Speeches, Interviews & Other Statements

Complete list of 8,000+ Thatcher statements & texts of many of them

1975 Jan 22 We
Margaret Thatcher

HC Committee [Finance Bill] (Howell Amendment)

Document type: Speeches, interviews, etc.
Venue: House of Commons
Source: Hansard HC [994/1609-48]
Editorial comments: Around 2215-0020. MT spoke at c1647.
Importance ranking: Major
Word count: 13772
[column 1609]

Mr. David Howell

I beg to move Amendment No. 52, in page 26, leave out lines 11 to 27 and insert:

The Temporary Chairman

We shall take at the same time the following amendments:

No. 93, in page 26, column 3, leave out lines 14 to 27, and insert:

'7

10

13

17

20

24

27

30

33

37

40

43

47

50'.

No. 57, in page 26, line 27, at end add—

‘(3) Each of the indexed figures shall with effect from 6th April 1975 and from every subsequent 6th April be altered in accordance with the formula set out below and the indexed figure as so altered shall apply during the period of 12 months beginning on the said 6th April in lieu of the indexed figure set out in this Part of this Act or, as the case may be, the indexed figure previously applicable:—

a × b&/c=d

“a” is the indexed figure as set out in this Part of this Act;

“b” is the retain price index for the month of March immediately before the 6th April on which the adjustment is to be made;

“c” is the retail price index for March 1974;

“d” is the index figure as altered.

(4) In this section the expression “the indexed figure” shall mean each of the figures in the first and second columns of the Table set out in subsection (2) above. [column 1610]

(5) The tax charged on the value transferred by a chargeable transfer made after the figures in the first and second columns of the Table set out in subsection (2) above have been altered in accordance with subsection (3) above shall instead of being charged in accordance with subsection (1) above be charged as follows, that is to say—

(a) if the transfer is the first chargeable transfer made by that transferor, at the rate or rates applicable to that value under the Table set out in subsection (2) above as altered in accordance with subsection (3) above;

(b) subject to subsection 6 below if the transfer is not the first chargeable transfer made by that transferor, at the difference between the tax which would be chargeable at the rate or rates applicable under that Table as altered in accordance with subsection (3) above on a transfer of value equal to the aggregate of that value and of the adjusted total of the values previously transferred by that transferor, and the tax which would be chargeable at such rate or rates on the adjusted total of the values previously transferred by that transferor.

(6) Each chargeable transfer previously made by the transferor shall be adjusted as if it were an indexed figure and as if in the formula “b” were the retain price index for the month of March immediately before the time when the adjusted total of the values previously transferred is being ascertained and “c” were the retail price index for the month of March immediately before the transfer which is being adjusted and the aggregate of the values of charged transfers as so adjusted is in this section called “the adjusted total of the values previously transferred” .

(7) The Treasury shall as soon as practicable after 6th April 1976 and after every subsequent 6th April 1976 and after every subsequent 6th April cause to be published in the Gazette the indexed figures as so altered and applicable during the period ending on the next following 5th April’.

No. 86, in page 26, line 27, at end insert— ‘(3) If, at any time, the official retail price index shall rise above that obtaining on 25th March 1974 the Treasury shall, by order, specify that, for the purpose of subsections (1) and (2) of this section, “value” shall be taken to mean that value which, on 25th March 1974, had the same purchasing power (calculated by reference to that index) as the value transferred, and the tax charged on any chargeable transfer shall be that amount which has the same purchasing power (similarly calculated) at the time of the transfer as the amount of tax computed according to subsections (1) and (2) above had on 25th March 1974’.

Mr. Howell

We come now to the set of amendments which go to the heart of the clause and the table set out in it. The figures in the amendment, by widening [column 1611]the tax bands, would substantially reduce the rate at which capital transfer tax would be charged. Throughout our debate so far the Chancellor and the Chief Secretary have maintained two things about the rate and the burden of the new tax. The Chancellor has argued more than once that his aim is to perfect what he believes to have been the aims of estate duty, and that these objectives should now be fully, roundly and perfectly achieved by the capital transfer tax. He has said more than once that the capital transfer tax will operate at a lower rate and that it will be a lesser burden, particularly on the less wealthy and people at the lower end of the scale. We believe that to be incorrect. We are not surprised that the right hon. Gentleman should say it because in his contributions last night and this afternoon he won the championship for getting the maximum number of incorrect statements into a speech. On this occasion he is flatly wrong.

The right hon. Gentleman is wrong for three substantial reasons, and he cannot escape them merely by waving his hand and saying that the new tax replaces estate duty and tightens it up and that the rates are lower. The trouble is in the lifetime accumulation principle which is built into the tax. The fact that past gifts are taken into account means inevitably that transfers in many cases will be immediately lifted into the bands which would generate a far heavier burden than would have been the case with estate duty where it was paid. The accumulation principle makes straight comparison, rate with rate, absurd.

Even greater complexity is added by the principle of the tax on the tax. I do not think that even now, certainly not outside the House and perhaps not even inside it, it is appreciated just what an additional burden this is and how the levying of CTT on the amount paid in CTT conceals the true scale of the tax, which is far higher than appears from the table in the clause. A complex set of calculations results.

In an earlier debate one of my right hon. Friends challenged the Chancellor or anyone else to explain in intelligible and comprehensible terms what the rate of tax would be on any particular gift, on net gift value or on any grossed-up figure. The fractions and complexities are almost [column 1612]incomprehensible. If one tries to trace through the table one finds that on a gift of between £35,000 and £42,000 there would be a tax of £4,750 plus thirty-seventieths or 42.86 per cent. of any cost of the net gift over £35,250. That is one of the simpler examples. The cases get much more complicated after that.

The additional twist of the tax on the tax means that the scale which appears so blandly in the clause is grossly misleading. Furthermore, I think we heard the Chancellor aright when he claimed that the same principles applied in the calculation and payment of estate duty. I fully support my hon. Friend who said that that, too, was incorrect. T he estate duty principle is not the same as that which is proposed here. I do not know whether this was in the Government's mind, but the idea that donors would normally deduct from their chargeable gifts before payment seems to me to belong to cloud-cuckoo land like so much else of the tax. One has only to begin thinking about handing over a house and other things to realise the silliness of this proposition and the absurdities of the situation where part of the house has to be pulled down, or something equally absurd has to be done, in order to pay off part of the tax so that the gift may be made in the first place. It is a nonsense. The rates here are utterly misleading.

That is the first set of reasons why the rates and the claim that the whole impost is lower than estate duty do not add up. The removal of the exemptions under estate duty for business assets and agriculture is yet another reason why the rates cannot be compared in the way in which the Chancellor tries to compare them.

The second proposition concerning the rates has come up in a number of Labour speeches, inside and outside the Chamber, to the general effect that it is time we moved on to a capital transfer tax of this type because everyone overseas has one. They say that it is time we moved into the modern world and aligned ourselves with all those other countries with similar taxes. The implication, even if it is not spelt out, is that by doing so we are merely moving alongside them in our level of capital taxation. Comparisons with overseas countries can be [column 1613]misleading, and the whole of the Government's proposition which is based on such a comparison is also misleading. But if that is their ground they must expect to be fought on it. Therefore, it is worth looking at the reality of capital taxes overseas at the beginning of this debate.

One of the most recent authoritative surveys is one by the Confederation of British Industry on overseas inheritance and gift taxes and estate duty. I shall not delay the Committee by giving the full details of the complexities and tables. To compare like with like is difficult, but the survey comes to some general conclusions which are significant for the debate. First, it points out that above a net gift of £176,250 we are dealing with a 100 per cent. tax—in other words, it is at a confiscatory level—and that the 100 per cent. rate rises considerably further than that. The sum of £176,250 is not considerable when we are concerned with handing on a small business.

After looking around the world for other levels with which to compare the British rates, the survey's conclusion is that “Sri Lanka” — in my school geography textbooks that was Ceylon—

“is generally considered to place the highest tax burden on capital of any non-Communist country in the world. Its maximum rate on gifts is 100 per cent., and it only applies to the taxable slice of gift over £92,500.”

That is, at the level of £176,250, where we have 100 per cent., the average rate in Sri Lanka is 77 per cent.

