (Mr. Campbell-Savours) to which I want briefly to refer.

The hon. Member expressed curiosity about the standing of an accessions tax in the policy of the alliance and its two member parties. I refer him to the Amendment Paper, containing details of the amendment in favour of an accessions tax. It stands in the names of three members of the Liberal party and three members of the Social Democratic party, headed by the leaders of each.

On the more important aspect—the influence, which the hon. Member doubted, of a capital transfer tax on enterprise and on the foundation of small but growing businesses — I must beg to differ, although I do not believe that the hon. Member or I could adduce proof.

In the west riding of Yorkshire and in east Lancashire, where I used to practise accountancy, it was evident to me in the years immediately after the war that many of the largest and most rapidly growing native businesses—not the branch factories of great international companies, but the biggest native local businesses—in large measure had been founded by people who in their youth had been foremen or supervisors with other companies in their trades. In the spirit of the early part of the century—and to some extent even after the first war that spirit remained — they felt that they could, to use the north country term, better themselves and their families by cutting loose from what they regarded as rather decaying leading firms in the trades and trying their luck with what they believed to be their superior abilities, often taking with them the cream of the old companies' skilled workers.

That had a powerful effect on the economy of west Yorkshire because it injected life into industry that all too often was, and certainly is now, left in the hands of incompetent people who are there by virtue of who they know rather than what they can do. It pushed aside all that dreary, possessive aspect of crumbling business and made way for those who could compete with the Germans, the Japanese, the United States, and so on. It is to the destruction of that ethos that taxes such as capital transfer tax — perversely maintained by a Tory Government—contribute substantially. It is not the hard accountancy of the tax that usually puts people off, but the spirit of the age, which is encapsulated in whether we have heavy capital taxes or whether, as in an earlier time, there are death duties that need not necessarily be incurred. That is the difference between the period before the first world war and that before the second.

I have only one point to put to the Financial Secretary about the clause. I put it in a spirit of inquiry, because I do not know what the answer will be. It has already been pointed out, and I make no complaint that the changes in the thresholds that the clause provides apply the index in a rough and ready manner and at each step rather overdo the indexations. If each step is studied, it will be found that the rise in thresholds is either a little more, or, in one or two cases, noticeably more than indexation required.

Before I give any verdict on this clause, I wish to have information as to why there has been a marked difference in the application of indexation on certain levels of rate at death compared with the indexation on the rates of lifetime gifts. The enthusiasts who remain in the Chamber at this stage will be aware that it has been a marked feature of this tax from the beginning that the tax liability on lifetime transfers has been markedly, deliberately and rightly, lower than the liability on property passing on death. The effect on the way that the Government have indexed these thresholds is to narrow that gap. The gap between the rate at death and the rate on lifetime transfer is at some stages narrower than it was before the clause was introduced.

One example is that on transfers of £1 million value, the rate of duty payable on lifetime distribution is about £8,350 more favourable than strict indexation but £80,000 more favourable on death. I should like an explanation as to why this deliberate gap which has been an act of policy, between the rate at death and the rate at lifetime transfer, has been somewhat narrowed in the process of applying this rough and ready index.

Mr. Ridley

I should like to reply briefly to the points that have been made on clause 63. I fear that I must disappoint the hon. Members for Edinburgh, Central (Mr. Cook) and for Workington (Mr. Campbell-Savours) in terms of the whole premise of the case that they sought to put forward. Let us first take the changes made in the Budget and then I shall go back over the longer time scale that the hon. Gentlemen suggested.

I can answer the question asked by the hon. Member for Colne Valley (Mr. Wainwright) by saying that the threshold changes were rounded up to a reasonable figure in each case and in each case they were rounded up rather than down. In some cases, as he has pointed out, there has been a slightly bigger or smaller change than strict indexation would have given because we were looking for reasonably round figures. The cost of straight indexing to about six decimal points would this year have been £15 million, £30 million next year, and £35 million the year afterwards. That is straight Rooker-Wising of the bands. The actual costs estimated are £20 million, £40 million and £50 million; slightly more. Roughly speaking, that is 2 per cent. more than would be necessary for straight Rooker-Wising, which compares unfavourably with the 8.5 per cent. which is the excess over indexation for income tax allowances. That 2 per cent. is approximate.

The hon. Member for Edinburgh, Central had a figure of 12.8 per cent. because he was looking at the tax paid on a £100,000 estate. With respect—the Opposition have proved themselves a little short on comprehending true mathematical principles throughout the study of the Bill so far—the hon. Gentleman should have addressed himself to what is the after-tax estate in each case. The £100,000 estate before the Budget would have left £85,250 in the hands of the inheritors. If indexation only had been applied, that figure would have risen to £86,400—a 1.3 per cent. increase. As proposed in the clause, the figure will be £87,000 — a 2.5 per cent. increase. Those increases compare with the increase in the retail price index over the period of 5–4 per cent. So even in the short term the recipient in the hon. Member's example has been taxed a little harder than straight indexation would require.

Mr. Richard Wainwright

Will the Minister answer my precise question whether there is an act of deliberate policy in narrowing the gap at certain stages between the death and lifetime rates, or is it purely accidental?

Mr. Ridley

There was no deliberate policy. It was purely the result of rounding and trying to keep the cost of the concession within bounds, the two going in slightly different directions.

The basic premise that in the Budget the tax has been lightened is false and the hon. Members for Edinburgh, Central and Workington should know that. Let me lake them a stage further in the history of this.

