§ 'Section 104 of the Inheritance Act 1984 shall be amended by deleting the sub-paragraphs numbered (a) and (b) and by substituting therefor the words "by one hundred per cent.".'. —[Mr. William Powell.]
§ Brought up, and read the First time.
§ Mr. William Powell (Corby)
I beg to move, That the clause be read a Second time.
New clause 8 concerns the relief that I claim should be given against inheritance tax in respect of shares in long-term unquoted, usually family, businesses. I act as an adviser to the Unquoted Companies Group, and the debate is essentially about the taxation of the shares in unquoted companies. [Interruption.]
§ Mr. Speaker
Order. Hon. Members below the Gangway should either come into the Chamber or hold their conversations outside.
§ Mr. Powell
I pay tribute to the Government for the relief that they have given during the past decade to unquoted companies. There has been a significant reduction in the burden of taxation, especially as it applies to the bottom of the scale. However, when a company's assets are worth £250,000 or more, there is little reduction, if any, in its compulsory tax burden.
New clause 8 concerns the taxation of business assets. I do not propose to talk about agricultural assets, although I concede that the same principle of the new clause might be expected to apply. If the principle of the new clause is accepted, it will be necessary to extend it to agricultural assets.
Long-term, unquoted family businesses have an important part to play in the British economy. They already play a major role, and should be encouraged to continue to do so. Unquoted companies fall into two categories. One comprises unquoted companies whose prevailing ambition is to become quoted. I am talking not about those companies, or those that intend to move to a quotation on the stock exchange as soon as it is convenient and expedient to do so, but about companies which do not 770 intend to do that. The present tax system encourages them to go to the market for a quotation rather than remain long-term family businesses.
Many such businesses have existed for generations. Hon. Members will be aware of family companies that have existed for six or more generations. All those companies face a threat because of the burden imposed by inheritance tax. It is a substantial burden for medium sized companies. The inheritance tax can usually only be paid out of the active assets of a particular company as the main assets of the taxpayer are the shares in that unquoted company. To meet the inheritance tax bill it is therefore necessary to sell those shares, and that usually means selling them to a quoted company. The larger the company, the more certain it is that it will be taken over by a quoted company. That is not necessarily of benefit to anyone.
Unquoted companies have a strong presence in our regions, but quoted companies have not and, unlike unquoted companies, many have metropolitan headquarters. Unquoted companies are not looking all the time for the latest valuation of their shares and their managers are managing not in the interests of that valuation, but in the long-term interests of that company.
There is substantial evidence to suggest that the inheritance tax acts as a deterrent to the growth of unquoted companies. I know of several companies that have deliberately restricted their activities because, were they to grow further, they would be unable to fund any potential inheritance tax bill without selling company shares. Those companies would pass out of family control into the quoted sector, usually to a rival, and, in all likelihood, would be closed in due course. That has happened over and over again in the past 20 years.
The Government have been extremely successful in stimulating new businesses—scheme after scheme has enabled new companies to develop. Those new family businesses, however, will last one generation only unless something can be done to mitigate the potential tax burden posed by the inheritance tax.
It is important to stress that long-term family businesses must select who is to take over within their group. It is possible to make a lifetime gift of assets and, if that has been in existence for seven years, those assets are exempt from the payment of tax. To allow a tax law that involves such a lottery to govern the management of a corporate business is extremely misguided. The suitable person to inherit the assets is not necessarily known until comparatively late in the life of the existing owner of the shares. He or she may die within the seven years and then the tax liability is due.
The disposal of a company is different from the disposal of a picture or other inheritance, and that is why it is wrong that the selection of a suitable heir should depend upon the whim of whether someone lives for seven years or more. That is not a suitable way to reach such decisions. I understand from discussions that we have had on the Finance Bill—parliamentary questions do not seem to have changed this—that, if the new clause were accepted, the annual cost would be about £20 million a year. I see that my hon. Friend the Economic Secretary agrees. Therefore, it is not the case that huge sums of taxpayers' money would not accrue to the Exchequer if the new clause were passed. But, if it were passed, the prospects of more long-term family businesses growing to their full maturity 771 and yielding much greater sums than £20 million to the Exchequer, in corporation tax and so on, would be substantial.
We are in danger of seeing, yet again, the growth of companies, but of that danger being restricted because the companies are restricted to one generation. We should not allow that. That is why I say to my hon. Friend the Economic Secretary that the time has come for the Government to look afresh at the matter and to bring forward proposals, if they do not like mine, to enable that threat to the existence of such companies to be removed.