The survey continues:

“In European countries the inheritance and gift tax are considerably lower than those envisaged in the United Kingdom, and the majority of these countries have different scales of rates according to the degrees of consanguinity of the beneficiary with the donor. The maximum rates applicable to beneficiaries other than close relatives average about 62 per cent. The highest rate in Spain is at 84 per cent. which applies to gifts or legacies over £745,000.”

That compares with the proposed 181 per cent. for gifts over £1,710,250 in the United Kingdom.

The survey also points out that outside the United Kingdom the consanguinity rates are such that “where spouses are not exempt from gifts or inheritance taxes the maximum rates applicable to them are predominantly in the range of 15 per [column 1614]cent. to 19.2 per cent. The maximum rates applicable to children vary more widely, but in no major European country” — except this country, if the Government persist with this crazy tax— “are they in excess of 35 per cent.”

We have already touched on the way in which CTT rates and the principle of the tax strike at the structure and principle of the family. We shall return to the question many times.

I think I have said enough to demonstrate that the Chancellor's claim that this is no worse a tax and possibly a lighter tax than estate duty is spurious nonsense. The principles built into capital transfer tax mean that it will be a confiscatory and destructive tax. It will be a tax that will automatically lead to the elimination of many small firms, businesses and farms. The comparisons with other countries prove that we have the privilege of rating alongside Sri Lanka—possibly a little ahead of Sri Lanka—in the heaviness of the impost that we place on transfers, gifts and the inheritance of capital.

[Mr. George Thomas in the Chair]

Mr. Cecil Parkinson (Hertfordshire, South)

It is probably entirely inappropriate, but the phrase “For many are called, but few chosen” sprang to mind as my name came out of your lips, Mr. Thomas. At that moment I was sitting down minding my own business. I am relieved to be able to say that I want to speak on this group of amendments. I associate myself with the remarks of my hon. Friend the Member for Guildford (Mr. Howell). There is an amendment in my name, Amendment No. 92, which proposes a slightly different scale of rates. The thinking behind that different scale and the reasons for proposing it to the Committee are exactly the same as the reasons that my hon. Friend put forward.

I must declare my position straight away. I do not feel as strongly as some of my right hon. Friends about the principle of a capital transfer tax. I have for some time been in favour of a form of capital transfer tax. I know that a number of my hon. Friends feel exactly the same way. We object to the complexity of this tax and the proposed rates.

It is wrong for the Chancellor to try to portray the Conservative Party as a party that wants to entrench loopholes [column 1615]into our tax system. We oppose Clause 17 because we feel that at this moment this tax in this form will do great damage to the country. The principle of a capital transfer tax and the idea that when a person parts with part of his assets to another generation or to another group of people a tax should be levied is not objectionable. What makes this tax objectionable are the penal rates and the complexities.

Even if we are in favour of a capital transfer tax, we only have to listen to the Chancellor trying to justify it to have our feeling of support begin to erode and our confidence undermined that there is a case to be made for such a tax. If the right hon. Gentleman believes in a capital transfer tax, he should make a vow never again to speak in favour of it until he understands it. When he speaks in favour of it he should take the malice and envy out of his voice and out of his thinking.

As I have sat here over the past two days I have tried to reconcile what the Chancellor was saying about entrenching wealth with my experience of 15 years in practice as a chartered accountant. A practising accountant immediately becomes aware—the right hon. Gentleman may be bored with this phrase, but we know that he had a distinguished practice as an accountant—that wealth is not entrenched and that there are wealthy people who are in the process of losing control of their wealth, and people who never had any wealth to inherit who are acquiring wealth.

It may well be, as the hon. Member for Oldham, West (Mr. Meacher), now Under-Secretary of State for Industry, used to bore us by saying, that a proportion of people had control at any given moment of a proportion of the nation's wealth. But the fundamental fallacy in his thinking was that that proportion was an unchanging group. It is no more offensive to say that there is a reasonably fixed proportion of people capable of controlling, handling and using money than it is to say that there is a fixed proportion of people capable of running a mile in four minutes. There is a fixed proportion, but it is not always the same people.

The fallacy in the thinking of the hon. Member for Oldham, West and of the [column 1616]Chancellor, judging from the right hon. Gentlemen's remarks over the last two days, is that they keep thinking of entrenched wealth being in the hands of a fixed, unchanging group of people. The whole of my personal experience in the commercial world, and as one who has attempted to build up a group of companies, has been to prove exactly the opposite. It has been that at any given moment there are people who prove to be incapable of handling the assets they have acquired, either by inheritance or by good fortune, and are in the process of losing control of them to people more capable of handling them. The sooner the Chancellor gets out of his mind the idea that only he is capable of promoting redistribution—by which he means confiscation—and the sooner he starts to understand the way our present system works, the better it will be for all of us.

My principal objection to this tax stems from that. The Chancellor feels that he is promoting redistribution and that this is the instrument which will prevent a fixed group of people controlling a huge slice of the nation's wealth. There is no need for him to trouble about that. The market is constantly taking care to make sure that people incapable of handling money do not keep it for long and that it finds its way into the hands of more capable people. The Opposition believe that society is safer that way and that the power and the ability to control people's lives should be taken away from bureaucrats. We believe that people's ability to stand up to the State and to be independent is preserved by the present system.

It is very difficult to make a nice, tidy case for a society in which wealth and power are diffused and apparently controlled on a haphazard basis, but the fact is that an economy based on that principle happens to work. The Chancellor, in his misguided way, is setting out to wreak vengeance on the successful. The Chief Secretary shakes his head, but anyone who has listened to the Chancellor in the last two days must have formed the distinct impression that the yield of this tax and the question whether it would be of any use to him were of secondary importance. What he was after was the settling of some old scores with people whom he has hated for a very long time. He does not mind destroying a lot of [column 1617]companies and enterprises in his search for vengeance.

We as a party say that this tax in its present form is objectionable. Its most objectionable features are the swingeing rates proposed. I have often wondered how the Chief Secretary reconciles the things he has to say at the Dispatch Box with the sort of advice he used to give to the people in the world in which he lived very successfully for a long time. I ask him to go back to Manchester and talk to various people—not people whose fathers left them fortunes but people who have built up their businesses and made a success of their lives. He should ask them how they feel about this tax and what it will mean, and whether their enthusiasm for investing in and enlarging their businesses has been affected. He should ask them what they feel now about the Chancellor's other plea that they should invest and set about creating the machinery which can produce greater wealth for our country, and whether they believe that this tax, on the present basis, will do anything to encourage them.

The answer from the real world is loud and clear. It is not coming from people who seek to protect vested interests. It is coming from people who have only one interest, which is to see a prosperous and thriving Britain. They say to the Chancellor of the Exchequer “If you do this, especially at the rates which you propose, you will inflict enormous damage on our country.”

In its wisdom the Committee has approved Clause 17, although I doubt whether the motives of Government supporters in voting can be described as wisdom. Most of them have taken care not to be here so as not to hear either the Opposition arguments or those of the Government. But the news that there should be a tax on transfers is not in itself objectionable. Many of us would support a sensible capital transfer tax. We say, however, that at the proposed rates it will be a very damaging instrument and, in the hands of a politically motivated, unattractive Chancellor of the Exchequer like the one we have at present, a particularly damaging instrument.

Some years ago I read an interesting article by the hon. Member for Birmingham, Ladywood (Mr. Walden) in which he used a phrase which I never [column 1618]understood until tonight. He was describing a Government composed of “knee in the groin” politicians. Until I saw the Chancellor of the Exchequer operating tonight, I had never understood the meaning of the phrase. The right hon. Gentleman has brought to life for me a most distasteful phrase in a most colourful way. Whenever I read the phrase again, I shall have no doubt about who is the quintessence of that very unattractive sounding type of politician.

Mr. Ridley

But the Chancellor of the Exchequer said that he wanted to “make the pip squeak” . I am surprised that my hon. Friend did not understand the meaning earlier.

Mr. Parkinson

I led a very sheltered life before coming to the House of Commons.