Mr. Campbell-Savours

rose—

Mr. Ridley

No, I shall not give way. Will the hon. Gentleman please listen to me? I shall give him the yield of this tax in real 1983–84 prices.

Mr. Campbell-Savours

rose—

Mr. Ridley

The 1983–84 yields of this tax are as follows. I quote the first-year figure of a financial year. The figure for 1970–71 was £1,645 million; for 1971, £1,905 million; for 1972, £1,808 million; and for 1973, £1,471 million. Then the Labour party brought in capital transfer tax and estate duty was phased out. The yields were £1,026 million; £801 million; £807 million; £736 million; £630 million; and £638 million—all under the Labour party. It was the Labour party that destroyed the yield of capital transfer tax. Since our day it has hardly gone down. It has gone down to £550 million in the current financial year. So all that rubbish and claptrap that the hon. Gentlemen were talking was the result of their own Front Bench's actions.

Mr. Campbell-Savours

rose—

Mr. Ridley

If the hon. Gentleman is going to come here and keep the Committee up late at night for a long time, he should first acquaint himself with the facts that he is seeking to discuss.

Mr. Campbell-Savours

On a point of order, Mr. Armstrong. If a Minister makes an accusation against another hon. Member, surely it is courteous for that hon. Member to be given a right to respond.

The First Deputy Chairman (Mr. Ernest Armstrong)

The hon. Gentleman knows that if the Minister does not give way he must resume his seat.

Mr. Ridley

I give way to the hon. Gentleman.

Mr. Campbell-Savours

If the right hon. Gentleman cares to examine the Official Report tomorrow, he will find that I said that the tax take from capital transfer tax next year is likely to increase. Does he now wish to withdraw his statement?

Mr. Ridley

That is completely irrelevant to the point that I was making. I shall give the hon. Gentleman further proof. If we were to institute the rates and bands that the right hon. Member for Leeds, East (Mr. Healey) introduced when he brought in this tax, and index them, we should reduce the yield by £75 million. What the Opposition are doing talking about an increase in the burden is well beyond me. We have no plans to use an accessions tax or to make the pips squeak or whatever was that nasty phrase the Opposition used. The tax is now in the right form. We have not changed it much in this Budget and I commend it to the Committee.

12 midnight

Mr. Robert Sheldon

The right hon. Gentleman has left two things out with regard to the changing yield of this tax, which the Labour Government introduced. First, the initial rates of tax increased during the Labour Government's term of office. Secondly, under the capital transfer tax, free transfers between spouses was instituted. In many cases, there is a considerable time before the spouse is charged to tax as the wife is often considerably younger than the husband.

Mr. Ridley

The right hon. Gentleman is right. Perhaps he could draw his hon. Friend the Member for Workington aside, give him a nice cup of tea and explain some of these things to him.

Mr. Cook

I was impressed by the Financial Secretary to the Treasury's discovery of the new basis of indexation. It is that indexation should maintain the real value, net of tax, of whatever is being taxed. We do not apply indexation on that basis to income and we do not milk what is being earned by the taxpayer by discovering what tax burden he can pay to leave him with an indexed net income. We apply the indexation or the retail price index to the threshold. It is perfectly reasonable to expect that to apply to tax on capital as to tax on income.

The Financial Secretary said that the increase over and above indexation of the capital taxes in this clause is only some 2 per cent. as compared with 8 per cent. for income. We would not quibble with that 2 per cent. and accept the comparison with the 8 per cent. were it not the case that, as recently as 1980, the threshold for capital transfer tax was doubled. Had the threshold for the basic rate of income tax similarly been doubled in 1980, there would have been a basis for comparison. However, it was not. Until this year, the threshold for the basic rate declined.

As I expected, the Financial Secretary said that, if one uprates the 1975 thresholds, one finds that they are higher than those with which we are faced today. However, as I said to the Financial Secretary, it is most unreasonable — he knows it because he was a member of the Standing Committee that considered the Bill—to claim that it was the intention of the Government in 1975 to introduce thresholds that would be appropriate to the tax as he has changed it in 1983. He said that he now believes the tax to be reasonable and that it should remain in its present form on the statute book. Therefore, it must be different from the tax against which he inveighed in 1975, and which he told the Standing Committee he wished to see buried, forgotten and dead. Given that he has carried through substantial changes to the structure of the tax, especially in the community principle, it is unfair of him to base his case on the thresholds on thresholds that were appropriate to a very different tax in 1975.

We have debated this matter before, and I am aware of what has happened to the revenue from capital taxation during the past decade. I know of the decline from the early 1970s until now, and it will come as no surprise to the Committee that the Opposition are a little disappointed by the way in which capital transfer tax operates. There is no question but that the total yield, and the incidence of that yield on wealth, has fallen during the past 15 years. A priori, we can conclude that a taxable capacity is not being realised to its fullest extent. [Interruption.] If the right hon. Gentleman wishes to argue that during his period at the Treasury total wealth, as well as real disposable personal income, has fallen, it is reasonable to say that the taxable capacity is not bearing its full share. I assure the right hon. Gentleman that a future Labour Administration will ensure that it makes a fairer contribution.

Question put and agreed to.

Clause 63 ordered to stand part of the Bill.

To report Progress and ask leave to sit again.—[Mr. Ridley.]

Committee report Progress; to sit again.