§ Mr. Nicholas Brown
The hon. Member for Corby (Mr. Powell) has not made a persuasive case. The Register of Members' Interests states that he is employed as an adviser to the Unquoted Companies Group, which I suppose includes companies that would benefit from the handout of £20 million—the figure that is universally accepted as the sum asked for in new clause 8. If the Treasury has £20 million to give away, is that the most appropriate way to do it? Are there not more deserving causes that should come first? That is a reasonable question for the House to ask and the answer from the Opposition is yes; I suspect that the Economic Secretary's answer would also be yes. I do not recommend the new clause to my hon. Friends.
The hon. Member for Corby mentioned the period of seven years but once, and it may not be precisely clear that that period is significant. Therefore, it may be helpful if I spell out exactly what his proposal would entail. At present, inheritance tax is not payable when a business is transferred, whether by way of a gift of business assets or shares in the company that owns the business, if the transfer survives seven years.
The new clause addresses the issue of the seven-year period because for transfers on death or where the transfer does not survive seven years, inheritance tax is chargeable at 40 per cent. on the value transferred, subject to relief under section 104 of the Inheritance Tax Act 1984. That relief is a reduction in the value taxed at 50 per cent. or 30 per cent., depending on the amounts, thus reducing the effective rate of inheritance tax to 20 or 28 per cent. The amendment proposes to make that reduction 100 per cent. and so stop inheritance tax being charged on any transfer of businesses. That is an extensive and radical proposal, and certainly not one I could recommend to my hon. Friends.
The Economic Secretary has no doubt picked up a further point. The new clause talks about the "Inheritance Act 1984", but what is being addressed is the Inheritance Tax Act 1984, a different piece of legislation not specified in the new clause. Therefore, the new clause is technically defective, but that is not the reason to oppose it. We oppose it because it is wrong.
§ Sir William Clark (Croydon, South)
I support my hon. Friend the Member for Corby (Mr. Powell). There is no question but that the Government have done quite a lot for unquoted companies. It was quite churlish of the hon. Member for Newcastle upon Tyne, East (Mr. Brown) to refer to my hon. Friend's consultancy in such a sneering way.
§ Mr. Brown
The right hon. Gentleman accuses me of sneering. I was doing nothing of the sort. I referred to the consultancy simply to put it on record. If I had an interest, I would put it on record and I suggest that Conservative Members do the same. We have already had rows across 772 the Floor of the House about this very matter. It is not a matter for sneering; it is a question of the accuracy of the record to ensure that people who read the record and follow our debates on television, on the radio and in newspapers know precisely the full extent of Members' interests.
§ 10 pm
§ Sir William Clark
My hon. Friend the Member for Corby was talking about the entrepreneurial expertise that exists in Britain and the number of small businesses that have grown up over the years. The Morris motor company at Nuffield was built up into a tremendously large business. I am not so sure whether that would have happened had there been inheritance tax then. Obviously, under no circumstances could the new clause be accepted this year, but the Government have a good record in cancelling taxation that was introduced by Labour Governments, such as the selective employment tax and development land tax. We have done a tremendous amount to build up small businesses under the business expansion scheme and so on. I agree with my hon. Friend the Member for Corby that those running family businesses are afraid of expansion, because if the value of the business increased and someone died, it would attract inheritance tax. Whether it is discounted at 30 per cent. is immaterial, but it could lead to the curtailment of profit for some of those companies.
Although the cost of abolishing the tax is somewhere in the region of £20 million, I am convinced that if many of those companies were allowed to expand without the fear of inheritance tax hanging over them, the corporation tax take by the Inland Revenue would probably exceed £20 million.
Obviously, my hon. Friend's new clause cannot be accepted this year, but the Government should consider it sympathetically as in future we will have to do something about inheritance tax involving such companies and generally as it is acting against the production of wealth in Britain.
§ Mr. Ryder
At the beginning of this short debate there was a great deal of noise at the Bar of the House. My hon. Friend the Member for Corby (Mr. Powell) declared his interest as a representative of the Unquoted Companies Group, but it was difficult to hear him, because of the noise.
I pay tribute to the work that my hon. Friend does for the UCG. I recall a most useful meeting a few months ago with the UCG to discuss a range of issues. As my hon. Friend and the House know, we all want to encourage people of enterprise to set up businesses, but we have never accepted that, simply because the property of an estate is held in the form of business assets, it should escape tax altogether. That would be going to the other extreme.
There can be a particular problem involving tax on businesses. A taxable estate that includes business assets might not have sufficient liquid resources available to meet the tax. Special rules of business property relief and the similar ones to which my hon. Friend the Member for Corby alluded which apply to agricultural property recognise that. The purpose of business property relief is to ensure that if such circumstances were to arise, the tax bill could be paid without damaging the existence or development of that particular business. It is not intended to give a privileged exemption.