I have made my point. I believe that this tax, rid of some of the complexities and at a sensible rate—and I regard these proposed rates as nonsensical—could be a not unwelcome addition to the statute book. At the present rates it is totally unacceptable. Even if the Chief Secretary is unwilling to accept these amendments, I hope he will accept an amendment based on the principles that our amendments try to express and that he will recognise that the rates proposed by the Government are damaging.

Sir John Hall

With this amendment we are discussing Amendment No. 57. This may make for a slightly untidy debate, but we appreciate that this course has been adopted to facilitate our business in the hope that we may finish a little earlier tonight than we did last night.

Amendment No. 57 is slightly complex but its purpose is clear. It is to ensure that, taking the retail price index at March 1974 as the base, the indexed figures set out in the amendment are adjusted automatically every 12 months in accordance with the retail price index, so that the tax is charged on the real value of capital transfers and not on the inflated value.

The proposed subsections (5) and (6) may cause concern or puzzlement to those who, like me, have difficulty in understanding even what they have written. They are designed, however, to ensure in real terms that a transferor whose [column 1619]estate has been reduced by gifts over a lifetime should not pay more tax than if no transfers had been made before his death.

This is another form of indexation amendment, in rather more positive terms than that moved by the hon. Member for Cornwall, North (Mr. Pardoe) earlier. If the amendment were accepted—and I confess that, having heard the Chief Secretary's response to earlier amendments dealing with indexation, I am not too confident—we would need to apply the same indexation to the figures in Schedules 4, 6 and 8. I cannot do so in this amendment because we are to debate those schedules in Standing Committee and it would be out of order to include them here.

It has already been said that rapidly-growing inflation is concentrating attention more and more on the subject of indexation. That has been defined in various ways. Perhaps I can define it as relating monetary obligations—that is wages, salaries, pensions, loans, insurance and so on and tax scales—to an index of the rise in price levels or the fall in the value of money. It is by no means a new concept. I think it was first advocated in about 1875. The apostle of it today is the Chicago sage, Mr. Milton Friedman, who has advocated such a system for wages, taxes and financial investment for a long time in the United States.

I believe that some hon. Members share my view that if we are to have indexation it has to be across the board. I do not think it succeeds if we apply it only to some elements of the economy. This has probably been the mistake when it has been tried in other countries and failed. It must be all-embracing. We have to be content with small beginnings. The opportunities given to the Opposition to move amendments which introduce an all-embracing system of indexation are rather limited. We have, therefore, to start with this.

It has been said, I think by the Chancellor although it smacks of the Chief Secretary, that if we are to introduce indexation we should not start with the tax scales because they are likely to affect only the most affluent. I remind [column 1620]the Committee that we already have, in various ways, indexation for wages and salaries and social service benefits. As I pointed out in an intervention, the social contract provides a form of indexation.

If we look at a comparison between wage levels and the rise in prices announced recently it is clear that workers generally have managed to keep ahead, through this social contract form of indexation, of the rise in prices. However, it is not much use providing improved remuneration, in whatever form, if by so doing we merely push individuals into higher tax brackets. If we are thinking of the effect of inflation on tax scales, especially on capital, we have only to consider capital gains tax, which has been with us for a long time. The failure to apply indexation to that tax has meant that over the years it has been a tax on capital. Frequently the gain which becomes a taxable item does not represent a profit at all and is merely an accretion of capital, due entirely to the impact of inflation. If that continued it would lead to the virtual destruction of capital.

At present there are opportunities for capital gains to be limited. Anyone wishing to dispose of assets in whatever form may find himself involved in a loss rather than a gain. In normal circumstances, under a Conservative Government and in a prosperous economy, people would be making real capital gains.

The scales of the capital transfer tax are very severe. Even if the amendment were accepted they would still be severe within the structure of the Bill. That is likely to lead to the break-up of businesses, farms and woodlands and will discourage enterprise. It will penalise many individuals, reduce donations to charities and cause serious damage to the economy. High as the scales are, and high as they will be even if the Chief Secretary has the wisdom to accept the amendment, they will become still higher as inflation works its way.

The rate at which capital is being destroyed will be accelerated by the proposed capital transfer tax. Within a short time thousands of workers who would not normally expect to come within the purview of the tax will find that inflation brings the price of the house they own [column 1621]and their possessions within its ambit. Unless we introduce a form of indexation, for the first time they will have to pay capital transfer tax.

In the past every Chancellor has enjoyed the benefit of undeclared tax collected for him by inflation. That has been described as buoyant taxation. When inflation was running at between 2½ per cent. and 3½ per cent., one could accept that and adjust oneself to it. It gave an extra bonus to the Chancellor which one did not grudge, but with inflation at its present rate that cannot continue. It makes complete nonsense of taxation when the Chancellor relies on inflation running at the rate of 20 per cent.—plus to yield him ever-increasing revenue, and it destroys capital and savings in private hands.

Perhaps that is the intention. If it is the intention to use the tax weapon and unindexed scales as a quick means of destroying private capital and savings, the Chancellor should have the courage to say so. If it is not the intention, I can see no logical reason why the Chief Secretary should persist in his determination to resist any amendment which is designed to introduce a proper element of indexation into our tax legislation.

Although the Chief Secretary gave a dusty answer to the hon. Member for Cornwall, North on the previous amendment, I hope that he will think again. We still have the opportunity on the schedules in Committee to table amendments to draw to his attention the overriding importance of introducing indexation in our fiscal legislation. We should not in future introduce any fiscal legislation in which tax scales are involved without automatically indexing them.

Mr. Lawson

I should like to assist the Chief Secretary in rethinking his attitude on indexation in general and indexation of the capital transfer tax in particular.

My Amendment No. 86 has been grouped with this series of amendments. It is not for me to say that it is a better amendment, but it is certainly briefer and easier to understand. The purpose of this amendment is to say that for the purposes of the capital transfer tax all the transfers made and all the various amounts should be expressed in term s of 1974 pounds—a common base date—[column 1622]and be aggregated in 1974 pounds, and that the tax should then be calculated according to the table set out in the Bill, whatever the table is when the Bill is eventually on the statute book. When the tax liability is calculated in 1974 pounds, it would then be adjusted up again in relation to the rise in the cost of living, according to the retail price index and according to the fall in the value of money; and this would be the tax that is then paid.

It is manifestly the case that if it is held that a particular level of wealth should attract the tax and that a lower level should not, that can make sense only in real terms. Wealth can be defined only in real terms. If mere numbers change, that fact does not make anybody wealthy. Therefore, nobody should come into the bracket simply because numbers change.

The Chief Secretary has given an assurance that the tax will, of course, be reviewed every year. I am glad that the Chancellor has now come in and I hope that after consultation the Chief Secretary will be able to give a slightly more forthcoming assurance, because a review is never good enough, for the reasons pointed out by the hon. Member for Cornwall, North (Mr. Pardoe). It is also not sufficient assurance for the reasons cogently and tersely expressed by my right hon. Friend the Member for Finchley (Mrs. Thatcher).

The promise of a review is certainly not good enough, particularly in this case. By what principle would the Treasury adjust the rates, even if in the annual review they were to adjust them? Simply adjusting the rates will not do the trick because if the rates were adjusted according to the increase in prices over a period this would have effects on somebody who had recently died without having given any gifts, with the whole estate taxed at that point. That is totally different from the effect on somebody who has been giving away most of his money in previous periods and when the aggregation covers different dates with the pound at different values.

Whereas a rough and ready form of justice can be imported into the income tax system by a review, if that leads to regular adjustment, as it is for pension relief, it is a curious fact that in this [column 1623]form of taxation only an indexation formula, and of the kind I suggest in the amendment, would do the trick. That is the only way one can get an adjustment which is fair, just, and equal as between different taxpayers who have made their gifts at different times.

Justice and constitutionalism lie in the root of the cry which is increasingly heard for indexation.

It is appropriate that this amendment should be in my name and that of my hon. Friend the Member for Kingston-upon-Thames (Mr. Lamont) because it was an amendment in his name and mine which in Committee on the Floor of the House on the last Finance Bill initiated the first debate in this Chamber on the principle of indexation. It was not a Liberal amendment, as we were erroneously led to suppose. [Hon. Members: “Where are the Liberals?” ] They are on their way to Annabel's or wherever Liberals go.

We do not say that indexation would cure inflation, although we say that it would not make worse the rate of inflation. We do not say that it would have a direct effect, although it might have an indirect bearing in the sense that it would reduce the incentive to the Government to inflate. There is an incentive to a Government to inflate, because by doing so they can get increase d revenue, and a Socialist Government, dedicate d to increase d taxation and to crippling various sectors of the economy and various groups of people through high income tax, see that inflation plus an unindexed tax system may have the combined effect of achieving Socialist ends more quickly.

What we do say is that our proposal would be likely to bring justice into the tax system and into the way in which inflation affects different groups of tax- payers. It would, in general, remove some of the more difficult consequences of bringing down the rate of inflation.

I quote as an example the indexing of the rate of interest on securities. If that rate is very high because the rate of inflation is high, when the rate of inflation comes down the borrower is in a bad way and there will be bankruptcies, failures and more unemployment. If, on the other hand, the borrowing is done in [column 1624]real terms, so that when the rate of inflation falls—we all hope that it will—the borrower is not left with the problems caused by the old high rate, there will be fewer bankruptcies and failures. What we propose would mitigate the undesirable side effects of curbing the rate of inflation.

It is wholly wrong that the State should be able to increase taxation with out getting the sanction of Parliament, but that is what happens with an unindexed tax system. It is also the case that the value of revenue from certain indirect taxes&em ;the so-called specific duties—goes down all the time in real terms with rapid inflation whereas revenue from direct taxation goes up rapidly; thus, without the sanction of Parliament, there is a massive shift from indirect to direct taxation. Perhaps there should be such a shift, but if so it should be debated and agreed by the House of Commons.

Mr. James Dempsey (Coatbridge and Airdrie)

On several occasions the hon. Gentleman has lamented the amount of taxation that operates without the sanction of Parliament. Has not this been the practice in the past? Is he saying that taxation operating without the overall approval of Parliament is something new?

Mr. Lawson

I think it is deplorable that in recent debates the question of indexation has tended to be considered as a party political matter, with Labour Members feeling that they must support the tried old Treasury arguments against indexation without thinking matters out. This is not a party political matter. It has been around as long as inflation has been with us, but it has become much worse because the rate of inflation is very much higher. That is why it is urgent that we should do something about the situation now.

I should like to make one last point, and I shall make it briefly because we sat so late last night. It was very cheap of the Chancellor of the Exchequer—I am not surprised that he has now slunk out of the Chamber—to accuse us of wanting to index the capital transfer tax and not being interested in indexing personal taxation which affects many more people. Not only did we discuss the question of indexation of personal taxation on Clause 5, as the Chief Secretary will bear out, but [column 1625]CTT was the one new tax which we had an opportunity to amend. We do not have the opportunity to amend personal income tax in the same way.

I should like to make this offer to show our good faith. If the Chancellor will agree to introduce a new clause to give the Treasury power to index income tax, we shall be very happy to debate that matter whenever he sees fit to give us the opportunity to do so. With that assurance, I very much hope that the Chief Secretary will be able to support the amendment.

Mr. Norman Lamont

I agree very much with all that my hon. Friend the Member for Blaby (Mr. Lawson) said about indexation, but I hope he will for give me if I do not join him in debating that matter now since I have tabled a number of amendments on the subject for discussion upstairs in Committee. Therefore, I hope that we can leave the matter until later.

I want to return to the point raised in Amendment No. 52—namely, the incidence and rates of tax to be levied under the Government's proposals. I accept the principle of a capital transfer tax, but one must look at the rates and the exemptions and make up one's mind whether it is broadly right or wrong. I have no doubt that in this case it is broadly wrong.

I do not disagree when the Chancellor says that it would be right to block the old loopholes that exist in estate duty, but in the last few days the right hon. Gentleman has not learned so heavily as he has in the past on his views about the unfair distribution and inequalities of wealth. I often wish that instead of using the word “inequalities” he would use the phrase “differences of wealth” . I am sure even the right hon. Gentleman would accept that some people, with different qualifications and responsibilities, would accumulate more wealth in respect of the function they have to perform in society and the responsibilities which they fulfil.

Much of the discussion about the distribution of wealth has been extremely muddled, as the hon. Member for Birmingham, Ladywood (Mr. Walden) said yesterday. There have been a number of publications by Left-wing academics on this subject. I refer particularly to that written by Professor Atkinson entitled “Unequal Shares” . [column 1626]That book contributed significantly and misleadingly to the clouding of opinion on the distribution of wealth. The facts are hard to arrive at with any degree of certainty. It is noticeable that in the Green Paper on the wealth tax the Government could not come to firm conclusions about the distribution of wealth or the trend in that direction. I imagine that that is why the Royal Commission has been set up, to find out some of the facts, although the Chancellor seems to be prepared to leap ahead and make assumptions.

The Government's Green Paper on the wealth tax made it clear that it is an uncertain area and that the distribution of wealth cannot be established from the figures for estate duty, because they leave out many small and medium estates and, therefore, understate the amount of such wealth—the amount of popular wealth and the number of insurance policies, often issued by the industrial companies and held by a large section of modestly-well-off people.

Also, the statistics make little allowance for social benefits, for council housing or nationalised industries. The figures which are flung about say nothing about that sector of the economy which is in social ownership, yet in logic they should do so. The argument for nationalisation is that the community reaps the benefit. Therefore, one should ascribe a notional amount for one's ownership of British Rail or the docks. These figures are flung around with little justification.

One figure often quoted by Labour Members is that 10 per cent. of the population own 70 per cent. of the wealth—a figure which is scarcely to be believed when it is accompanied in the next breath by the statement that 24 million adults have no wealth of any significance at all. That does not appear to be true when one considers the price of housing and the number of insurance policies issued. But even if that figure, which I believe to be untrue, is accepted, one has to make two significant adjustments. First, wealth in many families is usually concentrated in one member of the household, usually the senior male member. Second, older people tend to have much more in savings than young people. Statistics show that people over 75 have about seven times as much wealth as those in the 20–24 age group. [column 1627]

Thus the figures are themselves suspect. Even if they were not, in the form in which they are presented they would not show that this country is markedly inegalitarian. A leading article in The Times a couple of years ago pointed out that if those two adjustments which I have mentioned were taken into account and applied to a society in which everybody earned the same amount but save a proportion of their income through time, we would reach a society in which the distribution of wealth was not far different from what the statistics suggest it is today.

It is remarkable that capital taxation should be increased before the facts about the distribution of wealth are clearly established. The Chancellor does not seem to be interested in listening to any evidence. He has continually swept aside objections because they have been made only by those who were affected by the tax. That was extraordinary , because in the Green Paper and in his announcement he said that he would be interested to receive representations from those affected by the tax. How are they to make their representations when, if they protest about it, their representations are to be dismissed because they are the people who are affected by the tax? 11.15 p.m.

We might ask how much redistribution and change has taken place in wealth in the recent past. Capital values have been eroded by the slump on the Stock Exchange and by inflation. We hear talk about vast agglomerations of wealth, but I wonder whether the wealthy in Britain are wealthy by comparison with those in many other countries and whether the “vast agglomerations of wealth” exist except in the Chancellor's mind. I suspect that there is more than a little truth in the remark of Rebecca West that we shall have a revolution in Britain only when the poor feel as poor as the rich.

It is said that we wish to move to a society in which there will be a wider distribution of wealth. A wider distribution of wealth is not the same as concentrating that wealth in the hands of the State. Nor should spreading wealth throughout society be inconsistent with encouraging people to accumulate wealth and to save. [column 1628]

Labour Members have little understanding of how people can accumulate wealth during their working life. A remarkable story appeared in The Times recently of a man who during his life had never earned more than £1,000 a year but had managed to save a few pounds each week. Eventually he had saved sufficient to buy himself a business. He ended up living in a hotel off the benefit of his business. He paid for his daughter's education. Now he is liable to the wealth tax and the capital transfer tax. One wonders whether those who framed this tax realise what can be achieved sometimes by people on modest and middle-range incomes.

We on this side are not against the principle of a gifts tax. Inheritance is no more natural than property itself. Inheritance must be justified not by an appeal to natural rights, but by reason of the social utility of private wealth. The facts are that those who save or accumulate do this for the ends of society even though they themselves have narrower ends in view.