773 I share the view of my hon. Friend the Member for Corby and my right hon. Friend the Member for Croydon, South (Sir W. Clark) about the vital contribution that family businesses make to the economy. I am conscious of the need to prevent the tax from restricting their ability to survive and flourish, but the wider question is whether we are doing enough for businesses. When the relief was first introduced under capital transfer tax it was limited to interests in unincorporated businesses and controlling shareholdings and assets used in but held outside businesses. Since then, the relief has been improved more than once. In 1978, the rate was increased from 30 to 50 per cent. and a new lower rate of 20 per cent. was introduced for minority shareholdings in unquoted companies. In 1983, that was raised to 30 per cent., since when the relief has continued to apply at two rates. In 1987, the higher rate was extended to minority unquoted holdings of more than 25 per cent.
In addition to the improvements to business relief, since 1979 we have done much to improve the tax charge on the business sector more generally—that point was acknowledged by my hon. Friend the Member for Corby and my right hon. Friend the Member for Croydon, South—by specific measures and more general reductions in the level of the charge. In particular, the abolition in 1986 of the lifetime charge on gifts between individuals and in 1987 on those into interest in possession trusts meant that owners of family businesses could hand over their businesses to the next generation without an immediate charge to inheritance tax. Where those owners survive seven years, there is no death charge on gifts.
That change has been generally welcomed by business men for the freedom and flexibility that it provides. The abolition of the lifetime charge reduced another tax constraint on wealth creation and encourages owners of productive assets to pass them to younger hands rather than to hold on to them into old age. The Government's intention is to encourage that lifetime giving of business assets. The new clause would remove the incentive in the present system because it would give double the present relief for assets held until death.
In 1988, we replaced the four rates for inheritance tax with a single rate of 40 per cent. Therefore, where inheritance tax becomes payable on family businesses, the effective rate will never be more than 28 per cent., even for a tiny holding in an unquoted company. For most family businesses, the effective rate will not be higher than 20 per cent., and those effective rates are among the lowest of our trading partners.
It is important to maintain a balance between the tax burden on people whose possessions consist of business assets and those who have other property. As my hon. Friend the Member for Corby knows, these matters are kept under constant review. My right hon. Friend the Member for Croydon, South asked us to ensure that they are reviewed for next year's Finance Bill. I give them both an undertaking that we shall consider what they have said when we prepare next year's Bill.
§ Mr. William Powell
I am grateful to my hon. Friend the Economic Secretary for that undertaking and for the way in which he set out the substantial improvements that have been made in the taxation of assets in the past decade.
774 The short debate has been extremely useful. When the hon. Member for Newcastle upon Tyne, East (Mr. Brown) reads the record tomorrow, he will see that from the outset I declared my interest in this matter. The hon. Gentleman's speech will be widely scrutinised because the Labour party is trying to pretend that it has changed and that it is not the Labour party of high taxation and destruction of business that it used to be. Hundreds of thousands of unquoted family businesses will read his remarks and realise that little has changed. They will deplore the line that he chose to take in the debate.
§ Mr. Nicholas Brown
Let me make two points. First, if I missed the declaration of interest by the hon. Member for Corby (Mr. Powell) at the beginning of his speech, I apologise to him. As was pointed out by the Economic Secretary, there was a lot of noise at the Bar of the House. I shall check Hansard tomorrow—as, no doubt, will the hon. Gentleman—but if I missed what he said I unreservedly apologise to him. My hon. Friends and I believe that it is right for matters to be spelt out and placed on the record in a way that did not always happen when the Bill was in Committee.
Secondly, if the hon. Member for Corby thinks that he can go around the country attacking the Labour party for opposing the concession that he seeks from the House, he will have to explain why the Government will not give him the concession either.
§ Mr. Powell
I agree with the hon. Gentleman's first point: interests should always be declared. It has always been—and will continue to be—my unvarying practice to declare my interest, and the record will show that I did so in my opening remarks. As for the attitude of the Labour party, the hon. Gentleman will have to stand by what he said, which will be greeted with dismay by the owners of unquoted family businesses who were hoping for a more enlightened attitude from the official Opposition.
I am grateful to my right hon. Friend the Member for Croydon, South (Sir W. Clark) for his support. As my hon. Friend the Economic Secretary said, matters must remain open, and he and Treasury Ministers must expect to receive continuing representations. Although the burden of taxation has been reduced, it still represents a long-term continuing threat to what is a necessary and important part of economic life in this country.
I beg to ask leave to withdraw the motion.
§ Motion and clause, by leave, withdrawn.