As a result of this tax and as a result of the rates proposed by the Chancellor, the net stocks of savings will be lower. Savings which are well and efficiently managed will be transferred to consumption. We are always being told by hon. Members opposite that Britain does not invest enough. The other side of investment is savings. It is a noticeable fact, connected with our past economic performance, that Britain's savings ratio is very low compared with that of most other advanced countries. After this tax is introduced that ration will be even lower.

We believe that private wealth fulfils a social function. It helps to disperse power throughout society and to create different centres of power in opposition to the State. To confiscate wealth is simply to concentrate power in Whitehall. We are seeing in this tax and in the rates proposed nothing less than an envy tax designed to confiscate wealth. We are seeing the Chancellor's motives being revealed. It reminds me of an extract from Eva Peron 's diary relating her discovery that there were poor and rich people in the world, but she decided that, on the whole, it was a fact that there were rich people in the world that upset her more than the fact that there were poor. [column 1629]

This tax is an envy tax, a tax which will be socially destructive, a tax which will do immense harm to small businesses, to farms and to forests. Hon. Members on the Government side seem to think that all private wealth can exist only because one's great-grandfather was a robber or a pirate or achieved wealth by immoral or illegal means. The truth is that private wealth is the fruit of labour, and it ill becomes the Chancellor to take measures which will be utterly punitive and immensely damaging to our country's economy.

Mr. John MacGregor (Norfolk, South)

I have hitherto restrained myself in this debate because I knew that I could look forward, if that be the right expression, to long exchanges with the Chief Secretary and the Financial Secretary during the night in the Standing Committee. I rest rained myself despite considerable provocation from the Chancellor's inaccuracies and lack of knowledge about his own tax. I hope that I shall be forgiven now if, in view of the right hon. Gentleman's assertion that most of the critics of his tax were in favour of preserving the status quo, I make my own testament of faith before coming to the amendment itself.

I am, and for a long time have been, in favour of reforms in capital taxation. I am in favour of a greater spread of wealth throughout the community. I wish to see a much better balance between taxes on income, including tax on savings income, and taxes on inherited capital. It follows from that that I want to see given to those without wealth who are trying to create some capital for themselves a much greater opportunity to keep more of their earnings and acquire savings up to a reasonable level, and a chance to pass some of that capital on, at reasonable levels, levels a bit beyond the present taxation, to their dependants. It follows also that I agree with many of my hon. Friends that it would be right to close the loopholes in the present tax at the higher levels of inherited wealth.

In that connection I take the point made by the hon. Member for Birmingham, Ladywood (Mr. Walden) last night when he said that in taxation often the lesser objective should be subservient to the greater. In this tax we see the opposite applying. [column 1630]

I come now to the amendments, and I shall refer in particular to No. 52. Many of the deleterious effects of the Chancellor's tax would be at least mitigated by Amendment No. 52. If we cannot tear up the tax and start again, at least let us ease the situation by introducing these rates, because in many ways they go to the heart of the matter, since it is the rates as much as the method of the tax which are causing the difficulties.

My first objection to the tax stems from the principle that no tax should be vicious and penal. The Chancellor made great play of the argument that at the lower levels of tax—I assume that by that he means lower levels of capital, that is, about £100,000 or less—his tax is more favourable than the present estate duty. That is just not true, and it is time we got that on the record once and for all. The right hon. Gentleman said that the tax was aimed at the vast estates, at a tiny minority. If that is the case, why penalise those of modest means?

In fact, if we ignore the gifts element altogether and take the tax on death alone, where people have been prudent and taken advantage of the perfectly normal methods open to them under the estate duty system—that is, equalising assets between husband and wife and taking advantage of leaving a life interest to the surviving spouse—we see at every level, starting at £15,000, that this tax takes more away than does the estate duty. The Chancellor's argument about the benefits to the spouse is true only for those who have not arranged their affairs prudently.

Moreover, as my hon. Friend the Member for Kingston-upon-Thames (Mr. Lamont) said, an enormous number of people will be brought into the net more disadvantaged by this tax than they would have been by the previous arrangements—brought in because of the inflation in house prices and the wide spread of life policies from which people are now gaining the benefit when they retire.

The second reason why the tax is penal and vicious and why I support Amendment No. 57 is that the tax takes no account of the effects of inflation. It is unfair to compare the levels of this tax with the levels of estate duty. The Government should be raising the levels to take account of inflation. The third [column 1631]reason why it is vicious and penal lies in the combined effects of capital gains tax and the gifts tax, and because of the grossing-up. I do not believe that the Chancellor in his arguments last night dealt at all adequately with either of these points. I hope that we shall have some elaboration of what he said when we go into Standing Committee.

A further objection that I have is that the rates of tax should be seen in the overall context of the rates of other taxes. Direct taxation is now at a very much higher level in Britain than it is in most of our competitors, and this applies to taxes on savings and capital gains tax. Here, surely, indexation is a necessity, because without it the present capital gains tax is a fraud since it is frequently not a tax on a capital gain. We shall have to take into account, too, other capital taxes in train.

I would prefer to see lower rates of direct taxation, but I do not expect that from the Government. The rates in the amendment would therefore at least help to offset the very high levels of direct taxation generally.

Finally, the capital transfer tax should be seen in the context of the general economic climate, and never more so than now. This is a time when we must go for expansion of agriculture for balance of payments reasons. More of existing earnings must go into savings, and jobs must be preserved. A lower rate of tax would help in all those respects .

Much has already been said on savings, but I should like to give an illustration of the problem from something that has happened to me several times in the last few days. I have been visiting stores during their sales to try to acquire some of the things I need, and I have been talking to the sales staff at all types of stores. They have told m e that the sales this year have greatly exceeded their expectations. I was told repeatedly that people seemed to be spending not only their income but their savings because they felt that their savings would be no longer worth keeping. This has happened before the capital transfer tax has appeared on the scene. The indications are that when the tax is law things will be very much worse.

We have dealt with the arguments about agriculture. It is extraordinary that just when we need to expand agriculture for balance of payments reasons the Government are introducing a tax which will lead to a substantial loss of production. I fear that we shall see a decline of investment and of working capital, a fragmentation of the farms and a n enormous loss of efficiency. I look forward to these arguments being developed in Standing Committee.

There is also the question of the small businesses. There is a family firm adjoining my constituency which employed in 182 people in a small rural town which is highly dependent on that employment. In the last 10 days the firm has gone into liquidation. I am not arguing that the reason for that is the capital transfer tax. The reason is the general economic situation and various other matters. But the capital transfer tax will cause this sort of thing to happen repeatedly to small firms in rural areas. In these rural areas there is frequently no alternative employment, and public ownership is certainly not the answer.

For all the reasons I have given, therefore, I believe that it would help to mitigate the worst effects of the tax if the rates were reduced. Speaking as someone who has only recently become acquainted at firsthand with a rural area, I must say that as I listen to these debates unfold the conviction grows upon me that the Chancellor and his colleagues have simply not begun to understand the impact of a tax of this sort on the social and economic life of rural areas.

This tax will seriously affect agricultural production, it will destroy woodlands and stop new planting, it will encourage the destruction and spending of savings, it will weaken the economy, it will make enterprise not worth while and it will seriously affect the fabric of society. At least if the Government were prepared to concede the amendment they would do something to lessen these effects. [Mr. Alan Fitch in the Chair.]

Mr. Tim Renton

I too wish to speak to Amendment 52, but first I declare an [column 1633]interest in the matter. I apologise for not having declared it when I spoke about three hours ago on another amendment.

Like my hon. Friends who have already spoken, I have no objection to the principle of a gifts tax, cumulative and inter vivos. But there are four points in the capital transfer tax—the double taxation element, the tax accumulated on the donor and not on the donee, the tax rates, and the allied point of grossing-up—that make me believe that the tax will place an intolerable burden on anyone who is endeavouring to save money or to build up a new business.

Like my hon. Friend the Member for Norfolk, South (Mr. MacGregor), I think that the Chancellor has tried to mislead the Committee in saying that the burden of the tax will be less than that of estate duty on those of modest means and modest savings. He has totally ignored the basic concept of the tax, which is that, unlike estate duty, it will be a lifetime tax and many things will fall into its net that would not fall into the net of estate duty.

Looking at the Chief Secretary, I am reminded of the words in “Alice's Adventures in Wonderland” :

“How cheerfully he seems to grin,
How neatly spreads his claws,
And welcomes little fishes in,
With gently smiling jaws!”

I wonder how many little fishes will swim into the jaws of the Treasury as a result of this new tax, and how many of them will be ordinary people who have tried to help their children, for example, by giving them a house on marriage or by paying a deposit towards a house—the sort of people who would never have been caught under estate duty.

In support of his argument the Chancellor argued last night that the yield on CTT would be only about £380 million in the first year as opposed to £400 million with estate duty. But when Stock Exchange values have fallen by about one-half and property values are down by at least one-third we could normally have expected that the yield from estate duty would have fallen substantially in the period immediately ahead. The fact that the expected yield from CTT is only £20 million less shows just how buoyant a tax it will be and how large its net will be.

The principle of grossing-up is incomprehensible to most laymen. I believe [column 1634]that it is a principle of taxation that it should be basically simple and easy to understand. This grossing-up is not. For example, in an inset in the Economist and the Investors' Review this week Barclays Bank said that on a gift of £50,000 the cumulative total of tax would be £7,750. A note put round about the CTT by some accountants said that on a gift of that sum the tax would be £12,083. The Times said today that it would be £19,000. On a simple, straight gift of £50,000, assuming no previous gifts, three sources estimate that the yield will be different. No one will be able to make a gift without seeing an accountant to try to calculate what the tax effects will be. Perhaps the Chief Secretary will tell us just what would be the tax on a gift of £50,000.

Last night my right hon. Friend the Member for Finchley (Mrs. Thatcher) gave the example of someone who has a business worth £200,000 which he passes on to four people and pays a total of £211,000 in tax. I should like to develop that. Let us assume that he is then left only with a house, which he leaves to his daughter on his death , and that she has no other assets. The house is valued at £40,000, but the Revenue will seek to collect from the daughter tax of £61,696. Therefore the daughter, having received the house, will have no option but to sell the house and leave the country before the Inland Revenue can claim from her in tax £21,000 that she does not have. This is the effect of the Chancellor's tax and the combined and surprising effect of cumulative rates when they are matched with grossing-up.

On the rates of the CTT, my hon. Friend the Member for Guildford (Mr. Howell) rightly said that we should not draw too many comparisons with rates in other countries. We must, of course, stand on our own feet in Great Britain. The fact remains, though, that tax rates on gifts throughout EEC countries are in every case except one substantially lower than the rates the Chancellor is proposing. In France, on gifts inter vivos to the spouse and children they range from 5 to 20 per cent., for example, and in Austria and Germany from 2 to 15 per cent. With the exception of Spain we, with rates at this level, will be far and away the highest in Europe. [column 1635]

I speak in support of Amendment No. 52 moved by my hon. Friend, but I believe that the rates we suggest in that amendment for gifts tax are too high. When these are coupled with an extremely high burden of income tax in this country, I believe that for a cumulative gifts tax to work the rate should not be more than a low of 10 per cent. and a peak of perhaps 25 per cent., because it is only at that level that an individual starting his own business will be able to save enough money out of taxed earnings to put aside and to pay the gifts tax when he passes the business on to the next generation. It is essential that he should be able to do this.

At the rates the Chancellor is suggesting, the tax will have two consequences. One will be massive evasion. I regret this. Internationally we have a very high reputation for paying our tax. A nation takes its stamp, however, finally from the people who govern it, and if we have a Government of evaders we shall turn into a nation of evaders.

The final result of this tax will be that it will destroy private capital within a generation. If this is the purpose of the Government, if it is their wish to ruin those who go to work early, who have started a business and who have put their all into getting that business going, let them proceed with this tax at these rates but they should re member the cartoon which appeared the other day with the caption

“Will the last business man leaving Britain kindly switch out the light.”

That will be the effect of this tax on British business men. They will leave. There will be a mass exodus from this country of just those people whom we need most. I sincerely hope that the Government will rethink the question of the rates.

Mr. A. G. F. Hall-Davis (Morecambe and Lonsdale)

I know there are many who would like this debate to be brought to a fairly speedy conclusion. I start, therefore, by saying that I believe there is no reason whatever for curtailing discussion of any aspect of this measure. If we organise our business collectively in the House of Commons—this applies to all parties in turn as the change of democracy operates—so that we spend [column 1636]hours discussing minor matters and are then limited for time on matters which the Chancellor himself describes as being one of the most important tax changes since the war, that is no reason for curtailing the discussion, however inconvenient it may be to all concerned.

Having listened to most of the debate on the capital transfer tax I am convinced, and I hope that every other Member is equally convinced, that never again should we have a major, complicated tax change introduced in legislative form without having a Select Committee to consider it first.

We are often condemned in the House for being an irrelevant appendage to the life of the country. I am certain that none of the discussion on this measure that has taken place in the Press and which has been entered into by experts in other spheres has cast one fraction of the light cast by our discussion in Committee.

Having said that, I make a plea to the Chief Secretary, for whose professional competence I have the highest regard, to take the opportunity to clear up the question of grossing-up. Just what is the difference between the tax on death and the tax when there is a gift inter vivos? Would I be right in assuming that the tax to be paid by the donor in any circumstances—I hope that the right hon. Gentleman is listening to me. I am trying to put these points as simply as possible. I suspect that he is not listening.

Mr. Joel Barnett

I am listening to the hon. Gentleman.

Mr. Hall-Davis

Will the tax to be paid by the donor on a gift inter vivos correspond to the tax that would be paid by a sole beneficiary if there were a death? Secondly, will the right hon. Gentleman tell us in simple terms what the tax would be on £200,000 if there had been n o previous gift? If the donor has no liquid funds of any kind on which he can lay his hands to pay the tax and if the donee pays the tax, will that be a loan to the donor attracting the penalties laid down for loans or will it be a gift to the donor on which tax will be payable and which will start the aggregation on disbursements by the donee?

Those fairly simple questions show as we all know, that this is a complicated [column 1637]tax. What worries me is that many people over the past eight or nine months will have committed themselves to a course of action which they probably cannot redress without having understood the consequences.

I make one specific point on the levels of taxation which we are discussing. Again I feel that I should declare an interest, and to be on the safe side I shall do so. If I do not have an interest I shall be rather sorry. The Chancellor has said, and I accept this entirely, that estate duty was a voluntary tax. But I put to the Chief Secretary that our industrial structure exists in its present form and distribution because we have been operating a voluntary tax. What attempt has been made to assess the impact of the introduction of this tax on a business which does not have a Stock Exchange quotation and which may be family-owned or owned by a limited body of shareholders who are not related to each other?

In my view the two-year stage will be too late. Maybe this is a tax that can be justified in logic and on the ground of social justice, but it is a tax—I admire the judgement of my right hon. Friend the Member for Finchley (Mrs. Thatcher) but on this point I must disagree with her—that will result in a life of about five years for many unquoted family companies.

When this imposition—or this tax, if one wants to be non- controversial—is fully comprehended by people who, in order to keep such firms going, have to show great prudence in the handling of the company finances and in many cases substantial self-denial in the ordering of their affairs, find themselves faced with another complication, they will wait for the first opportunity to dispose of the business. I am not saying that that is right or wrong. I am saying that it is what will happen.

Has any attempt been made by the Chief Secretary and his colleagues to discover how many businesses of this kind have continued because of gifts inter vivos? Have the Government made any attempt to weigh this particular change in our industrial structure against the advantages of a tax change which is dear to their hearts? [column 1638]

Let me carry this one stage further. A host of smaller towns are largely dependent on just this kind of firm, so we are not discussing the one person in a thousand who is materially affected by estate duty or CTT. We are discussing a large number of the 37 per cent. of the working population who are employed by this kind of firm. We all know the process. The purchasers are a large organisation, and the employees are informed that, for good or bad reasons, the company has been sold. The purchasers say to the employees that they want to carry on the tradition of service and local employment and possibly expand it. In 12 months' time or two years' time, the premises are shut, the jobs are no longer there and the industrial and social life of the community is impoverished.

That is what will happen as a result of this tax. It will happen not in 25 years or 20 years but in about five years. When we assess the level at which this tax is to be levied, I hope that we do it with our eyes open as a House of Commons. I hope that hon. Members on the Government benches will not complain to their colleagues at the Dispatch Box in the course of the next year or two about rising unemployment in their constituencies, the loss of jobs and the lobbying to which they are being subjected because long-established firms are closing when they themselves have directly contributed to that situation by approval of this tax.

By all means let anyone who thinks this is a good tax vote for it. But let him do so with full knowledge and comprehension of what the consequences will be for a very large number of firms and employees who are happy in their work and who would be very unhappy if they know the insecurity which lay ahead.

Mr. Nick Budgen (Wolverhampton, South-West)

I never find it difficult to offend the Whips. I shall not offend them tonight by taking very long.

I associate myself with what my hon. Friend the Member for Hertfordshire, South (Mr. Parkinson) said about the general approach towards the tax. I do not object to the broad principle of a capital transfer tax. What I do object to are the confiscatory rates at which this tax is to be levied, the grossing up effect, and the fact that it is to be levied in conjunction with a capital gains tax and in [column 1639]conjunction with a stamp duty. I also object to the fact that it may be levied in conjunction with a wealth tax.

For all those reasons, I believe that it will have a catastrophic effect, especially upon the industrial West Midlands. It is there that we see the typical small business. It is there that we see the typical small business. It is there that we see the typical risk-taker, the entrepreneur who has built up a great industrial concern from small beginnings. These small concerns are already heavily taxed. Often they are heavily taxed so that they may subsidise failing giants like British Leyland. The only reason why their owners hang on to them is the fond hope that the organisations may outlive their owners and may be passed on to their children. At the proposed rates of tax, that hope has gone for ever, and businesses like this are likely to be disbanded.

I come now to the subject of indexation, which has been proposed as a fashionable panacea in this Committee on one occasion before. I disagree with my hon. Friend the Member for Wycombe (Sir J. Hall) and others who believe that to mention indexation is to be fashionable and trendy, and to suggest that there is some easy alternative to these harsh measures necessary to stop inflation.

I do not think it will be possible to have indexation unless it is total indexation. I agree with the right hon. Member for Down, South (Mr. Powell). No Government could introduce total indexation in whole sectors of our economic activity. It would be impossible, for instance, to index all the loans which private individuals made to building societies. Equally, it would be impossible to index all loans made by building societies to people buying houses on mortgages. Even if all transactions surrounding the housing market were indexed, it is difficult to see how that would not affect all transactions in relation to the ownership or occupation of housing. It i s difficult to see how it would be possible to avoid indexing contracts earlier to the date of indexation. Again, it is difficult to see how it would be possible to work out the indexing of private contracts. I am sure that some of my sophisticated hon. Friends say that it could be worked out very well. I am sure that it could, and I am sure that many of my hon. Friends who work for [column 1640]merchant bankers could work it out very well. But it is difficult to see how a notional Grannie Smith from Grazely in my constituency who lent her grandson £100 at 5 per cent. would be able to index that loan over a 20-year period. She would have the same difficulty in understanding indexation as some of my right hon. and hon. Friends have had in understanding the grossing-up effects of CTT.

For all those reasons, I hope that my right hon., and hon. Friends will think long and carefully before jumping on board the indexation band wagon. I am highly sceptical of it, simply by temperament, because I am always sceptical of the fashionable. I believe that we should concentrate instead on becoming not the party of fashionable foibles but, most of all, the party of sound money.

Sir John Hall

May I remind my hon. Friend that a number of us were talking about indexation and proposing it long before it became fashionable?

Mr. Budgen

I am sure that is so. I was not suggesting that all those who advocated it did so just because it was fashionable. In my enthusiasm, perhaps I was a little offensive. I withdraw the remark.

Mr. Ian Stewart (Hitchin)

I am aware of the hour, and I shall endeavour not to test the patience of right hon. and hon. Members. Equally, I hope that they will have sympathy for those of us who do not try to speak too often in his Chamber and who, just because we are not fortunate to be called earlier in the proceedings, might feel inhibited from speaking on subjects about which we feel strongly, when we believe that the interests of our constituents are seriously at risk.

I will not traverse the ground covered at great length last night and this afternoon. I feel that there are points which have not yet been sufficiently forcibly made and which are germane to the question of the rate at which this tax is proposed to be levied. Last night the Chancellor made an effective debating point when he turned and grinned benignly at his hon. Friends behind him and said that it was unfair for us to argue that transactions should not be subject both to capital gains tax and [column 1641]capital transfer tax because it was the same as saying that because someone paid income tax they should not pay duty on a pint of beer. There is a fundamental difference between the se two cases.

It is that before any Chancellor fixes or revises the rates at which taxes on income shall apply, and the rates at which duties are to be levied, he takes careful account of the interaction of the two and of the spending power, after income tax, of those who will be required to pay taxes and imposts in other forms. The point which has emerged in the debate on capital transfer tax is that the rates proposed do not appear in any way to take account of the other weapons in this armament of taxes on capital which are now being slowly revealed.

I agree with my hon. Friend the Member for St. Ives (Mr. Nott) and others, that it is difficult for us to make any objective estimate of the effects of this sort of taxation if it is revealed piecemeal and if we are still without the independent assessment, which the Chancellor has set in train, of the whole structure of wealth and income and therefore of the suitability of different types of taxation. It is because of the high rates at which the tax is proposed to be levied that its interaction with other taxes on capital becomes so relevant in considering its likely effects.

Many hon. Members will have found that they are deeply affected, on behalf of their constituents, in the two respects which have been so fully discussed, those of farms and private companies. Perhaps because of the depth and detail of the discussions we have had, the single, central reason for this has been a little obscure. The reason why so much attention has been devoted in these last two days to these subjects is that they are the sort of assets which are largely indivisible for purposes of raising money with which to pay capital taxes. A second reason is that the people who have wealth in that form are also very often the least likely to have other liquid resources for assets out of which they could meet such taxes.

I represent a constituency only 30 to 40 miles from London. It has four small to medium-size towns in it. Hitchin and Letchworth have many factories run by private companies. In the [column 1642]surrounding area of countryside there are small to medium-size farms. From what my hon. Friends have said I know t hat I am far from being alone in this. We are anxious because the whole fabric and social pattern of this type of constituency will be seriously undermined by capital transfer tax at these rates.

Last night I went through the Lobby in support of the amendment moved by the hon. Member for Cornwall, North (Mr. Pardoe), partly because the Chancellor's answer was inadequate and partly because much of the danger of the tax to private companies would be mitigated if the tax were to fall on recipients rather than donors.

But I must return to agriculture, because there is an important issue which remains to be raised. High rates of tax are to be levied on small and medium-sized farms which are held in a discretionary trust. A rate of 30 per cent. of the applicable tax is to be charged every 10 years. The great danger here comes from dealing with assets which are not easily divisible. Let us suppose that a farm of 1,000 acres in the home counties was valued at £1,000 an acre. The farm would represent an asset of £1 million. If the farm were to be transferred a tax of approximately £600,000 would be payable. Thirty per cent. of that would be £180,000.

How is the farmer to raise that amount of money for the trustees within 10 years? He cannot raise it by selling 180 acres of a 1,000 acre farm because 180 acres are not viable as a farm. A farmer who anticipated the effect of the tax is bound to have concentrated his buildings and investment on that part of the land of which he did not expect to dispose. To pay the tax he will have to sell a larger proportion of the land than is represented by a straight division on a value basis. A farmer who for precautionary and not evasive reasons had put farming land into a discretionary trust within the last four years, and who was now the tenant of the farm, would be virtually forced out of business.

In my constituency trusts were set up because there was at the time a 45 per cent. concession on estate duty and there is always a political danger that such a [column 1643]concession may be withdrawn. [Interruption.] My argument does not depend on the reasons for the setting up of the trust but on the fact that it has been set up. For agricultural property, land values rose within a very few years from £200 or £300 an acre to £1,000 an acre, and that rapid rise in the market value left people in extremely exposed personal financial positions.

Had the 45 per cent. concession been under threat of withdrawal and had there been a fall in the market value of agricultural land at the time of a death it might have been completely impossible for the family of the farmer to raise sufficient money to pay the estate duty. Therefore it was a perfectly reasonable precaution to set up such discretionary trusts. I make this point in the sincere hope that the Government may have overlooked it rather than deliberately have excluded it.

I apologise for raising this at such a late hour, but it is one more point made so serious by the extremely high rates and the grossing-up basis on which the tax is to be levied. The whole tenor of the arrangements for a tax on this scale and at these rates, as my hon. Friends have been saying with great effect, demonstrates that the Labour Party is more offended by wealth than by poverty while we are more offended by poverty than by wealth.

Mr. Joel Barnett

It will be no surprise to the Committee when I tell them that I shall advise my right hon. and hon. Friends to resist this amendment. My first ground, but by no means my main ground, is on the question of cost. The cost of Amendment No. 52, to reduce the rate, in 1974–75 would be only £7 million. But in 1975–76 it would be £80 million, or nearly 25 per cent. of the estimated yield, and in the long term the cost would be almost 40 per cent. of the yield. That is a reasonable argument for resisting, but not the main argument.

Hon. Members will forgive me if I am reasonably brief, because much of the debate was covered in the long Second Reading-type debate on the motion that Clause 17 stand part of the Bill. The question of small businesses will be covered in the next amendment but one, whenever we reach it. [column 1644]

I shall refer to the speech by the hon. Member for Hertfordshire, South (Mr. Parkinson). I have great respect for him as a fellow accountant and I am happy to learn that he has always led a sheltered life. I am particularly pleased to learn that in common with many who have spoken from the other side of the Committee, he supports the capital transfer tax in principle, but I must say that they had a strange way of telling us how they support the tax in principle when they voted against it in principle when we sought to introduce it in Clause 17.

At least the tax is not objectionable to them in principle, only on the rates. However, that was no reason why they should not have voted for the tax and sought to amend the rates. It is only because a certain gentlemen wrote in a certain Sunday newspaper and the right hon. Lady the Member for Finchley (Mrs. Thatcher) felt it necessary to say w hat she would do about the tax if she ever had the opportunity—but this is a strange reason if they all support the principle.

The hon. Member for Kingston-upon-Thames (Mr. Lamont) said at some length that he doubted whether we should have done this before knowing more about the distribution of wealth, about which we are having a Royal Commission. While there may be some doubt about the distribution of wealth, there can be no doubt whatever —and I hope that there is none in the mind of the hon. Member for Kingston- upon-Thames—that substantial sums have been avoided and not paid because of the way estate duty worked.

Mr. Norman Lamont

I agree.

Mr. Barnett

The hon. Member agrees, and I am happy that he does. He said that he supports the principle of the tax, so now I come to the rates.

The hon. Member for Guildford (Mr. Howell), who opened this debate, said, and has said before on a number of occasions, that the rates here were no lower than those of estate duty. Among those who argued the case, he put it differently, saying that it was not true that it would be lower than estate duty where estate duty was paid. But even that is not true because, at death, the rates for estate duty were higher than under the CTT. [column 1645]

Of course, there was the major difference that there was no tax in most cases when the transfer was made in a lifetime. That was just one of the ways of avoiding paying estate duty. As far as the rates at death are concerned, there can be no doubt that, under Clause 33, the rates now are lower than they were under estate duty.

The hon. Gentleman said that it would be difficult to calculate the rate of tax on the gift. The hon. Member for Wolverhampton, South-West (Mr. Budgen) explained how difficult it would be if we were to be so foolish as to accept Amendment No. 57 to index the rate, because the grandmother to whom someone referred would have to calculate by using the formula a×b&/c=d, as shown in that amendment.

Some could argue that that would be simpler than under the system we propose, but nevertheless I suggest that it would be quite a way for the average taxpayer to calculate his liability. The hon. Member for Wolverhampton, South-West had strong words about the general question of indexation—it seems that there is indeed something in the air at Wolverhampton. I shall not repeat what I have already said about indexation. I simply say that I cannot accept the argument for indexation of CTT.

Mr. Norman Lamont

The right hon. Gentleman gave some estimates for the future yield of the tax for two years forward. He also said that the rate would be required to take account of the rate of inflation. Can he now say whether the precise figures he quoted were on the assumption of a change in the tax of that kind?

Mr. Barnett

When we make an estimate of tax yield, we cannot do it on what the tax might be in years to come. It would be impossible. We can only do it on the basis of present rates. For the reasons I have given previously, and for the excellent reasons given by the hon. Member for Wolverhampton, South-West, I cannot accept indexation in this case.

I have been asked about grossing up. It is important to get the point clear because a number of hon. Members are not sure about it. The hon. Member for Guildford gave some figures about its [column 1646]being a 100 per cent. tax—he was using the net level—and said that it was much worse than under estate duty. I make it clear that the CTT arrangement follows estate duty.

I was asked about the figure of £50,000, so I will use it as an example. The leader in The Times today referred to this question, and it seems that the person who wrote it did not write The Times leader on 14th August and does not quite appreciate the problems in relation to grossing up. On a first gift of £50,000, if the tax were paid by the donee as the person receiving the gift he would bear tax of £7,750, so that there would be a gross gift of £50,000 and the net benefit to the recipient would be £42,250. If the tax were paid by the donor he would bear tax of £12,083, because the gross gift would be £62,083 and the net benefit to the donee would be £50,000. That is the way in which estate duty works out at death—in other words, in exactly the same way. I hope that is now clear and that we can leave the question of grossing- up.

Mr. Tim Renton

Could the Chief Secretary say under what circumstances the capital transfer tax could be paid by the donee in the first example which he quoted?

Mr. Barnett

The answer is simple. If the donor gives away total assets and has no assets left, it will be paid by the donee.

A number of other points have been made which have been answered on a number of occasions throughout our many debates. We also have had many representations from people outside the House on the rates proposed in the Bill and their argument has been that the rates are intolerably high. They are lower than they were under estate duty, but the major difference is that they were not paid under estate duty.

I should like to have heard the right hon. Member for Finchley say that she, too, did not like the idea of having a capital transfer tax which was as readily avoided as estate duty. There was nothing illegal about it, but what we are now doing is to stop that form of avoidance. We shall stop the situation whereby large numbers of people—in the comparative sense wealthy people—were able to avoid paying any tax at all. [column 1647]

We on the Government benches believe that there is a considerable difference of opinion on the whole question of the avoidance of estate duty. I know that some Opposition Members have paid lip-service to wanting to stop avoidance, but are opposed to the idea of replacing it with a tax which would stop avoidance. They vote against the principle of a capital transfer tax but——

Mrs. Thatcher

If the right hon. Gentleman would like to introduce the kind of gifts tax which exists in France, many of us would be willing to support him. It is a totally different tax.

Mr. Barnett

I am happy with the one we have got, and so are my right hon. and hon. Friends.

The right hon. Lady and many of her colleagues think that the tax is very penal. The fact is that the yield is similar to that from estate duty. In regard to all the people for whom the right hon. Lady has been pleading who have not previously paid estate duty and who will now pay capital transfer tax, who will pay less? I shall tell her. The people paying less are the small and medium-sized type of wealthy person who did not [column 1648]previously avoid paying tax. I refer to wives and husbands who previously paid tax on death. That is what we are doing in this tax, and I do not think anybody on this side of the Committee wants to change that type of tax. We have a good one and we are going to stick to it.

Mr. David Howell

My hon. Friends have made it clear that tens of thousands of families and work people in smaller businesses will be directly hit by the tax, and that it is so complicated that many will not be able to work out their liability until too late. Whatever the Chief Secretary says, it is utterly misleading to compare it with estate duty and to imply that the effect will not be much different, that it will merely fill a few loopholes. It will do nothing of the kind. It will strike at the livelihood of many tens of thousands of small people, concerned with creating wealth, who can ill afford to pay it. The tax will destroy wealth. We shall vote for the amendment to show our deep disapproval of this type of tax. Question put, That the amendment be made:— The Committee divided: Ayes 220, Noes 252.